The statewide capital gain tax, signed into law by Gov. Jay Inslee in 2021, placed a 7% tax on the sale of stocks, bonds, and businesses

Brett Davis 
The Center Square Washington

A Tuesday morning Department of Revenue hybrid in-person/virtual public hearing on clarifying administrative rules regarding the new capital gains income tax – including filing procedures and penalties – ended up clarifying little related to the disputed tax.

Michael Hwang, tax policy specialist with the DOR’s interpretation and technical advice division, may have had an inkling of what was to transpire during the public hearing when he made his opening remarks explaining the status of the tax.

“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.

The statewide capital gain tax, signed into law by Gov. Jay Inslee in 2021, placed a 7% tax on the sale of stocks, bonds, and businesses.

Last month, the state Supreme Court issued a stay on a previous ruling from March when a lower court ruled that the tax was unconstitutional.

That means any effects of that decision are on hold and the state can begin issuing rules and setting up collection before next year’s tax due date. DOR plans to set up an online system for taxpayers to report and pay the tax.

A Supreme Court case to determine the constitutionality of the tax is set to begin on Jan. 26, 2023.

In his March 1 ruling, Douglas County Superior Court Judge Brian Huber ruled the tax on capital gains was “properly characterized as an income tax…rather than as an excise tax as argued by the State” and thus struck it down. The Washington Constitution’s uniformity clause does not allow income to be taxed at different rates.

Washington Attorney General Bob Ferguson then asked the Supreme Court to take up the case on direct appeal. This summer, the high court agreed to do so. 

“When this rule is ready for adoption, if the Supreme Court has not issued its ruling the department will include language…and a note to the official published rule indicating that the validity of the capital gains excise tax is under review by the Washington State Supreme Court and that rule will apply only if the tax is ruled constitutional and valid by the court,” Hwang continued.

The note will be removed should the court uphold the tax, he explained, adding the note would be repealed through expedited rulemaking if the court rules the tax is unconstitutional.

In the absence of any ruling by April 18, 2023, Hwang said the online system would be available for people to report and pay the tax.

If the tax is invalidated, he said refunds with interest would be issued.

An awkward exchange between Hwang and a caller who identified himself as Doug typified the nearly hour-long public hearing.

“Can net long-term capital losses be carried forward for use in future years to offset future long-term capital gains?” Doug asked.

Hwang replied that, generally speaking, carryover of losses is not allowed.

Doug mentioned that was different than federal tax rules on carryover of losses.

“As far as your federal tax return goes, your calculation of Washington capital gains would start from your net long-term capital gains figure on your federal tax return,” Hwang replied.

Doug said that would mean different figures for state and federal taxes.

“I don’t understand,” he said. “I have no understanding of what you’re saying. Please clarify.”

Hwang said he could provide a better answer in written form, asking Doug to send him an email.

“If I submit an email, how soon could I expect an answer?” Doug asked.

Hwang said he would “be on top of it,” but noted he couldn’t commit to a specific deadline.

Doug replied by saying he’s sent questions to the DOR before and it’s taken more than 40 days to get a response.

“Is that the standard I should be thinking of?” he asked.

“It’s a newer tax, so it’s taking longer than usual to respond,” Hwang said, “but we do try to turn around and answer taxpayer questions as soon as possible.”

This report was first published by The Center Square Washington.