Understanding Washington’s Millionaires’ Tax: What Business Owners and High Income Taxpayers Should Know About Senate Bill 6346

After extensive legislative debate, Washington enacted Engrossed Substitute Senate Bill 6346 (SB 6346), Chapter 238, Laws of 2026, establishing a new tax on certain high-income individuals and pairing that tax with several sales, use, and business and occupation (B&O) tax changes. The House passed the final bill on March 9, 2026, the Senate concurred in the House amendments on March 11, 2026, and Governor Bob Ferguson signed the bill on March 30, 2026. The new individual income tax applies to income years beginning January 1, 2028, with first returns and payments due in 2029.

Although the tax has been enacted, taxpayers should continue to treat the law as a forward-looking planning item because constitutional litigation is pending. The statutory effective date has not changed, but the ultimate application of the tax and certain tax-relief provisions may depend on the outcome of that litigation and future Department of Revenue guidance.

Constitutional and Legal Status

The principal constitutional issue is expected to focus on Washington’s long-standing income-tax precedent, including Culliton v. Chase, 174 Wash. 363, 25 P.2d 81 (1933). In Culliton, the Washington Supreme Court treated income as property for state constitutional purposes and struck down a graduated income tax that did not satisfy the property-tax uniformity and rate limitations. Opponents of SB 6346 are expected to rely on that line of authority in challenging the new tax.

The state is likely to point to Washington’s more recent capital gains tax decision, Quinn v. State, in which the Washington Supreme Court upheld the capital gains tax as an excise tax imposed on the sale or exchange of capital assets rather than a tax on property itself. SB 6346 is drafted as a tax on the receipt of Washington taxable income, so the constitutional challenge will likely focus on whether courts treat the new tax as a tax on income/property or as a permissible excise-type tax.

A separate referendum challenge has already been resolved. SB 6346 includes a necessity clause stating that the tax is necessary for the support of state government and its existing public institutions. In Heywood v. Hobbs, the Washington Supreme Court rejected a petition seeking to force processing of a referendum and expressly stated that the case addressed referendum availability, not the tax’s constitutionality. The active political route is therefore the initiative process. As of this writing, Let’s Go Washington delivered 511,408 signatures for IP26-645 to the Secretary of State’s office on July 2, 2026, against a requirement of approximately 308,911 valid signatures, giving the filing a substantial cushion over the threshold. The initiative campaign has begun. The Attorney General’s office prepared a public investment impact disclosure to be added to the ballot title. The disclosure statement was validated by Thurston County Superior Court. It will be added to the ballot title quoted on page 1 as follows: “This measure would decrease funding for public K-12 education, higher education (including universities and community colleges), and human services (primarily healthcare).”

Governor Ferguson has taken an increasingly public and personal role in opposing the repeal effort. In a May 27, 2026, social media statement, he pledged that so long as he remains governor, he will veto any legislation that lowers the $1 million threshold or raises the 9.9% rate, a message aimed at reassuring voters that the tax will not later be expanded to reach a broader population. At a July 14, 2026, press conference, the Governor said he is confident voters will reject Initiative 645, warned that repeal would force billions of dollars in cuts to education funding, and directly criticized Let’s Go Washington founder Brian Heywood, noting that a prior Heywood-backed effort to repeal the state’s capital gains tax was turned down by voters by what Ferguson described as a 64 percent margin.

The measure will appear on the November 3, 2026, general election ballot; if approved by voters, Article II, Section 41 of the Washington Constitution would generally bar the Legislature from repealing or amending the resulting law for two years except by a two-thirds vote of each chamber.

Final Provisions of SB 6346

SB 6346’s final provisions are broader than the income tax alone. The following items reflect the enacted structure and the major House-amended provisions that should be addressed in planning and compliance discussions.

