Washington Supreme Court Rules Controversial Capital Gains Tax is Constitutional

April 27, 2023

At a glance

  • The main takeaway: The Washington Supreme Court upheld the state’s recently enacted and controversial 7% tax on an individual’s long-term capital gains, including the sale or exchange of long-term capital assets by a pass-through entity or disregarded entity that the individual owns. 
  • Assess the impact: Taxpayers, both residents and nonresidents who own capital assets, directly or through ownership in a pass-through entity, need to consider any potential taxes that may arise from the sale or exchange of such assets. 
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help you determine if you owe any Washington capital gains tax and whether you may be entitled to a credit. 

Schedule a free consultation today to learn more!

The full story:

On March 24, 2023, the Washington Supreme Court ruled that the state’s recently enacted and controversial tax on capital gains does not violate the state’s Constitution.1 To understand the new tax and why it became the subject of litigation, let’s take a brief look at the history of Washington’s tax system.

Washington’s tax structure

Washington is one of several states that does not impose a graduated income tax on individuals and businesses. Much of the state’s revenue is derived from sales and use, property, business and occupations (B&O) taxes.2 The state’s income tax free status is owed to its Constitution and almost a century of case law.

Washington’s Constitution, Article VII, Section 1, requires that “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word “property” as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.” That definition of “property” was not in the original Constitution but was adopted in 1930 by 61% of voters. In addition, Section 2 limits any taxation on property to no more than 1% of its value.

In the following decades, Washington courts have repeatedly held that Washington residents “own” their income, making it property. Therefore, any taxation of income must be uniform (i.e., not graduated) and not exceed 1% unless the state’s Constitution is amended, which Washington voters have overwhelmingly rejected on six different occasions.

The capital gains tax and legal challenge

On May 4, 2021, Washington Governor Jay Inslee signed SB 5096,3 which imposes “an excise tax . . . on the sale or exchange of long-term capital assets” beginning January 1, 2022.4 Only individuals are subject to tax, which equals 7% of such individual’s Washington capital gains; however, this includes gains from the sale or exchange of long-term capital assets by a pass-through entity or disregarded entity that the individual owns.  

There are several exemptions from the tax, including gains from the sale of real estate and of assets held in certain retirement accounts.5 A standard deduction of $250,000 is applied against an individual’s Washington capital gains; this amount applies to married couples as well (regardless of whether they file a joint or individual return).6

An individual is taxed on long-term capital gains allocated to Washington. Gains from the sale of intangible personal property are allocated to the state if the taxpayer was domiciled in this state at the time the sale or exchange occurred.7 Gains from the sale of tangible personal property are allocated to Washington if the property was located in the state at the time of the sale or if:

  1. The property was located in the state at any time during the taxable year in which the sale or exchange occurred or the immediately preceding taxable year;
  1. The taxpayer was a resident at the time the sale or exchange occurred; and
  1. The taxpayer is not subject to the payment of an income or excise tax legally imposed on the long-term capital gains or losses by another taxing jurisdiction.8

To alleviate the potential risk of double taxation, a credit is provided if the taxpayer pays an income/excise tax to another jurisdiction on the capital gain derived from capital assets within such other jurisdiction to the extent the capital gain is also included in the amount of Washington capital gains.9

The tax was challenged on the grounds that it violated the state’s Constitution since it was a non-uniform tax on property (i.e., income). In a lengthy opinion, the Court concluded that this was not a tax on property but rather an excise tax on the sale or exchange of a long-term capital asset. It explained that the tax was not imposed on mere ownership of the asset, but rather on its sale or exchange, and the fact that the tax liability is measured by the amount of the gain (income) does not make it unconstitutional.

The bottom line

Taxpayers, both residents and nonresidents who own capital assets, directly or through ownership in pass-through entities, that could give rise to Washington capital gains need to consider any potential taxes that may arise on the sale or exchange of such assets. Payment of tax for the 2022 tax year was due on April 18, 2023, although if you missed that deadline the state’s capital gains tax webpage provides helpful information about the tax, including how to file/pay and make extension/estimated payments.Aprio’s SALT team can assist you to determine if you owe any Washington capital gains tax and whether you may be entitled to a credit. We constantly monitoring these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.


1 Quinn, et al. v. State of Washington, No. 100769-8, Wash. Supreme Court, March 24, 2023.

2 The B&O tax is a tax on the privilege of doing business in Washington as measured by gross receipts.

3 The legislation is now codified in Chapter 82.87 of the Revised Code of Washington.

4 Rev. Code Wash. § 82.87.040. Long-term capital assets are those capital assets (as defined in Internal Revenue Code section 1221) that are held more than one year.

5 For more exemptions, see Rev. Code Wash. § 82.87.050.

6 Other deductions may be available, including certain charitable donations. See Rev. Code Wash. § 82.87.060.

7 Rev. Code Wash. § 82.87.100(1)(b).

8 Rev. Code Wash. § 82.87.100(1)(a).

9 Rev. Code Wash. § 82.87.100(2)(a).

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.


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