On November 30, 2022, the Washington Supreme Court granted a stay of the lower court’s ruling that the Washington Capital Gains Tax (CGT) was unconstitutional under the Washington Constitution.
Washington Supreme Court Decision
As a result, the Washington Department of Revenue (DOR) is authorized to continue to draft regulations related to this tax and is permitted to enforce the filing and collection requirements of the law.
The Washington Supreme Court unanimously granted the stay after being sought in a motion filed by the Washington attorney general’s office. The decision did not address the legal merits of the CGT but was rather intended to authorize the DOR to administer the tax until its legality is decided.
Oral arguments are scheduled for January 26, 2023, and a decision is expected in the following months. It’s unknown if a final decision on the merits will be released prior to April 18, 2023, which is the original CGT return filing and payment deadline.
If the CGT is ruled unconstitutional, the DOR would be expected to refund CGT paid within the statute of limitations. That process may require taxpayer action.
Senate Bill 5096 and the Capital Gains Tax
In April 2021, Washington enacted SB 5096, creating the CGT, an excise tax on long-term capital gains. The tax is imposed at a rate of 7% on an individual’s federal capital gain from the sale, exchange, or other disposition of long-term capital assets sourced to Washington and not otherwise exempt under the law.
Individual taxpayers are permitted a $250,000 standard deduction in calculating the CGT. Married or state-registered domestic partner filers will collectively have a single $250,000 deduction.
Douglas County Superior Court Decision
In March 2022, the Douglas County Superior Court in Washington held the CGT was unconstitutional under the Washington Constitution in Quinn/Clayton et. al. v. State of Washington.
This lower court determined the CGT was an impermissible income tax because it found the gains to be income, and therefore property under the Washington constitution, that was being taxed at a non-uniform rate. Since prior decisions have held income as a form of property that must be taxed at a uniform rate, the CGT was found to fail these Washington constitutional requirements.
Hearings Results Implications
With the stay of the Douglas County Superior Court’s decision, the DOR is authorized to enforce the CGT’s filing and payment requirements. Individuals with Washington-source taxable long-term capital gain income in excess of $250,000 for tax year 2022 will be expected to file and pay CGT no later than April 18, 2023.
While taxpayers can obtain a six-month filing extension for the tax, there’s no extension of the deadline to pay. The DOR will require CGT returns to be filed electronically on a platform scheduled to be released to the public in February 2023.
We’re Here to Help
To better understand how this tax might affect you or your business, contact your Moss Adams professional or visit our State & Local Tax Services.