DOR responds to capital gains income tax cease and desist letter

Jason Mercier of the Washington Policy Center discusses whether the Department of Revenue plans to collect the capital gains income tax next April even if the state supreme court hasn’t ruled by then

Jason Mercier
Washington Policy Center

The Department of Revenue (DOR) this week responded to the October 5 letter from the Citizen Action Defense Fund (CADF) asking the agency to cease and desist its capital gains income tax rule-making. On March 1, an Inslee-appointed judge ruled that the capital gains income tax “is declared unconstitutional and invalid and, therefore, is void and inoperable as a matter of law.” DOR is declining to stop and told CADF:

“The Department has not taken any actions to enforce the capital gains tax. Rather, it simply is taking reasonable steps to be prepared to administer the capital gains tax if the Washington Supreme Court reverses the superior court and upholds the tax’s constitutionality.”

Based on this response to CADF, I sent this question to DOR yesterday:

“Does this mean DOR has now made the decision that it will not try to collect the tax unless the state supreme court first says it is constitutional, even if no ruling has occurred by April? Based on the current schedule for the case, it is unlikely a ruling will be issued before April 2023 when the draft rules say the tax would be owed.

The last update I received from DOR on this question said: ‘No filings are due until April 2023 so there is still time before a decision would need to be made on how to address this. Currently, that decision has not been made.’”

The following is from a March 2 DOR email chain responding to the court ruling declaring the capital gains income tax unconstitutional (these public records are available on request):

“So…. We will keep going obvi, but scrap the whole thing when the supreme court weighs in? Also, this was no surprise.”

“Yes, no surprise. I believe we keep plugging away until we receive direction to cease.”

“We are still going to act like it will be rolling out in December, so please don’t let your attention or your commitment wane while working on Capital Gains. If it is decided later to be unconstitutional, then we will work to pull it out. But until then we are ‘A GO’ for December.”

Citizen Action Defense Fund is not stopping its efforts. The legal watchdog sent a new letter today to the Joint Administrative Rules Review Committee asking for a review of the statutory authority for DOR’s capital gains income tax rules. According to CADF’s press release:

“The Department claimed that their proposed rule to collect the capital gains income tax is just ‘guidance’ and won’t be implemented until a court of final jurisdiction has ruled. But actions speak louder than words. If the Department is planning to wait, why does its website say the final rule will be adopted later this year? Why does the proposed rule say the tax is due April 17 of next year? Why is DOR asking for money to upgrade its computers to collect the tax in 2023? None of this makes sense if the proposed rule is just guidance.”

I will update this blog when I receive a response from DOR on whether it plans to collect the capital gains income tax next April even if the state supreme court hasn’t ruled by then.

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center.