Professional Documents
Culture Documents
Capital Gains Tax Ruled Constitutional by Washington State Supreme Court
Capital Gains Tax Ruled Constitutional by Washington State Supreme Court
Respondents,
v.
STATE OF WASHINGTON;
DEPARTMENT OF REVENUE, an
agency of the State of Washington;
VIKKI SMITH, in her official capacity as
Director of the Department of Revenue,
Appellants,
Appellants.
Quinn v. State, No. 100769-8
Respondents,
v.
STATE OF WASHINGTON;
DEPARTMENT OF REVENUE, an
agency of the State of Washington;
VIKKI SMITH, in her official capacity as
Director of the Department of Revenue,
Appellants,
Appellants.
tax, levied at a rate of seven percent on the sale or exchange of certain long-term
capital assets. Ch. 82.87 RCW. Two groups of plaintiffs, the Quinn and Clayton
2
Quinn v. State, No. 100769-8
plaintiffs (Plaintiffs), brought suit to facially invalidate the tax on three independent
constitutional grounds. They principally claim the tax is a property tax on income,
article VII, sections 1 and 2 of the Washington Constitution. They also claim the
tax violates the privileges and immunities clause of the Washington Constitution and
the dormant commerce clause of the United States Constitution. WASH CONST. art.
I, § 12; U.S. CONST. art. I, § 8, cl. 3. In defending the tax, the State argues that it is
a valid excise tax not subject to article VII’s uniformity and levy requirements, and
The court below concluded the tax is a property tax that violates article VII’s
uniformity requirement. In light of this ruling, the court did not address Plaintiffs’
on the sale or exchange of capital assets, not on capital assets or gains themselves.
This understanding of the tax is consistent with a long line of precedent recognizing
excise taxes as those levied on the exercise of rights associated with property
taxes levied on property itself. Because the capital gains tax is an excise tax under
Washington law, it is not subject to the uniformity and levy requirements of article
VII. We further hold the capital gains tax is consistent with our state constitution’s
3
Quinn v. State, No. 100769-8
privileges and immunities clause and the federal dormant commerce clause. We
therefore reject Plaintiffs’ facial challenge to the capital gains tax and remand to the
personal or corporate income tax and instead generate revenue primarily through a
combination of sales taxes, property taxes, and the business and occupation (B&O)
receipts. See INST. ON TAX’N & ECON. POL’Y, WHO PAYS? A DISTRIBUTIONAL
ANALYSIS OF THE TAX SYSTEMS IN ALL 50 STATES 127 (6th ed. 2018) (hereinafter
ITEP), https://www.itep.sf02.digitaloceanspaces.com/whopays-ITEP-2018.pdf
title of most regressive in the nation. Id. at 7-8; see also RCW 82.87.010. The
poorest individuals bear the greatest tax burden due in large part to our heavy
reliance on sales taxes and the lack of a graduated income tax, with low wage earners
paying nearly six times more in state taxes as a percentage of personal income than
overrepresented in low income brackets. See, e.g., WASH. FUTURE FUND COMM., A
4
Quinn v. State, No. 100769-8
content/uploads/2022-WFF-Committee-Report_Submitted-11.30.22.pdf
[https://perma.cc/7QFG-3BNX].
Much of our modern taxation landscape can be traced to the 1930s—an era of
rapid socioeconomic change and accompanying tax reform efforts, and related state
Supreme Court decisions challenging those efforts. This court’s decisions from that
era still shape Washington tax law today. The capital gains tax must be understood
Washington since early statehood before turning to the underlying facts and
STATEHOOD TO 2013, at 82, 87-88 (2013) (in 1891, 95 percent of state and local tax
revenues came from property taxes). During this early period, Washington’s
economy was driven by farming, logging, mining, fishing, and like industries, a
reflection of the state’s abundance of land and natural resources. BURROWS, supra,
1
An “ad valorem tax” is “imposed proportionally on the value of something
(esp[ecially] real property), rather than on its quantity or some other measure.”
BLACK’S LAW DICTIONARY 1758 (11th ed. 2019); see also “property tax,” id. at
1760 (“A tax levied on the owner of property (esp[ecially] real property), usu[ally]
based on the property’s value.”).
5
Quinn v. State, No. 100769-8
at 87; see also Culliton v. Chase, 174 Wash. 363, 385, 25 P.2d 81 (1933) (Blake, J.,
dissenting) (“In 1889 the major portion of the wealth of the state lay in its lands and
their produce . . . .”). Property taxes proved a fairly equitable and effective way to
fund government because “in those days the value of tangible property was great and
the cost of government little.” Culliton, 174 Wash. at 385 (Blake, J., dissenting).
Things changed, however, as the population expanded and the state urbanized.
Washington’s population more than tripled between 1890 and 1910. BURROWS,
supra, at 88. This fueled a greater need for government services and programs,
especially education and roads. Id. at 88, 90-91. From the 1891–1893 biennium to
Id. at 88. In that same period, multiple national recessions stalled the Washington
Population growth combined with declining property values translated to greater real
property tax rates in order to meet the burgeoning demand for revenue. Id. Rates
more than doubled from 1890 to 1912—from 0.7 percent to 1.6 percent—then
property like stocks and bonds, which largely evaded taxation because intangibles
were easy to hide. Id. at 94, 131; Culliton, 174 Wash. at 385 (Blake, J. dissenting).
6
Quinn v. State, No. 100769-8
Banks also successfully lobbied for a property tax exemption for intangible personal
The increasingly onerous and unfair property tax burden spurred a popular
movement for tax reform, which gained steam in the 1920s. See Hugh D. Spitzer, A
(1993). The most vocal organization supporting tax reform was the Washington
State Grange, a coalition of farmers who felt the acute effects of economic
depression and burdensome property taxes. PHIL ROBERTS, A PENNY FOR THE
(2002). The Grange became a driving force behind efforts to enact new tax
Washington’s 1889 constitution did not limit property tax rates and it contained a
strict uniformity clause requiring that property taxes be uniform on all forms of
In 1929, the legislature enacted the first state income tax: a five percent
corporate “franchise tax” on the net income of banks and financial institutions.
