On May 4, 2021, Washington Gov. Jay Inslee signed legislation (ESB 5096, RCW 82.87), a bill which creates a new Washington excise tax on the sale or exchange of certain capital assets. Specifically, starting Jan. 1, 2022, Washington imposes a 7% excise tax on Washington residents for the sale or exchange of over $250,000 of long-term gain from capital assets reported on their federal tax return.
The Washington excise tax base includes all long-term capital assets with the exception of the following:
In addition to the above exceptions, Washington residents are permitted a deduction from the excise tax base for the following:
Long-term capital gains or losses from the sale or exchange of tangible personal property are allocated to Washington if the property was located in Washington at the time of the sale or exchange. Long-term capital gains or losses from the sale or exchange of tangible personal property are also allocated to Washington even though the property was located in another state at the time of the sale or exchange if:
In addition, long-term capital gains or losses derived from intangible personal property are allocated to Washington if the taxpayer was domiciled in Washington at the time the sale or exchange occurred.
In March 2022, the Douglass County Superior Court in Washington held the Washington excise tax on long-term capital gains was unconstitutional. Specifically, the Superior Court determined the excise tax was an impermissible income tax due to the fact the income is considered property, and the constitution mandates all state taxes on property be uniform or taxed at the same rate. In addition, any tax on property cannot exceed 1%.
On Nov. 30, 2022, the Washington state Supreme Court granted a stay on the Superior Court’s unconstitutional ruling in order to authorize the Washington Department of Revenue the ability to administer the excise tax until it is legally decided. As a result, the Washington Department of Revenue has communicated its intent to enforce the excise tax filing and excise tax collection as permitted under law. The Washington Supreme Court started to hear oral arguments on Jan. 26, 2023.
On March 24, 2023, the Washington state Supreme Court decided with a vote of 7-2 that the capital gains tax is a valid excise tax under Washington law and therefore constitutional. Specifically, the Superior Court concluded that “the capital gains tax is appropriately characterized as an excise tax because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves,” which is consistent with Washington legal precedence. This decision reverses the Douglass County Superior Court in March of 2022. This decision may be challenged and appealed in the future, however, taxpayers will need to make sure they are compliant today.
For tax year starting Jan. 1, 2022, the Washington excise tax return is due on the original due date of April 18, 2023, or the due date with extension. However, the Washington excise tax payment is due no later than April 18, 2023, regardless of any extension. A valid federal extension will apply to the filing of the capital gains tax; however, a taxpayer is required to confirm this extension with the Washington Department of Revenue before the April 18, 2023 due date.
The Washington excise tax return and payment must be filed electronically on the prescribed Washington forms. Washington’s online system (https://secure.dor.wa.gov/home/Login) is available for Washington individuals to remit tax to the state. Registration for a capital gain account is required before making payments or filing returns and can be done via https://secure.dor.wa.gov/home/Account/Register. In addition, the steps to confirm the extension are found via https://dor.wa.gov/manage-business/my-dor-help/capital-gains-my-dor-help#fileextension on the Washington Department of Revenue website. If the return and/or payment is late, Washington will impose penalties (from 5% and up to 25% in addition to all other applicable penalties) and interest.
For additional information on the Washington capital gains tax, please contact a member of the Baker Tilly state and local tax team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.