Douglas County Superior Court Rules Washington’s Capital Gains Tax Unconstitutional

Update: On March 25, 2022, the Washington Attorney General’s Office petitioned the Washington Supreme Court for direct review of the Douglas County Superior Court’s decision. The Supreme Court may accept direct review or may defer to the Court of Appeals to issue a decision before it accepts the case.

On Monday, March 1, 2022, the Douglas County Superior Court ruled Washington’s new capital gains tax, which took effect on January 1, 2022, violates the Washington State Constitution and is therefore invalid.

Background

Two lawsuits filed in the spring of 2021 by the Freedom Foundation and former Attorney General Rob McKenna were subsequently consolidated into a single case;

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Lawsuits Brought Against the Washington Capital Gains Tax

Last May, Clark Nuber published an overview of Washington state’s capital gains tax that takes effect on January 1, 2022. Shortly after the act was signed into law by Governor Inslee, a lawsuit was filed by the Freedom Foundation, represented by Seattle law firm Lane Powell. The lawsuit alleges the new tax violates the Washington State Constitution, as well as the Commerce Clause of the U.S. Constitution, by taxing the sale of capital held out-of-state by Washington residents.

A second lawsuit was filed on May 20, 2021 by former Washington state Attorney General Rob McKenna (now with the law firm Orrick Harrington &

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An Overview of Washington State’s Capital Gains Tax

Senate Bill 5096, “Concerning an excise tax on gains from the sale or exchange of certain capital assets,” was passed by the Washington Legislature on April 25, 2021 and signed into law by Governor Inslee on May 4, 2021. The law generally imposes a 7% tax on net long-term capital gains in excess of $250,000 recognized during each calendar year. Net long-term capital gain is defined by reference to U.S. federal income tax law. The tax is imposed on capital gains recognized on or after January 1, 2022. The first returns will be due in 2023 on capital gains recognized during calendar year 2022.

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