BURROWS, supra, at 130; ROBERTS, supra, at 66-67. The tax included liberal
exemptions for large urban commercial banks, and it quickly faced legal challenges.
Spitzer, supra, at 526. In Aberdeen Savings & Loan Ass’n v. Chase, 157 Wash. 351,
7
Quinn v. State, No. 100769-8
289 P. 536 (1930), this court voided the tax on federal law grounds.2 ROBERTS,
supra, at 67. Specifically, the court found an equal protection violation because the
tax applied to corporate banks but not to unincorporated entities or natural persons
engaged in the savings and loan business. Aberdeen, 157 Wash. at 364-65.
Even as the franchise tax in Aberdeen fell, other tax reforms continued to take
shape. In 1929, the legislature proposed constitutional amendment 14, which voters
approved the following year. Spitzer, supra, at 524. Amendment 14 struck the first
LAWS OF 1929, ch. 191, § 1 (approved Nov. 1930) (emphasis added). This
supra, at 137. Calls for tax relief remained steady as unemployment rates soared,
taxes went unpaid, and citizens lost their homes due to tax delinquency. Id. That
2
Aberdeen was the lead of two cases challenging the franchise tax. Its companion case
was Burr, Conrad & Broom, Inc. v. Chase, 157 Wash. 393, 289 P. 551 (1930).
8
Quinn v. State, No. 100769-8
year, the people took matters into their own hands and overwhelmingly approved
two tax-related popular initiatives, I-64 and I-69, each by a vote of 70 percent. Id.
The first initiative, I-64, imposed a 40-mill property tax rate limit. 3 The second
initiative, I-69, enacted a graduated personal and corporate income tax. Id. at 138.
But before the state collected any income tax revenues, I-69 faced court challenges.
Id. This legal uncertainty, combined with the new 40-mill limit on property taxes,
led the legislature to enact a B&O tax in order to meet the state’s short-term fiscal
In 1933, the litigation challenging the I-69 income tax reached this court in
the case of Culliton v. Chase, 174 Wash. 363. BURROWS, supra, at 138-39. That
term, the court had only eight justices as Justice Parker had fallen ill, and historical
records relay that the first vote was deadlocked, four to four. Id. at 138. The
governor appointed a new justice who appeared to favor the tax, but, as the story is
told, one justice changed his position while the case was pending, resulting in a five
to four vote to void the tax. Id. at 138-39. The five justices joining that result agreed
3
“Mill rate” is “[a] tax applied to real property whereby each mill represents $1 of tax
assessment per $1,000 of the property’s assessed value.” BLACK’S LAW DICTIONARY,
supra, at 1190. For example, if the mill rate is 40 mills and a home is valued at $100,000,
the owner will pay $4,000 in property taxes. See id. The 40-mill limit was later
incorporated into the state constitution through amendment 17 in 1944. H.R.J. Res. 1, 28th
Leg., Reg. Sess. (Wash), LAWS OF 1943, at 936 (approved Nov. 1944); see also BURROWS,
supra, at 159. Article VII, section 2’s maximum levy rate of one percent as we know it
today was enacted in 1972 through amendment 55. Engrossed S.J. Res. 1, 42d Leg., Reg.
Sess. (Wash.), LAWS OF 1971, at 1827 (approved Nov. 1972); see also Belas v. Kiga, 135
Wn.2d 913, 922, 959 P.2d 1037 (1998).
9
Quinn v. State, No. 100769-8
that income falls within amendment 14’s broad definition of property as everything
constitutional requirement that all taxes be uniform on the same class of property.
Culliton, 174 Wash. at 378 (Holcomb, J., lead opinion), 381-82 (Mitchell, J.,
The same day the court decided Culliton, it also issued State ex rel. Stiner v.
Yelle, upholding the B&O tax as a constitutional excise tax on the privilege of
engaging in business, and not a property tax. 174 Wash. 402, 407, 25 P.2d 91 (1933).
Washington was thus left with the B&O tax but no income tax. “Recognizing that
the interim B&O tax measure passed in 1933 would not provide for the total cost of
state government operations over the long term, the next legislature thoroughly
overhauled the tax system with the Revenue Act of 1935 . . . .” Spitzer, supra, at
538. The Revenue Act of 1935 drew various legal challenges, with this court
upholding retail sales and use taxes pursuant to Stiner, and voiding personal and
corporate income taxes (which the legislature had labeled as “privilege” taxes)
pursuant to Culliton. Id. at 538-41. In the years since, various attempts to enact a
By the end of the 1930s, the voters, legislature, and judiciary had carved the
basic state tax structure that remains today. See Spitzer, supra, at 538. As noted,
10
Quinn v. State, No. 100769-8
we still have no graduated income tax, instead funding the state through a
combination of other taxes such as the B&O tax, sales taxes, and real property taxes.
Ours has been recognized as a uniquely regressive tax system that “asks those
making the least to pay the most as a percentage of their income.” RCW 82.87.010;
see also ITEP, supra, at 127. The wealthiest households in Washington are
BIPOC. See, e.g., WASH. FUTURE FUND COMM., supra, at 17; see also Br. of Amicus
BIPOC residents.
Forty-one other states and the District of Columbia tax capital gains.
Elizabeth McNichol, State Taxes on Capital Gains, CTR. ON BUDGET & POL’Y
Legislature followed suit and enacted Engrossed Substitute Senate Bill (ESSB)
5096, imposing a seven percent tax on the sale or exchange of certain long-term
capital assets beginning January 1, 2022. LAWS OF 2021, ch. 196 (codified as ch.
82.87 RCW); see also RCW 82.87.040(1). Washington’s capital gains tax was
11
Quinn v. State, No. 100769-8
passed by a narrow one-vote majority in the state senate in April 2021, and Governor
Inslee signed the tax into law the following month. See LAWS OF 2021, ch. 196.
