Larry's Tax Law

As reported on May 13, 2025, several changes to the Washington state tax laws were passed by lawmakers and delivered to the desk of Governor Ferguson in late April, awaiting his signature to make them law.  In the aggregate, these changes create what is likely the largest historical increase in taxes the state has ever seen.  While there was some speculation that the governor would not sign all of the bills into law, especially since they had been sitting on his desk for more than three weeks, that speculation is no longer.  Governor Ferguson signed these bills into law on May 20, 2025.

Oregon House Bill 3115 (“HB 3115”) was sponsored by Representatives John Lively (D) and Kimberly Wallan (R).  It was co-sponsored by Representatives Tom Anderson (D), David Gomberg (D) and Nathan Sosa (D). 

HB 3115 was introduced in the Oregon House of Representatives (“House”) on January 13, 2025. It passed the House on March 17, 2025.  The legislation was introduced in the Oregon Senate (“Senate”) on March 18, 2025.  It passed in the Senate on April 29, 2025.  The bill was signed by the Speaker of the House and the President of the Senate on May 1, 2025.  Governor Kotek signed HB 3115 on May 8, 2025.  The bill becomes law 91 days following adjournment sine die (i.e., the final adjournment of the legislative session).

Many individuals, wanting to liberate their wallets from taxes, have moved to states like Washington, Nevada, Texas, Florida and other states that have friendly state and local tax regimes.  This trend, especially for residents of high-tax states such as New York, Oregon and California, has increased in recent years. 

Until 2022, Washington had been a top choice for many individuals seeking a better tax climate. Effective January 1, 2022, however, Washington lawmakers adopted a capital gains tax, causing several residents to look for residency outside of Washington, including billionaire Jeff Bezos who moved to Florida.  Additionally, effective January 1, 2022, the city of Seattle adopted a new payroll tax on certain businesses with payrolls of $7 million or more.  On top of that, effective January 1, 2025, the city of Seattle upped the ante, adopting an additional payroll tax of 5% on businesses with high-earning employees (5% of annual compensation paid to any employee in excess of $1 million who is based at a business location within the city). 

Rather than let the seas calm, Washington lawmakers are once again changing the tax terrain in the state.  Several tax bills have been passed by the legislature and are on Governor Ferguson’s desk waiting to be signed into law.  Whether these bills will become law is yet to be seen.

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.” 

As reported last week, opponents of the Washington state capital gains tax, after ultimately losing in the courts to have the legislation stricken as unconstitutional, decided to take the matter to the voters.  They have proposed a ballot measure which if successful, among other things, will repeal the tax. 

As part of the presentation of the ballot measure in the voters’ pamphlet, the State of Washington election officials recently announced that the explanation of the ballot measure must include a disclosure of the revenue impact its passage would have on the state’s revenue – a drop of roughly $1 billion per year.  Proponents of the ballot measure promptly filed a lawsuit in the Superior Court of Washington for Thurston County (“Court”) to block the inclusion of the revenue impact in the voter packets.  A hearing in the case occurred on June 7, 2024.

Judge Allyson Zipp, appointed to the Court by Governor Jay Inslee in 2021, presided over the case.  The oral arguments were interesting.

I have reported in several prior blog posts the significant events impacting the newly enacted Washington state capital gains tax.  The turbulent ride of this legislation continues!

The Colorful Journey

The colorful journey of the Washington capital gains tax started with Senate Bill 5096 ("SB 5096"). The bill was originally introduced to the Washington State Senate on January 6, 2021.  It was passed by the Senate on March 6, 2021, after a hearing in the Senate Committee on Ways and Means, three readings and some floor amendments.  The bill's passage margin in the Senate was narrow, receiving 25 affirmative votes and 24 negative votes. 

SB 5096 continued its journey to the Washington State House of Representatives, where the bill was introduced on March 9, 2021.  After three readings and two separate votes, as well as some amendments, the bill was passed in the House on April 21, 2021.  As was the case in the Senate, its passage margin in the House was narrow, receiving 52 affirmative votes and 46 negative votes. 

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.”

By motion dated November 3, 2022, the Washington State Attorney General asked the Supreme Court of the State of Washington to allow the Washington Department of Revenue to implement and collect the capital gains tax struck down as unconstitutional by the Douglas County Superior Court, pending the high court’s ultimate ruling on the matter. 

As previously reported, the tax, which was set to go into effect on January 1, 2022 was struck down by the Douglas County Superior Court as unconstitutional.  The first tax payments under the new tax regime would be due on April 17, 2023.

On August 23, 2022, the Regular Division of the Oregon Tax Court issued its opinion in Santa Fe Natural Tobacco Co. v. Department of Revenue, State of Oregon.  The court determined that the taxpayer in that case is subject to the corporate excise tax. 

The taxpayer, Santa Fe Natural Tobacco Co., required that its wholesale customers located in Oregon accept and process returned goods.  In addition, the taxpayer’s in-state sales representatives, who did not maintain inventory, routinely confirmed and processed purchase orders between Oregon retailers and wholesalers.

As previously reported, due to the COVID-19 pandemic, remote workforces currently dominate the landscape of most U.S. businesses.  In fact, in many industries, remote workforces may be the new normal post-pandemic.  Unfortunately, as workers become more mobile, the tax and human resources issues become more challenging for employers.

I was asked by Dan Feld, Principal Editor, Tax Journals, of Thomson Reuters, to author an article on this topic for the July 2022 Practical Tax Strategies Journal.  With Dan’s approval, I have provided a link to the complete article, Remote Workforces: Tax Perils and Other Traps For Unwary Employers, for my blog readers.