The Washington state Supreme Court recently ruled that the 7% capital gains tax passed into law in 2021 is constitutional. As a result, the Washington Department of Revenue has stated that it will administer and start collecting the tax for Tax Year 2022. The due date for the new Washington capital gains tax return for the 2022 tax year is April 18, 2023.

Background

In 2021, the Washington legislature passed into law a capital gains tax on the sale/exchange of long-term capital assets at the rate of 7%, effective for tax periods beginning Jan. 1, 2022. The constitutionality of the tax was challenged in court on the argument that it is an income tax, which, under Washington state Supreme Court precedent, constitutes an unconstitutional tax on property, violating the uniformity and levy limitations of the Washington state constitution.

Court ruling

In its ruling, the Washington state Supreme Court determined that the capital gains tax is an excise tax on the sale of capital assets, rather than a direct tax on the capital assets or gains. Since excise taxes do not violate the uniformity and levy limitation of the Washington state constitution, the Court concluded the capital gains tax is lawful and may be implemented.

Effect of the ruling

The Washington Department of Revenue announced that it will continue collecting the tax given the Court’s ruling that it is valid. Taking effect Jan. 1, 2022, the tax is imposed at a rate of 7% on sales or exchanges of long-term capital assets. Only individuals are subject to the tax; however, individuals who are partners or members of pass-through entities can be liable for the tax on sales or exchanges of long-term capital assets made by the pass-through entity.

There are a number of adjustments that may apply, including an annual $250,000 standard deduction for individuals and deductions, credits, or exemptions for certain capital assets. It is important to note that the combined standard deduction for spouses and domestic partners is also $250,000, regardless of whether joint or separate returns are filed.

Payment of the tax is due on or before the due date of the taxpayer’s federal income tax return without regard of filing an extension, which is April 18, 2023, for Tax Year 2022. The capital gains tax return is also due on this date; however, taxpayers may request an extension of time to file.

What does CohnReznick think?

Given the Court’s ruling and the rapidly approaching April 18, 2023, statutory due date, taxpayers who are Washington state residents, are partners/members in Washington state pass-through entities, or own capital assets with situs in Washington state should take quick action to determine if they are affected by the capital gains tax. Due to the newness of the tax and the multiple deductions, credits, and exemptions available, taxpayers are encouraged to seek advice from their tax advisors about their capital gains tax liability.

Contact

Krista Schipp, Director, State and Local Tax Services

646.630.1924

Jamie Kelly, Manager, State and Local Tax Services

312.788.6058

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}