Excise Tax On Capital Gains is Constitutional in Washington State

The Washington State Supreme Court recently ruled in a 7-2 decision that the state’s 7% capital gains tax is a valid excise tax, rather than an income tax, and not subject to the uniformity and levy requirements of the Washington state constitution. Therefore, the Washington State Department of Revenue will continue collecting the tax which is due on April 18, 2023.

Taxpayers: If this tax applies to you personally, you yourself will need to file, pay, and extend via Washington’s online system.

Earlier this year, taxpayers brought suit to invalidate the capital gains tax on constitutional grounds in Quinn v. Washington, arguing that it constitutes a property tax on income and violates multiple clauses of the state and federal constitutions. The Douglas County Superior Court voided the tax as unconstitutional under Article VII of the state constitution. However, the Washington State Supreme Court has now ruled that the capital gains tax is appropriately characterized as an excise tax because it is imposed on the sale or exchange of long-term capital assets, not on capital assets or gains themselves. 

Key Information:

• The capital gains tax took effect on January 1, 2022. The first payments are due from taxpayers on April 18, 2023. 
• The tax levies a 7% rate on any gain from the sale or exchange of certain long-term capital assets which exceed $250,000 in a calendar year. Such assets may include stocks, bonds, business interests, investments, and other tangible assets.
• Deductions and exemptions are available that may reduce the taxable amount of long-term gains, including an annual standard deduction of $250,000 per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns.  
• The tax only applies to individuals. However, individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets. The tax only applies to gains allocated to Washington state.
• The Washington State Department of Revenue anticipates approximately 7,000 individuals will pay the tax in its first year. Over its first six years, the tax is projected to generate nearly $2.5 billion in revenue. The revenue collected will fund the education legacy trust account and common school construction account.

For more information and FAQs, visit the Washington State Department of Revenue.