• Tax rate and taxpayers: Beginning January 1, 2028, the tax is imposed at 9.9% of an individual’s Washington taxable income. Only individuals are directly subject to the tax, but pass-through business income may affect an owner’s individual liability.
• Threshold mechanism: The $1 million threshold is implemented as a standard deduction from Washington base income. Individuals receive a $1 million standard deduction; spouses and state registered domestic partners share a combined $1 million deduction regardless of whether they file jointly or separately.
• Residents, part-year residents, and nonresidents: Full-year Washington residents are generally taxed on Washington taxable income computed from all income. Nonresidents and part-year residents are taxed on Washington-source income, and their $1 million deduction is prorated based on the ratio of Washington base income to federal adjusted gross income.
• Starting point and modifications: Washington base income generally starts with federal adjusted gross income and then applies Washington-specific modifications. Key modifications include coordination with Washington’s capital gains tax, a deduction for a portion of federal net operating loss carryovers, and a charitable contribution deduction of up to $100,000 for qualifying contributions.
• Capital gains coordination: Long-term capital gains are generally removed from the Washington income tax base, with add-backs and credits designed to coordinate with Washington’s separate capital gains tax and reduce overlapping taxation. Gains that are exempt under Washington’s capital gains tax, including real estate gains, are not intended to be swept into the new income tax simply because they are included in federal adjusted gross income.
• Credits: The final bill includes nonrefundable credits for certain taxes paid to other jurisdictions, Washington B&O tax, Washington public utility tax, Washington capital gains tax, and the elective pass-through entity tax. These credits generally do not create refunds, carryforwards, or carrybacks unless future guidance provides otherwise.
• Nonresident exclusions and safe harbors: The final bill includes targeted rules for nonresident service providers, including an exclusion for certain keynote speakers, panelists, and moderators at qualifying conventions or trade shows and a limited five-day safe harbor for compensation earned from services performed in Washington.
• Pass-through entity tax election: Beginning January 1, 2028, eligible partnerships, LLCs, and S corporations may elect to pay a 9.9% tax at the entity level for participating owners. Participating owners receive a nonrefundable credit against their individual tax, and owners may be excluded from the election if they do not participate. Estimated payments for electing entities are not required before July 1, 2029.

Sales, Use, and B&O Tax Changes

SB 6346 also revises several sales, use, and B&O tax provisions, with effective dates that differ from the January 1, 2028 income-tax effective date.

• July 1, 2026, Service-Tax Refinements: The final bill narrows and clarifies certain 2025 service-tax changes. Among other items, it excludes specified activities from the taxable “live presentations” category, including before- and after-school care provided in person and on-site by elementary schools, one-on-one instructional activities and tutoring, music lessons, presentations by nonprofit organizations, and musical, dramatic, comedic, or similar performances.
• July 1, 2026, Buyer-Specific Exemptions: The final bill also exempts certain newly taxable services, including live presentations, custom software, and other specified services, when sold to public libraries, library districts, library service centers, K-12 schools, school districts, and educational service districts. Advertising services are not included in this broader relief.
• January 1, 2029, Service-Tax Repeal: Beginning January 1, 2029, SB 6346 is scheduled to repeal most of the 2025 retail sales tax expansion to newly taxable services, including many business-to-business services, while leaving advertising services taxable. Businesses should plan for the interim period in which the 2025 service-tax expansion generally continues to apply unless a specific 2026 exemption or exclusion applies.
• Contingency if the income tax is invalidated: The broad January 1, 2029, relief package, including the service-tax repeal and consumer-product exemptions, is tied to the new income tax. If courts invalidate the Millionaires’ Tax, those 2029 relief provisions are expected to be nullified or otherwise unavailable. This issue should be monitored closely as the litigation proceeds.
• Consumer product exemptions effective January 1, 2029: The final bill creates sales and use tax exemptions for diapers, over-the-counter drugs, and grooming and hygiene products. These exemptions have a later effective date than the income tax and are part of the broader 2029 relief package.
• B&O small business relief effective January 1, 2029: SB 6346 increases the small business B&O tax credit and increases the B&O tax return filing threshold to $250,000. Businesses should review filing-frequency and credit eligibility once Department of Revenue implementation guidance is released.
• High-grossing business B&O surcharge: SB 6346 changes the B&O surcharge on businesses with Washington taxable income over $250 million by moving the surcharge expiration one year earlier and adding or preserving specified exemptions, including certain health care-related income.

