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Legal Challenge to Capital-Gains Tax

Legal Challenge to Capital-Gains Tax – In 2021, the Washington State Legislature passed a new 7% tax on the sale of long-term capital assets (including stocks, bonds, business interests or other investments) if the profit exceed $250,000 annually. This tax applies to individuals only, though individuals can be liable for the tax because of their ownership interest in an entity that sells a long-term capital asset. This legislation included an emergency clause so it couldn’t be challenged on the ballot.

In turn, there were two lawsuits filed earlier in the year challenging the capital-gains tax. The first lawsuit was filed by the Freedom Foundation (represented by Lane Powell). Their lawsuit alleges the new tax violates the Washington State Constitution, as well as the Commerce Clause of the U.S. Constitution, by taxing the sale of capital held out-of-state by Washington residents.

A second lawsuit was filed by former Washington state Attorney General Rob McKenna (Orrick Harrington & Sutcliffe) on behalf of a coalition of farmers, business owners, investors and the Washington State Farm Bureau. It claims the new law is unconstitutional because, in reality, it’s a graduated tax on income — not an excise tax, as the law’s legislative preamble asserts.

In September, a Douglas County Superior Court judge ruled that the cases could move forward and merged the two cases. A Summary Judgement hearing in Douglas County is scheduled for February 4, 2022, with a ruling expected in either late February/early March. It’s anticipated that, no matter the outcome at the Superior Court, it will be appealed, and the state Supreme Court will ultimately make the decision.

Click here to visit the Washington’s Dept. of Revenue’s website to learn more on the tax. Just a reminder: this new tax goes into effect January 1, 2022, with collection starting in 2023. AGC was opposed to this legislation as it worked its way through the legislative process. If you have any questions, contact AGC’s Michele Willms.

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