On May 4, 2021, Washington Governor Jay Inslee signed Senate Bill 5096 ("SB 5096") into law, creating a capital gains tax regime in Washington. The bill has had a brief, but colorful journey so far. It appears that the journey is continuing.
Will Washington's capital gains tax be here to stay? At this point, it is anyone's guess.
SB 5096 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.
SB 5096, as amended by the House, was referred back to the Senate for consideration on April 22, 2021. The Senate, however, quickly refused to consider the House's amendments.
A Conference Committee was convened to break the deadlock between the House and the Senate. The Conference Committee was comprised of Senators June Robinson (D), Jamie Pederson (D) and Lynda Wilson (R), and Representatives Noel Frame (D), Ed Orcutt (R) and Pat Sullivan (D).
On April 23, 2021, the committee quickly issued a report ("Conference Report") with its recommendations/compromises. The following day, the Conference Report was adopted in the House by a narrow margin, receiving 52 affirmative votes and 44 negative votes (with two representatives excused). On April 25, 2021, the Senate voted in favor of SB 5096, as amended by the Conference Report, with the same voter results it originally had on the bill (i.e., 25 affirmative votes and 24 negative votes).
SB 5096 was delivered to Governor Inslee for signature on April 26, 2021. Before he could sign the bill into law, however, as previously reported, on April 28, 2021, seven opponents to the legislation filed a lawsuit in the Superior Court of Washington for Douglas County, challenging the new tax regime as a tax on income – a violation of the state constitution. Additionally, the plaintiffs are seeking injunctive relief, enjoining the taxing authorities from assessing and collecting the tax or otherwise enforcing the new law.
Almost a week after the judicial challenge was instituted, on May 4, 2021, Governor Inslee signed SB 5096. It is now a law set to go into effect on January 1, 2022, but it is the subject of a judicial challenge.
The journey of SB 5096 continues. It will be interesting to see what the courts do with it. I suspect, the debate will not end with the Superior Court of Washington for Douglas County having the last say. No matter what the outcome in the trial court, the challenge will surely see the appellate courts. That process could consume several years with motions, briefings, proceedings and hearings. In the interim, it will be interesting to see if injunctive relief is set in place until a final judicial determination is made. Time will tell.
I will keep you apprised of developments.
Larry J. Brant
Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Entity Classification – The Check-The-Box Regulations Revisited," New York University Advanced Conference on Subchapter SNew York, NY, 7.21.22-7.22.22
- "Entity Classification – The Check-The-Box Regulations Revisited," New York University 81st Institute on Federal TaxationNew York, NY, 10.23.22-10.28.22
- "The Intersection of Code Section 1031 and Opportunity Zones," 2022 OSCPA Northwest Federal Tax Conference10.24.22
- "Entity Classification – The Check-The-Box Regulations Revisited," New York University 81st Institute on Federal TaxationSan Diego, CA, 11.13.22-11.18.22