Larry's Tax Law

The Wild Journey

I am taking time out from my multi-part series on Subchapter S to report on the Washington capital gains tax.  As you know, I have reported in several prior blog posts on the numerous challenges confronting the tax.  The long, interesting and turbulent ride of this legislation, however, may be over!

Initiative 2109 was presented to Washington state voters.  A “yes” vote for the initiative would repeal the new tax, while a “no” vote would retain the new tax.  

On November 5, 2024, the voters spoke loud and clear – they overwhelmingly voted to retain the Washington capital gains tax.  A whopping 64.1 percent of the voters (2,341,553 voters) voted “no” on the initiative, while 35.9 percent of the voters (1,312,162 voters) voted “yes.” 

It is a rainy day in the Pacific Northwest with chances of snow showers.  For those taxpayers that reside in the state of Washington or own highly appreciated capital assets located in the state, their day just got a bit gloomier. 

Earlier today, the Washington Supreme Court, in a 7-2 opinion, overturned the Douglas County Superior Court decision that had ruled the state capital gains tax enacted by the legislature in 2021 violates the Washington State Constitution.  

Majority Opinion

In its 50-plus page opinion written by Justice Debra L. Stevens, the majority of the court concludes:

“The court below [the Douglas County Superior Court] concluded the tax is a property tax that violates article VII’s uniformity requirement. In light of this ruling, the court did not address Plaintiffs’ additional constitutional challenges. We accepted direct review and now reverse. The capital gains tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves. This understanding of the tax is consistent with a long line of precedent recognizing excise taxes as those levied on the exercise of rights associated with property ownership, such as the power to sell or exchange property, in contrast to property taxes levied on property itself. Because the capital gains tax is an excise tax under Washington law, it is not subject to the uniformity and levy requirements of article VII. We further hold the capital gains tax is consistent with our state constitution’s privileges and immunities clause and the federal dormant commerce clause. We therefore reject Plaintiffs’ facial challenge to the capital gains tax and remand to the trial court for further proceedings consistent with this opinion.”