In enacting the tax, the legislature made specific findings that “it is the
paramount duty of the state to amply provide every child in the state with an
education” and that “high quality early learning and child care is critical to a child’s
success in school and life.” RCW 82.87.010; see also WASH. CONST. art. IX, § 1
(“It is the paramount duty of the state to make ample provision for the education of
all children residing within its borders, without distinction or preference on account
of race, color, caste, or sex.”). The legislature further found that “Washington’s tax
system today is the most regressive in the nation because it asks those making the
least to pay the most as a percentage of their income.” RCW 82.87.010. The
legislative objective of the tax is thus twofold: “[t]o help meet the state’s paramount
duty” to amply fund public education, while “making material progress toward
All revenues from the capital gains tax are dedicated to public education in
Washington. The first $500 million collected from the tax each year will be
deposited into the education legacy trust account, which supports K-12 education,
expands access to higher education, and provides funding for early learning and
child care programs. RCW 82.87.030(1)(a); see also RCW 83.100.230 (education
legacy trust account). All annual revenue beyond $500 million will be deposited
12
Quinn v. State, No. 100769-8
into the common school construction account, which funds the construction of
facilities for common schools. RCW 82.87.030(1)(b); see also RCW 28A.515.320
exacerbating existing tax inequities, the capital gains tax contains numerous
donations. RCW 82.87.050, .060(4), .070(1). The tax applies only to individuals,
not businesses. RCW 82.87.040(1). And it applies only to the sale or exchange of
long-term capital assets, meaning the taxpayer has held the asset for longer than one
year. Id.; RCW 82.87.020(6). The legislature also included a standard deduction of
$250,000, so the tax applies only to nonexempt long-term capital gains that exceed
Washington resident made $260,000 from selling stocks in 2022, that person would
capital gains attributable to another state. The statute allocates to Washington only
those gains from the sale or exchange of tangible personal property located in-state
13
Quinn v. State, No. 100769-8
for example, if the owner is a Washington resident at the time of sale. RCW
82.87.100(1)(a). To further avoid the risk of taxation by multiple states, the statute
offers a tax credit “equal to the amount of any legally imposed income or excise tax
paid by the taxpayer to another taxing jurisdiction on capital gains derived from
To calculate the total amount owed in a given tax year, taxpayers must identify
their “Washington capital gains,” using federal tax reporting as a starting point.
RCW 82.87.020(1), (13). Then, specific adjustments are made to account for
taxable amount. The first payments are due from taxpayers on April 18, 2023. See
RCW 82.87.110(1) (tax due on or before federal tax day). The Department of
Revenue anticipates approximately 7,000 individuals will pay the tax in its first year.
Over its first six years, the tax is projected to generate nearly $2.5 billion in revenue.
Procedural History
facially invalidate the capital gains tax. All plaintiffs are individuals who own, or
are entities whose members own, capital assets, the gains on which are potentially
subject to the tax. They alleged the tax is a property tax, not an excise tax, and that
it violates the uniformity and levy limitations on property taxes set forth in article
14
Quinn v. State, No. 100769-8
VII, sections 1 and 2 of the Washington Constitution, as well as the privileges and
immunities clause of the Washington Constitution. They further alleged the tax
violates the dormant commerce clause of the United States Constitution.4 The
superior court consolidated the two cases and granted a motion by the “Education
Plaintiffs and the State filed cross motions for summary judgment on the facial
constitutionality of the capital gains tax. The superior court denied the State’s
motion and granted summary judgment to Plaintiffs. The court characterized the tax
as a property tax on income pursuant to Culliton, listing eight features of the tax it
voided the tax as unconstitutional under article VII, sections 1 and 2 because (1) the
$250,000 deduction violates the uniformity requirement and (2) the seven percent
rate exceeds the constitutional maximum of one percent for property taxes. The
Intervenors sought direct review under RAP 4.2(a)(2) because this case
pertains to the constitutionality of a tax. They also sought direct review under RAP
4
The Quinn Plaintiffs also pleaded a claim under article I, section 7 of the Washington
Constitution (right of privacy), but they did not move for summary judgment on that claim
and it is not before the court on appeal.
5
The “Education Parties” include the Edmonds School District, Tamara Grubb (a teacher),
Mary Curry (an early learning and childcare provider), and the Washington Education
Association.
15
Quinn v. State, No. 100769-8
4.2(a)(4), arguing the case raises fundamental and urgent issues of broad public
import, including the viability of the Culliton decision. We granted review and
accepted amici curiae briefs from various groups: four supporting the State in favor
of the capital gains tax 6 and three supporting Plaintiffs in opposing the tax. 7
ANALYSIS
This challenge to the capital gains tax is before the court on cross motions for
facts in the light most favorable to the nonmoving party. Wash. Bankers Ass’n v.
Dep’t of Revenue, 198 Wn.2d 418, 427, 495 P.3d 808 (2021), cert. denied, 142 S.
Plaintiffs seek to facially invalidate the capital gains tax on three separate
grounds. They first argue that the tax is a property tax on income pursuant to
Culliton and that it violates the uniformity and levy limitations on property taxes set
forth in article VII, sections 1 and 2 of the Washington Constitution. They also argue
the tax violates our state constitution’s privileges and immunities clause and the
federal constitution’s dormant commerce clause. The State maintains that the capital
gains tax is an excise tax, not a property tax, and that each of Plaintiffs’ constitutional
6
Br. of Amicus Curiae (Equity in Educ. Coal. et al.); Amicus Curiae Br. of Law Professors;
Amici Curiae Br. of Mary Ann Warren et al.; Wash. State Lab. Council et al. Br. of Amici
Curiae.
7
Br. of Amici Curiae Ass’n of Wash. Bus. et al.; Br. of Amici Bldg. Indus. Ass’n of Wash.
et al.; Br. of Amici Curiae Nat’l Taxpayers Union Found. et al.
16
Quinn v. State, No. 100769-8
court were to hold the capital gains tax comes within the purview of Culliton’s
holding that an income tax is a property tax subject to article VII, sections 1 and 2,
Intervenors urge the court to overturn Culliton as incorrect and harmful or because
We hold the capital gains tax is an excise tax under Washington law. We
decline to reexamine Culliton because article VII’s uniformity and levy limitations
on property taxes do not apply. We further conclude the capital gains tax survives
constitutional scrutiny under our state privileges and immunities clause and the
federal dormant commerce clause. We therefore reverse the superior court’s grant
8
We will overrule precedent only upon a showing that (1) an established rule is incorrect
and harmful or (2) the legal underpinnings of our precedent have changed or disappeared.
