Washington State: Seattle Payroll Tax Constitutional; Financial Institution Surcharge Oral Arguments Heard

Listen to a brief overview of state tax developments this week, including Washington State, or read full Washington State development below.

Detailed Washington State Development

Litigation is ongoing in Washington State over two recent tax measures. In July 2020, the Seattle City Council approved the JumpStart Seattle revenue plan, which was described as a “progressive revenue plan to respond to the immediate COVID crisis and focus on Seattle’s long-term economic revitalization….” Under the plan, a new payroll expense tax is imposed on persons doing business in Seattle that have over $7 million in payroll expense paid to employees primarily assigned to Seattle. The tax became effective January 1, 2021. Litigation was filed in December 2020 by the Seattle Chamber of Commerce alleging that the ordinance was unconstitutional as it impermissibly taxes an employee’s right to earn a living.  A superior court recently denied that claim and upheld the tax.  

Under the Washington State Constitution, cities have extensive taxing authority, and the court noted it is required to liberally construe such authority. The ordinance imposing the tax applies to businesses that spend $7 million or more on payroll in the City of Seattle; it includes a progressive rate structure. The ordinance expressly prohibits businesses from passing the expense of the tax on to employees in the form of wage deductions. In challenging the tax, the Chamber pointed to an earlier Washington Supreme Court decision striking down an ordinance requiring all employees within the City of Bellingham to secure a yearly license. The superior court contrasted that situation to the Seattle payroll tax and found that because the payroll tax is levied on businesses based on their aggregate payroll expense, it did not burden an employee’s right to earn a living. The court concluded that the payroll expense tax was a constitutionally permissible excise tax on the privilege of doing business in the City of Seattle.  

In the other case, Washington State adopted a B&O surcharge of 1.2 percent levied on specified financial institutions in 2020. A “specified financial institution” is a financial institution that is a member of a consolidated financial institution group that reported an annual net income of at least $1 billion on its consolidated financial statement for the previous calendar year. On May 8, 2020, a superior court judge ruled in favor of two banking associations that the additional tax impermissibly discriminated against out-of-state financial institutions. The state appealed that ruling to the Washington State Supreme Court, and oral arguments were heard on May 25, 2021. In defending the statute, the state argued that it applies to all financial institutions meeting the $1 billion threshold, regardless of where they are established, and that it contains an apportionment requirement to limit the application of the tax to Washington-sourced income. The banking associations argued the effect of the statute is discriminatory in that the vast majority of tax is paid by institutions established outside Washington. They also pointed to statements of legislative supporters of the measure noting that the impact would fall largely on non-Washington institutions. Please stay tuned to TWIST for updates on the litigation over these two measures. 


This Week's Developments

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US