Last year the Legislature passed a capital-gains tax which was immediately challenged in the courts as unconstitutional

Lawrence Wilson
The Center Square

Washington lawmakers have advised the Department of Revenue that its proposed rule concerning the state’s capital gains tax should be labeled as advisory only pending the state Supreme Court’s ruling on the law’s constitutionality.

Last year the Legislature passed a capital-gains tax, RCW 82.87, which was immediately challenged in the courts as unconstitutional. Douglas County Superior Court Judge Brian Huber agreed, ruling on March 1 that the tax is properly considered both a graduated tax and a property tax. 

Douglas ruled that, as a property tax, the law violates the state constitution which requires that property taxes be uniform. The law is not uniform, Douglas ruled, because it does not apply to amounts less than $250,000.

Washington Attorney General Bob Ferguson asked the state Supreme Court to take the case on direct appeal, which it did. A hearing is set for Jan. 26.

Meanwhile, the DOR continued to work on an administrative rule for collecting the tax, even though collection was prohibited by the Superior Court’s ruling that the tax is unconstitutional.

That prompted a letter of protest from the Citizen Action Defense Fund, a local government watchdog nonprofit, demanding the agency stop its rule making activities related to implementing the capital gains income tax.

“It is black letter law that statutes declared unconstitutional are deemed void ‘from the beginning’ or ab initio — they have no legal effect whatsoever and the law treats them as if they never existed,” CADF Executive Director Jackson Maynard wrote in the Oct. 5 letter, addressed to John Ryser, DOR acting director.

Then on Nov. 3 Attorney General Bob Ferguson asked the Supreme Court to stay the lower court’s ruling with respect to tax collecting, calling the decision “incorrect, and is at the very least debatable.” He argued that “It would be profoundly irresponsible for the Department to fail to prepare to collect the tax in April 2023 as directed by statute.”

To clarify the situation, the Joint Administrative Rules Review Committee of the Washington State Legislature wrote to Ryser requesting that “the Department amend the proposed rule to include language that the rule serves as guidance and only applies if the capital gains tax authorized under chapter 82.87 RCW is ruled constitutional and valid by the Washington Supreme Court.”

Wording to that effect is now displayed on the DOR webpage pertaining to RCW 82.87.

Meanwhile, a source familiar with the matter has confirmed to The Center Square that the state Supreme Court will consider Ferguson’s motion to stay the lower court ruling on Nov. 29.

If the Supreme Court grants Ferguson’s motion, the revenue department will be allowed to proceed with collecting the capital gains tax in April 2023 even if no final ruling on the constitutionality of the law is handed down before then.

The Center Square Washington first published this report. Brett Davis contributed to this report.