State v. Pierce, 195 Wn.2d 230, 240, 455 P.3d 647 (2020) (plurality opinion). We have
treated these standards as independent of each other, so satisfying one may provide
justification to overrule a prior case. See id. (both standards met); State v. Crossguns, 199
Wn.2d 282, 290, 505 P.3d 529 (2022) (incorrect and harmful); W.G. Clark Constr. Co. v.
Pac. Nw. Reg’l Council of Carpenters, 180 Wn.2d 54, 66, 322 P.3d 1207 (2014) (legal
underpinnings). Our decisions to date have not explained why no showing of harm is
required to overturn a precedent whose legal underpinnings have eroded, but our reasoning
demonstrates this is a historically driven inquiry, as opposed to a reassessment that a
precedent is legally incorrect. To determine if the legal underpinnings of a precedent have
eroded, we generally look to whether the foundation of the legal principle at issue no longer
exists, such as when a United States Supreme Court opinion we relied on is overturned.
Requiring an additional showing of social harm in such circumstances would seem
unnecessary, given that the very foundation of the rule we announced has eroded. In
contrast, a determination that a precedent is legally incorrect generally involves a critical
reassessment of the principles on which it rests. As an added protection against a later
majority second-guessing the wisdom of a prior majority of the court and thereby creating
instability in the rule of law, we require an additional showing that the prior court’s
interpretation has resulted in demonstrable harm.
17
Quinn v. State, No. 100769-8
of summary judgment to Plaintiffs and remand to the superior court for further
I. The Capital Gains Tax Is a Valid Excise Tax Not Subject to the Requirements
of Article VII, Sections 1 and 2
“The Legislature possesses a plenary power in matters of taxation except as
limited by the Constitution.” Belas v. Kiga, 135 Wn.2d 913, 919, 959 P.2d 1037
(1998). The burden to prove a legislative act is unconstitutional rests on the statute’s
property tax that violates the uniformity and levy limitations imposed by article VII
of the Washington Constitution. Article VII, section 1 requires that “[a]ll taxes shall
be uniform upon the same class of property.” Section 2 provides that “the aggregate
of all tax levies upon real and personal property . . . shall not in any year exceed one
percentum of the true and fair value of such property in money.” These uniformity
and levy requirements apply only to property taxes, not to excise taxes. See, e.g.,
Harbour Vill. Apts. v. City of Mukilteo, 139 Wn.2d 604, 605, 608, 989 P.2d 542
9
As used in this context, “‘beyond a reasonable doubt’” is not an evidentiary standard but
a reflection of “respect for the legislature.” Sch. Dists.’ All. for Adequate Funding of
Special Educ. v. State, 170 Wn.2d 599, 606, 244 P.3d 1 (2010). It signifies that we will
not invalidate a statute unless the challenger, “by argument and research, convince[s] the
court that there is no reasonable doubt that the statute violates the constitution.” Island
County v. State, 135 Wn.2d 141, 147, 955 P.2d 377 (1998).
18
Quinn v. State, No. 100769-8
(1999) (municipal tax on rental property was not an excise, but a property tax
violative of article VII, sections 1 and 2). The central question we must answer is
whether the capital gains tax constitutes a property tax within the meaning of our
state constitution.
century of case law.’” ACP at 867 (internal quotation marks omitted) (quoting
Kunath v. City of Seattle, 10 Wn. App. 2d 205, 216, 444 P.3d 1235 (2019), review
denied, 195 Wn.2d 1013 (2020)). However, the superior court erred in its
application of our precedent, which firmly indicates this tax is an excise. A steady
line of cases beginning with Culliton defines a “property tax” as a tax on the mere
ownership of property, while an “excise tax” applies to the exercise of rights in and
to property or the exercise of a privilege. The capital gains tax is an excise tax
because taxpayers do not owe the capital gains tax merely by virtue of owning capital
assets or capital gains, like a property tax. Instead, the tax relates to the exercise of
rights “in and to property”—namely, the power to sell or transfer capital assets—
like an excise. Mahler v. Tremper, 40 Wn.2d 405, 410, 243 P.2d 627 (1952). And
the “‘incidents’” of this tax do not make it a property tax, as the superior court
concluded, but rather confirm that it is an excise. ACP at 869. Because the capital
gains tax is appropriately characterized as an excise under our precedent, the tax is
19
Quinn v. State, No. 100769-8
This court once remarked there is no “precise line” separating property and
excise taxes. Morrow v. Henneford, 182 Wash. 625, 628, 47 P.2d 1016 (1935). But
over the course of decades, that line has sharpened. A survey of our cases reveals
we have articulated and consistently applied certain key principles for distinguishing
property taxes from excise taxes. Applying those principles here, the capital gains
tax falls squarely on the excise side of the line because it taxes transactions involving
from reform efforts and related court decisions challenging those efforts in the early
twentieth century. In 1930, this court ruled in Aberdeen that a corporate income tax
violated federal equal protection guaranties. 157 Wash. at 365. Three years later,
the court issued its landmark decision in Culliton, addressing the constitutionality of
a newly enacted graduated personal income tax passed by voters through popular
initiative. Relying in part on Aberdeen, the court held that income is “property”
within the meaning of our state constitution, so an income tax must comply with the
uniformity and levy requirements of article VII, sections 1 and 2 of the Washington
tax for lack of uniformity). Since Culliton, Washington appellate courts have
reaffirmed that holding, consistently striking down graduated net income taxes as
20
Quinn v. State, No. 100769-8
209, 211, 215, 53 P.2d 607 (1936) (plurality decision) (personal net income tax);
Petrol. Navigation Co. v. Henneford, 185 Wash. 495, 495-96, 55 P.2d 1056 (1936)
(corporate net income tax); Power, Inc. v. Huntley, 39 Wn.2d 191, 193-95, 235 P.2d
173 (1951) (corporate net income tax); Kunath, 10 Wn. App. 2d at 211, 232
(personal net income tax). What all of these taxes had in common was that they
imposed a broad-based net income tax, capturing “almost any income from almost
The same day this court decided Culliton, it also issued Stiner. 174 Wash.
