Washington State: Excise Tax on Capital Gain Income Pending Signature

Washington State Senate Bill 5096, which was sent to the Governor on April 26, 2021, imposes a new excise tax on the sale or exchange of long-term capital assets effective January 1, 2022. Only individuals would be subject to the tax, which would be imposed at a rate of 7 percent of an individual’s Washington capital gains. In computing Washington capital gain, a standard deduction of $250,000 for both individuals and joint filers would be allowed.  The tax applies regardless of whether the taxpayer was the legal or beneficial owner of such assets at the time of the sale or exchange and an individual will be treated as the beneficial owner of long-term capital assets held by a pass-through entity or a grantor trust to the extent of the individual’s ownership in the entity. Sales or exchanges of certain capital assets are explicitly excluded from the scope of the tax including, but not limited to: real estate; an interest in a privately held entity only to the extent that any long-term capital gain or loss from such sale or exchange is directly attributable to the real estate owned directly by such entity: assets held in retirement accounts; assets transferred as part of a condemnation proceeding; livestock related to farming; certain types of property used in a trade or business such as machinery and equipment that have been immediately expensed or depreciated; timber and timberlands; commercial fishing privileges; and goodwill received from the sale of a franchised auto dealership. In addition to the standard $250,000 deduction, a deduction is allowed for the sale of substantially all of a qualified family-owned small business and charitable donations. The legislation adopts specific rules for allocating long-term capital gains and losses. The sale of tangible personal property will be allocated to Washington if the property is located in the state, or if the property is owned by an in-state resident, was present in the state at any time during the year of the sale, and it was not subject to taxation in another jurisdiction. Intangible personal property is allocated to the state based on the domicile of the owner at the time of the sale.  To avoid taxing the same sale or exchange under both the B&O Tax and the capital gains tax, a credit is allowed against B&O Tax due on a sale or exchange that is also subject to the excise tax.

This legislation is somewhat controversial. Washington State does not have an individual income tax and opponents of the measure have already filed a lawsuit alleging that the excise tax is actually a tax on income that violates the Washington Constitution’s Uniformity Clause because it is not applied uniformly across the same class of property. Please stay tuned to TWIST for additional updates on the new tax.