As previously reported on May 7 and June 17 of this year, Washington state lawmakers enacted a new capital gains tax, set to go into effect on January 1, 2022, but two lawsuits were initiated to declare the tax unconstitutional. To date, the court cases are continuing their way through the judicial process.
On November 2, 2021, as part of the statewide general elections process, Washington voters were not asked to vote on the new state capital gains tax; rather they were asked for their opinion on the tax.
The specific question posed, as written by the Office of the Attorney General, is as follows:
As I previously reported, on May 4, 2021, Washington State Governor Jay Inslee signed Senate Bill 5096 ("SB 5096") into law, creating the state's first capital gains tax. It is set to go into effect on January 1, 2022.
The new law has had a turbulent ride during its infancy. Before Governor Inslee could even sign the bill into law, 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’s constitution. The plaintiffs in that case seek to enjoin the taxing authorities from assessing and collecting the tax or otherwise enforcing the new law.
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.
On April 25, 2021, the Washington State Legislature passed Senate Bill 5096 (SB 5096). The bill was immediately sent to Governor's Inslee's desk for signature. It brings a new tax regime to the state of Washington.
Before we go into the details surrounding the new tax, I have to mention that it was challenged even before the governor had the opportunity to sign it into law. A group of potentially affected taxpayers filed a lawsuit in Douglas County, Washington, to strike down the new law as being unconstitutional. So, it is possible that SB 5096 will never breathe life.
Knowing that the new tax regime is under attack, it is still important to have a good understanding of it in the event it survives the battle.
Larry J. Brant
Larry J. Brant is a Shareholder in 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.