402. That decision upheld Washington’s first B&O tax, which assessed a tax on
“‘gross proceeds of sales, or gross income, as the case may be.’” Id. at 404 (quoting
LAWS OF 1933, ch. 191). The Stiner court held the B&O tax is an excise, reasoning
it “does not concern itself with income which has been acquired” and instead relates
to the privilege of citizens to pursue “gainful occupation with the expectation that
[they] will be by the state fully protected and made secure . . . in [their] gains
therefrom.” Id. at 406-07. “[T]hat the amount of the tax is measured by the amount
of the income in no way affects the purpose of the act or the principle involved.” Id.
21
Quinn v. State, No. 100769-8
Just two years later, in 1935, this court had an opportunity to apply the
a retail sales tax. We first noted that a tax’s true character “‘must be determined by
its incidents,’” not by its name. Morrow, 182 Wash. at 628 (quoting Wiseman v.
Phillips, 84 S.W.2d 91, 96 (Ark. 1935)). A property tax is “‘a tax which falls upon
the owner merely because [they are an] owner, regardless of the use or disposition
made of [their] property.’” Id. at 631 (quoting Bromley v. McCaughn, 280 U.S. 124,
137, 50 S. Ct. 46, 74 L. Ed. 226 (1929)). In contrast, an excise tax is levied “upon
licenses to pursue certain occupations, and upon corporate privileges,” like the B&O
tax. Id. at 627 (citing 1 THOMAS M. COOLEY, A TREATISE ON THE LAW OF TAXATION
§ 42 (4th ed. 1924)). And relevant to the present case, “‘a tax imposed upon a
particular use of property or the exercise of a single power over property incidental
to ownership, is an excise.’” Id. at 630 (quoting Bromley, 280 U.S. at 136). The
Morrow court upheld the retail sales tax as an excise, emphasizing it applies “‘only
which falls upon the owner merely because [they are an] owner.’” Id. at 631 (quoting
In the decades since, this court has continued to apply the principles set forth
property tax. For example, in Mahler this court upheld the real estate sales tax as an
22
Quinn v. State, No. 100769-8
excise. 40 Wn.2d at 406-07. Though that tax clearly concerned property, we held
it is a valid excise because it taxes the sale of property. Id. at 409-10. Imposition of
the tax is “not upon each and every owner merely because [they are] the owner of
the property involved” but instead “relates to an exercise of one of several rights in
and to property.” Id. (“[a] sales tax . . . is a tax upon the act or incidence of transfer”
and “not a tax upon the subject matter of that sale”); accord Black v. State, 67 Wn.2d
97, 99, 406 P.2d 761 (1965) (excise on the transaction of leasing personal property);
High Tide Seafoods v. State, 106 Wn.2d 695, 700, 725 P.2d 411 (1986) (excise on
the use, possession, and transfer of food fish for commercial purposes); Wash. Pub.
Ports Ass’n v. Dep’t of Revenue, 148 Wn.2d 637, 652, 62 P.3d 462 (2003) (excise
on the transaction of leasing public property); Covell v. City of Seattle, 127 Wn.2d
874, 889-91, 905 P.2d 324 (1995) (property tax labeled a “street utility charge” but
grounds by Chong Yim v. City of Seattle, 194 Wn.2d 682, 451 P.3d 694 (2019);
Harbour Vill. Apts. 139 Wn.2d at 608 (property tax on all residential properties
offered for rent, regardless of whether they were rented). Most recently, we applied
these principles in In re Estate of Hambleton, 181 Wn.2d 802, 335 P.3d 398 (2014).
There, we unanimously upheld the estate tax as an excise “because the tax is ‘not
the shifting of economic benefits and the privilege of transmitting or receiving such
23
Quinn v. State, No. 100769-8
benefits.’” Id. at 832 (quoting West v. Okla. Tax Comm’n, 334 U.S. 717, 727, 68 S.
expansion of Culliton and a limited departure from Stiner, Morrow, Mahler, and
Schumacher, this court considered a challenge to a state tax imposed “‘[u]pon every
person engaging within this state in the business of . . . the renting or leasing of real
property.’” 56 Wn.2d 46, 47, 351 P.2d 124 (1960) (quoting LAWS OF 1959, ch. 5, §
4). The tax was measured by gross rental business income exceeding $300 per
month. Id. At the time of Apartment Operators, the “right to levy an excise tax on
the privilege of doing business or exercising corporate franchises and to base that
tax on income” was well established. Power, Inc., 39 Wn.2d at 197; see also, e.g.,
Stiner, 174 Wash. at 407 (B&O tax is a valid excise measured by income).
Nonetheless, in a brief per curiam opinion, the court invalidated the rental tax as an
at 47 (stating “a tax on rental income is a tax on property, and not an excise tax”). 10
10
The sum total of the court’s reasoning is captured in the following passage: “[A] tax on
rental income is a tax on property, and not an excise tax. Furthermore, a tax upon rents
from real estate is a tax upon the real estate itself, and is, thus, a second tax upon real estate.
There is no tax levied by the act upon unrented real estate. For such reasons (the exclusion
of gross income of under three hundred dollars and the second tax upon rental realty), the
instant tax lacks the uniformity required by [article VII].” Apt. Operators, 56 Wn.2d at 47.
24
Quinn v. State, No. 100769-8
to recognize Apartment Operators was flawed, and we expressly limited the holding
in that case to its facts. For example, just five years later the court examined a retail
sales tax as applied to the lease of a ship used as a floating hotel. Black, 67 Wn.2d
at 98. Citing both Morrow and Mahler, the court upheld the tax as an excise “on the
“To the extent that the per curiam opinion in Apartment Operators may seem to make
statements inconsistent with the above outlined principles, it is hereby deemed not
controlling in the instant case.” Id. at 100 (citation omitted). When the case was
cited nearly 40 years later, we again found Apartment Operators “not controlling”
and upheld the leasehold excise tax (LET), concluding the LET is an excise because
it applies to rental transactions for the use and occupancy of public property. Wash.
