Court decides income tax lawsuit can continue
A Douglas County Superior Court judge dismissed a state motion to dismiss a lawsuit against its capital gains tax, citing numerous legal arguments made by plaintiffs in recent oral argument, thus allowing the action to continue.
Judge Brian Huber, in his Sept. 10 ruling, also dismissed a state request to move the case to Thurston County, writing that “no good reason has been presented by the state to overcome the presumption that the plaintiffs in this case have a right to choose the forum to decide the case. The state has presented no convincing legal authority that this must or even should do, especially despite the complainants’ objection. “
The consolidated lawsuit was filed by two separate groups of plaintiffs earlier this year after the state legislature passed a tax on long-term income from capital gains. However, Jason Mercier, director of government reform at the Washington Policy Center, told Lens that the new decision had less to do with the actual legality of the tax and more to do with “whether or not taxpayers have the right to challenge an unconstitutional tax in a court of their choice. It is just our right to challenge a tax that we find unconstitutional. “
State Attorney General Bob Ferguson had argued that plaintiffs could not sue the state until they actually paid the tax, citing a law that says injunctions or restrictions can be imposed on a tax on the ground that it violates the state or federal constitution.
The plaintiffs argued that it violates both, and an invoice report obtained by Mercier of the State Revenue Department seems to reinforce this assertion. The report says the charitable deduction in the new law “probably gradually strengthens the argument that capital gains tax is an income tax.” The plaintiffs allege that the tax violates the Federal Trade Clause by imposing the tax on people outside of Washington’s jurisdiction.
In oral argument on Aug. 18, former state attorney general Rob McKenna, who represents the plaintiffs, said the court may consider “hypothetical facts” to allow the trial to continue, an argument reaffirmed by Huber with reference to the 2009 decision in Kinney v. Cook.
The issue at stake is whether or not the new law imposes an excise duty or an income tax, and whether the latter is, whether the income is a good as defined by the constitution of the State and subject to its uniformity clause. While the city of Seattle has not disputed that its 2017 progressive income tax was something else, the new capital gains tax is billed as an excise tax.
However, Mercier said that “you can’t find any tax professional in the world who agrees” with this statement. “How Washington is going to say they know what nobody knows, it will be fascinating to see. It doesn’t matter if you’re the hardest core Bernie Sanders “Taxes the Rich Until They Can’t Breathe” [supporter], there is no dispute outside of Washington state, a capital gains tax is an income tax. “