Capital Gains Tax Now ‘in Effect’ Unless Washington Supreme Court Strikes It Down


It’s official: the Washington State Department of Revenue plans to collect the new capital gains income tax that was ruled unconstitutional earlier this year by a lower court judge.

That’s according a Dec. 27 letter from DOR Acting Director John Ryser to state Rep. My-Linh Thai, D-Bellevue.

“Please accept my holiday greetings!” the letter starts off. “I am writing to update you on a change in the plan described in my November 29 letter concerning the proposed capital gains excise tax rule.”

Ryser goes on to explain, “In my letter, I stated that the Department intended to ask the Code Reviser to add a note to the published version of the rule that would indicate that the validity of the capital gains excise tax is under review by the Washington State Supreme Court, and that the rule will apply only if the tax is ruled constitutional and valid by the court.”

On March 1, Douglas County Superior Court Judge Brian Huber ruled the tax was “properly characterized as an income tax…rather than as an excise tax as argued by the State” and struck it down. The state constitution’s uniformity clause does not allow income to be taxed at different rates.

Huber said the capital gains income tax “is declared unconstitutional and invalid, and therefore, is void and inoperable as a matter of law.”

Washington Attorney General Bob Ferguson asked the state Supreme Court to take up the case on appeal, with the high court agreeing to do so. Oral arguments in the case are slated to begin on Jan. 26, 2023.

The Supreme Court has since given the okay for DOR to administer and collect the tax in the meantime.

Ryser acknowledged that in his letter to Thai.

“After we sent the letter, the Washington Supreme Court granted the state’s motion to stay the Douglas County superior court’s ruling that had invalidated the tax,” he wrote. “Accordingly, the capital gains excise tax must now be considered valid unless the Washington Supreme Court invalidates the tax. To be accurate, we will now instead ask the Code Reviser to add a note to the published rule stating that the validity of the tax is currently under review by the Washington Supreme Court, and that the capital gains excise tax and the rule are in effect unless the tax is ruled invalid by the Washington Supreme Court.”

At a public hearing earlier this month, Michael Hwang, tax policy specialist with the DOR’s interpretation and technical advice division, explained the department’s reasoning in moving forward on the tax despite Huber’s ruling.

“The Department of Revenue is engaging in rulemaking to ensure that the state can comply with the Legislature’s directive to be ready to collect the tax in April 2023, and so that taxpayers have all the essential information related to the administration of the capital gains tax in the event the tax is ruled constitutional,” he said at the time.

In 2021, the state Legislature passed and Gov. Jay Inslee signed into law a capital gains income tax aimed at the state’s wealthiest residents. The measure adds a 7% tax on capital gains above $250,000 a year, such as profits from stocks or business sales. Exceptions include the sale of real estate, livestock, and small family-owned businesses.