Pub. Ports Ass’n, 148 Wn.2d at 650-52. This retreat from Apartment Operators
evidences a recognition that it is out of step with the well-established rule that a tax
privilege granted by the State or rights “in and to property,” such as the power to
lease or sell. Mahler, 40 Wn.2d at 410. Such excise taxes stand in contrast to taxes
assessed on property by virtue of ownership itself. See Harbour Vill. Apts., 139
unconstitutional property tax because it applied to every property offered for rent
25
Quinn v. State, No. 100769-8
regardless of whether property was actually rented, and thus “it is not the rental
taxed”); Covell, 127 Wn.2d at 889-91 (municipal “street utility charge” levied on all
for the charge ar[ose] from [the taxpayers]’ status as property owners and not from
This background on excise and property taxes establishes the foundation for
our conclusion that the capital gains tax is properly considered an excise tax under
Washington law and is therefore not subject to the strictures of article VII, sections
1 and 2.
Plaintiffs concede the tax does not apply unless “assets are sold or exchanged for
gain.” Quinn Resp’ts’ Resp. to State of Wash. Opening Br. (Quinn Br.) at 17; see
also RCW 82.87.040(1) (tax “imposed on the sale or exchange of long-term capital
characteristic of property taxes. Morrow, 182 Wash. at 631 (a property tax “falls
upon the owner merely because [they are an] owner”). One can own capital assets
without ever owing the tax. One owes the tax only when they sell or exchange
26
Quinn v. State, No. 100769-8
Wn.2d at 409-10 (“a tax upon the sale of property is not a tax upon the subject matter
of that sale” and is instead an excise). It is well established that a tax relating to
rights “in and to property,” such as the power to sell capital assets, constitutes an
This tax is wholly unlike the broad-based net income taxes we previously
invalidated under Culliton. Those taxes applied to the taxpayer’s aggregate net
income and were untethered to any specific taxable activity; rather, the taxable
incident was the receipt of income itself. See, e.g., Jensen, 185 Wash. at 218-19 (net
178)); Kunath, 10 Wn. App. 2d at 222-24 (municipal tax on aggregate of net income
capital gains tax does not capture net income sources but instead narrowly applies
Culliton, Jensen, and similar cases involving net income taxes, this tax specifically
exchange of property.
The tax here is comparable to the real estate and rental excises we upheld in
Mahler, Black, and Washington Public Ports Ass’n. Each of those cases involved
27
Quinn v. State, No. 100769-8
taxes that were measured by income derived from real estate sales or rentals, but we
recognized those taxes were excises because they applied to real estate transactions.
The taxable incident is the transaction. The same is true here: the capital gains tax
when “assets are sold or exchanged for gain.” Quinn Br. at 17. Mahler, Black, and
Washington Public Ports Ass’n are controlling. To the extent Apartment Operators
supports a contrary conclusion, our later cases have limited Apartment Operators to
Plaintiffs vigorously argue the taxable incident is not the transaction but the
realization of capital gains beyond $250,000. Plaintiffs confuse the tax’s subject
matter with its measure. The tax is not levied on capital gains; rather, it is measured
by capital gains. Our cases unequivocally hold that excise taxes levied on a
and this does not transform the fundamental nature of the tax. E.g., Stiner, 174
Wash. at 407 (measuring an excise tax by income “in no way affects the purpose of
the act or the principle involved”). We have upheld many excise taxes measured by
income. See generally, e.g., Mahler, 40 Wn.2d 405 (real estate sales excise
measured as percentage of sale price); Wash. Pub. Ports Ass’n, 148 Wn.2d 637 (LET
measured as percentage of rent); Hambleton, 181 Wn.2d 802 (estate excise measured
as percentage of estate value). That this tax applies only when one realizes gains
28
Quinn v. State, No. 100769-8
establishing a threshold at which the tax applies—it does not change the taxable
incident, which remains the transaction, not the ownership of property. Indeed,
many valid excise taxes contain similar features. See, e.g., RCW 82.32.045(5)(a)
(B&O tax exempts businesses that gross $125,000 or less annually); Estate Tax
82.08.0293(1) (retail sales tax exempts transactions for sale of food). Exemptions
and deductions are pervasive features of excise and property taxes alike. None of
our cases appear to suggest the presence of these features bears on the subject or
nature of the tax, which, again, relates to rights “in and to property,” as an excise.
Plaintiffs argue the capital gains tax cannot be an excise because it lacks
certain distinctive features of a classic excise tax, but they are incorrect. First,
11
Like Plaintiffs, the dissent misses this point with respect to the $250,000 deduction. The
dissent views the taxable incident here as the realization of gains beyond $250,000, stating
that “the financial outcome of the capital transaction determines whether the tax applies.”
Dissent at 14. But the same is true of the B&O excise, which exempts businesses whose
profits fall below a certain dollar threshold. In those circumstances, the financial outcome
similarly determines whether the tax applies—but the B&O tax is still an excise. The
legislature may permissibly establish exemptions or deductions fixing a particular
threshold that triggers the tax, and the choice to do so does not alter the fact that the
transaction is the taxable incident.