Other Related Tax Changes

Two related points should be distinguished from the income tax mechanics. First, SB 6346 expands eligibility for the Working Families Tax Credit, including eligibility for individuals who are at least 18 years old and otherwise meet the statutory requirements. Second, the estate tax rollback was not enacted in SB 6346; it was enacted separately in SB 6347. The bill rolls Washington estate tax rates back to the pre-2025 rate structure for estates triggered on or after July 1, 2026, with rates ranging from 10% to 20% and a $3 million filing threshold and exclusion amount for dates of death on or after July 1, 2026.

Areas Requiring Additional Guidance

Because SB 6346 creates an entirely new income-tax framework for Washington, several practical issues remain open pending litigation, Department of Revenue rulemaking, and additional legislative or administrative clarification. The most important areas to monitor include:

• Constitutional litigation: Whether the tax survives the pending challenge, and whether a decision invalidating the tax also nullifies the delayed 2029 sales, use, and B&O tax relief.
• Return filing and estimated payments: Forms, payment methods, due dates, extensions, penalty procedures, and the timing of estimated payments for individuals and electing pass-through entities.
• Pass-through entity administration: The annual election process, owner participation and opt-out mechanics, tiered-entity treatment, credit reporting to owners, treatment of nonresident owners, and whether any withholding-like or composite-payment obligations will be required outside the elective entity-level tax.
• Sourcing and apportionment: Detailed rules for nonresidents, part-year residents, multistate business owners, remote workers, traveling employees, athletes, entertainers, and other taxpayers whose income may be earned both inside and outside Washington.
• Capital gains coordination: The interaction between the new income tax and Washington’s existing capital gains tax, including credits, exemptions, losses, carryovers, and timing differences.
• Charitable contribution deduction: Documentation and eligibility standards for contributions to nonprofit organizations that are principally directed and managed in Washington.
• Sales tax transition rules: How the July 1, 2026, service-tax refinements and January 1, 2029, service-tax repeal apply to existing contracts, bundled transactions, digital services, custom software, and advertising-related services.
• Nonresident nexus and statutory sourcing: Whether the statute’s sourcing and apportionment rules (including the duty-day and nonresident safe harbor provisions) are, in all applications, coextensive with the constitutional nexus required to tax a nonresident — an as-applied question that remains untested pending DOR rulemaking and any future litigation.

Taxpayer Considerations

The Washington Millionaires’ Tax primarily affects high-income Washington residents, dual-income households approaching or exceeding the shared $1 million deduction, part-year residents, nonresidents with Washington-source income, and owners of pass-through businesses. The tax may also affect nonresident owners and businesses with Washington operations even when the owner does not live in Washington.

Pass-through businesses should evaluate the elective pass-through entity tax early. The election may allow a partnership, LLC, or S corporation to pay the 9.9% tax at the entity level for participating owners, with an owner-level credit to prevent double taxation. The election could also affect cash flow, distributions, owner agreements, estimated payments, federal deductibility, and owner communications. Businesses with nonresident owners should separately monitor whether Washington issues withholding, information-reporting, or composite-payment guidance outside the elective tax regime.

Businesses affected by the 2025 service-tax expansion should continue to comply with the current rules until the relevant 2026 or 2029 relief provision applies. The July 1, 2026, changes are targeted refinements, while the broader repeal of most newly taxable services does not take effect until January 1, 2029, and may depend on the Millionaires’ Tax surviving court review.

Taxpayers potentially impacted by SB 6346 should consult with a qualified state and local tax advisor before the January 1, 2028, effective date. Planning should focus on residency, sourcing, anticipated liquidity events, pass-through ownership, charitable giving, multistate activity, sales and use tax exposure, and the effect of any final court decisions or Department of Revenue guidance.

If you require assistance interpreting or planning for the Millionaires’ Tax and sourcing of income, the related sales and use tax changes, or the pass-through entity tax election, please contact the State and Local Tax team at Clark Nuber for guidance and support.