29
Quinn v. State, No. 100769-8
Plaintiffs misconstrue prior cases indicating that excise taxes apply only to purely
“voluntary” conduct. They maintain a true “excise tax is ‘imposed upon a voluntary
act of the taxpayer, which affords the taxpayer the benefits of the occupation,
business, or activity that triggers the taxable event’ . . . .” Quinn Br. at 15 (quoting
Sheehan v. Cent. Puget Sound Reg’l Transit Auth., 155 Wn.2d 790, 800, 123 P.3d
88 (2005)); see also id. at 18-19 (identifying possible scenarios where “individuals
will be subject to the capital gains tax even if they do not deliberately, intentionally,
or voluntarily take any action to cause the sale or exchange of long-term capital
assets”). In Plaintiffs’ view, the capital gains tax is not an excise because one owes
the tax even in circumstances where the taxpayer does not “voluntarily” sell an asset,
for example, where a trust sells capital assets on behalf of trust beneficiaries. To be
sure, voluntariness is a distinctive feature of excise taxes, but Plaintiffs take too
narrow a view. The State correctly notes that most transactions subject to this tax
will have been voluntarily made by the taxpayer, and we are unpersuaded that the
nature of the tax changes under the circumstances proffered by Plaintiffs, where the
taxpayer does not personally undertake the transaction from which they realize a
gain. Plaintiffs’ logic falters when considered in the context of other taxes we have
unanimously upheld the estate tax as a valid excise though it is triggered by death—
an event not usually associated with individual voluntary choice. Hambleton, 181
30
Quinn v. State, No. 100769-8
Wn.2d at 831-33 (“taxing [qualified terminable interest property] assets upon the
death of a surviving spouse qualifies as an excise tax”). And in the context of real
estate transactions, a minority owner of property would still owe the real estate
excise even if they personally objected to the majority owner’s decision to sell jointly
some action that results in a sale or transfer of property as the taxable event, whether
or not reflecting the individual will of the taxpayer. That there may not be a personal,
Next, Plaintiffs argue the capital gains tax cannot be an excise because it does
not rest on the exercise of any taxable privilege, as with the B&O tax. Moreover,
they argue, the tax is not measured by the extent that an individual engages with any
privilege. As to the first point, the State is not always required to identify a taxable
privilege in order for a tax to constitute an excise. While that was the case with the
B&O tax at issue in Stiner, there are different flavors of excise taxes under our
precedent. Some regulate a particular privilege granted by the State, whereas others
relate “to an exercise of one of several rights in and to property,” such as purchases,
sales, and use. Mahler, 40 Wn.2d at 409-10; see also, e.g., P. Lorillard Co. v. City
of Seattle, 83 Wn.2d 586, 588-90, 521 P.2d 208 (1974) (holding municipal privilege
tax on business of wholesaling cigarettes and state tax on “sale, use, [and]
31
Quinn v. State, No. 100769-8
consumption” of cigarette products “are not of the same nature” for preemption
purposes, though both are excise taxes related to cigarettes). We have upheld many
taxes relating to the exercise of property rights as excise taxes without specifying a
particular privilege that is being taxed. See generally, e.g., Morrow, 182 Wash. 625
(retail sales excise); Mahler, 40 Wn.2d 405 (real estate sales excise); Black, 67
Wn.2d 97 (retail sales excise applied to lease of floating hotel); High Tide Seafoods,
106 Wn.2d 695 (excise on transfer and possession of enhanced food fish for
commercial purposes). The capital gains tax belongs to this distinct category of
excise taxes relating to incidents of property ownership, so the lack of any taxable
privilege is immaterial. As to the second point, Plaintiffs are correct that excise taxes
typically have some degree of connection between the subject matter and the
measure of the tax. See, e.g., Sheehan, 155 Wn.2d at 801 (excise taxes require a
“nexus between the privilege and the taxation method,” though the state constitution
does not demand an entirely precise fit). But when the capital gains tax is properly
viewed as a tax on the exercise of rights in and to property, there is an obvious nexus
between the subject of the tax (transactions involving capital assets) and the measure
the capital gains tax differs from other excise taxes rests on their view of the
“incidents” of the tax. The superior court accepted these arguments, concluding that
32
Quinn v. State, No. 100769-8
the capital gains tax bears certain “hallmarks” of property taxes. We take this
opportunity to more specifically address the superior court’s analysis and to provide
In concluding the capital gains tax is a property tax on income, the superior
court relied almost exclusively on the principle that courts determine the true nature
of a tax based on “‘its incidents, not by its name.’” Harbour Vill. Apts. 139 Wn.2d
at 607 (quoting Jensen, 185 Wash. at 217); see also ACP at 869-71. The superior
voided the tax for violating the uniformity and levy requirements of article VII,
sections 1 and 2.
all the various facets of a tax, ranging from exemptions and deductions, to reliance
that we look beyond legislative labels and characterize a tax based on its “incidents,”
Jensen, 185 Wash. at 217, the plural term “incidents” as used in our cases describes
specific elements of a tax. We have explained that any tax statute has three basic
elements: (1) the “taxable incident,” or the activity that triggers the tax, (2) the tax
measure, or the “base that represents the value of the taxable incident,” (3) and the
tax rate, which, “when multiplied by the tax measure, determines ‘the amount of tax
33
Quinn v. State, No. 100769-8
due.’” Ford Motor Co. v. City of Seattle, 160 Wn.2d 32, 39, 156 P.3d 185 (2007)
§ 72.3, at 449 (1997)). When we determine the nature of a tax, we examine the first
two elements: the subject of the tax (the “taxable incident”) and the measure. P.
Lorillard Co., 83 Wn.2d at 589 (“We approve of and adopt the criteria for
determining the incidence of a tax . . . that is, the subject matter and measure of the
tax.”); Harbour Vill. Apts. 139 Wn.2d at 607 n.1 (“The nature of a tax is revealed by
examining the subject matter of the tax and . . . ‘the measure of the tax.’” (quoting
Reed v. City of New Orleans, 593 So. 2d 368, 371 (La. 1992)). Here the taxable
incident is the sale or exchange of qualifying capital assets. The measure is the
resulting gain. Consistent with our case law, the incidents of this tax confirm it is
an excise. See generally, e.g., Mahler, 40 Wn.2d 405 (excise on sale of real property
Rather than focusing on these elements, the superior court appears to have
analogized between the capital gains tax and the federal individual income tax,
drawing comparisons between the two. This is the wrong constitutional lens.
Because the federal individual income tax is considered an excise tax under federal
law, comparing various facets of the federal income tax and the capital gains tax
does not support characterizing the capital gains tax as a property tax under article
VII. See Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 16-17, 36 S. Ct. 236, 60 L.
34
Quinn v. State, No. 100769-8
Ed. 493 (1916) (income taxes do not come “within the class of direct taxes on
property,” and “taxation on income [is] in its nature an excise entitled to be enforced
as such”). To determine whether a tax is a property tax within the meaning of the
clear principles for distinguishing property and excise taxes. The superior court
features of a property tax and that can be found in taxes we have upheld as excises.
The first such “hallmark” states the capital gains tax “relies upon federal IRS
income tax returns that Washington residents must file and is thus derived from a
taxpayer’s annual federal income tax reporting.” ACP at 869 (citing Kunath, 10 Wn.
App. 2d at 215). A related “hallmark” states the tax “is based on an aggregate
calculation of an individual’s capital gains over the course of a year from all sources,
annual taxable dollar figure.” Id. at 870. Reliance on federal tax reporting
mechanisms does not transform the capital gains tax into a property tax. For
example, we unanimously upheld the estate tax as an excise despite our express
acknowledgement that Washington’s Estate and Transfer Tax Act, ch. 83.100 RCW,
“is based” on “federal estate tax law.” Hambleton, 181 Wn.2d at 832. As with the
estate tax, there are legitimate administrative reasons why the legislature would
35
Quinn v. State, No. 100769-8
implement aspects of federal tax law to collect the capital gains tax, including the
use of federal forms and an aggregate calculation method. See In re Est. of Bracken,
175 Wn.2d 549, 583, 290 P.3d 99 (2012) (Madsen, J., concurring/dissenting) (by
relying on federal estate tax law, our “legislature avoided having to duplicate
to avoid the complication and confusion that a different set of state rules might
create”).
here, either. Power is this court’s sole case suggesting that reliance on federal
income tax reporting may be relevant to the question whether a tax is an excise or
property tax on income. 39 Wn.2d 191. But federal reporting alone was not
determinative in Power, nor is it here. Power involved a corporate net income tax
the legislature levied on every bank and corporation purportedly for “‘the privilege
1951, ch. 10). In ruling this tax was an unconstitutional, nonuniform property tax
on income, the Power court noted, “It is geared throughout to the Federal income
tax legislation as it relates to corporations.” Id. at 196. But equally if not more
important was that the tax had “no reference to income from the various business
activities on which the [B&O] tax, a true excise tax, is based” but instead taxed
“almost any income from almost every source.” Id. at 196-97. The tax plainly was
36
Quinn v. State, No. 100769-8
not an excise because it was a broad-based levy on net income, lacking any nexus to
a taxable privilege or incident of property ownership. See id.; see also Jensen, 185
contrast, the capital gains tax targets an activity long recognized as subject to excise
taxation (the sale or exchange of property), and the clear nexus between the tax’s
subject matter (capital transactions) and its measure (capital gains) distinguishes it
Another putative “hallmark” states the capital gains tax “is levied annually
(like an income tax), not at the time of each transaction (like an excise tax).” ACP
at 870. But an annual or periodic levy is not a “hallmark” of a property tax under
our precedent. Many valid excise taxes are levied in this same way. See, e.g.,
Sheehan, 155 Wn.2d at 795 (motor vehicle excise tax due annually); RCW
82.32.045(1)-(3) (excise taxes under chapters 82.04 (B&O), 82.08 (retail sales),
82.14 (local retail sales and use), and 82.16 (public utility) RCW can be reported and
tax “includes a deduction for certain charitable donations the taxpayer has made
during the tax year.” ACP at 870. But Washington’s estate tax, which we
37
Quinn v. State, No. 100769-8
The superior court also distinguished the measure of the capital gains tax from
the real estate excise tax. ACP at 870 (identifying “hallmark” that the tax “is levied
not on the gross value of the property sold in a transaction (like an excise tax . . .),
but on an individual’s net capital gain (like an income tax)).” We find no authority
for the proposition that an excise tax on property transactions must be measured by
gross property value, or that a property tax must be measured by net gain. Indeed,
manner than by gross property value. See, e.g., Wash. Pub. Ports Ass’n, 148 Wn.2d
at 650-52 (LET assessed against amount of taxable rent). This measure of the tax
does not constitute a hallmark that defines the capital gains tax as a property tax.
reliance on certain “hallmarks” of the capital gains tax drifts from the relevant
distinctions drawn in our precedent. The principles developed in the line of cases
from Culliton and Stiner through Hambleton support the conclusion that the capital
gains tax is in the nature of an excise tax, not a property tax subject to the strictures
of article VII, sections 1 and 2. In light of this holding, we need not address the
uniformity and levy limitations of article VII, and we decline to reexamine the
Culliton decision, as the capital gains excise tax falls outside the scope of Culliton’s
38
Quinn v. State, No. 100769-8
challenges to the tax under the state privileges and immunities clause and the federal
Separate from their article VII claim, Plaintiffs seek to facially invalidate the
capital gains tax on two additional constitutional grounds. They argue the tax
violates (1) the privileges and immunities clause of the state constitution and (2) the
dormant commerce clause of the federal constitution. We hold the capital gains tax
A. The Capital Gains Tax Does Not Violate the Privileges and
Immunities Clause of the Washington Constitution
As the party challenging the constitutionality of the capital gains tax, Plaintiffs
bear the burden of proving a privileges and immunities violation. Woods v. Seattle’s
Union Gospel Mission, 197 Wn.2d 231, 239, 481 P.3d 1060 (2021). Plaintiffs’
privileges and immunities claim fails because they have not established that the
capital gains tax implicates a fundamental right of state citizenship, and even if it
corporation other than municipal, privileges or immunities which upon the same
terms shall not equally belong to all citizens, or corporations.” WASH. CONST. art.
39
Quinn v. State, No. 100769-8
clause. Schroeder v. Weighall, 179 Wn.2d 566, 571, 316 P.3d 482 (2014); U.S.
which rights are well defined in our cases. Id. at 572. We first ask whether the
Plaintiffs’ claim fails at both steps of the analysis. They first claim the capital
gains tax implicates the fundamental right to be exempt from taxes from which other
Washingtonians are exempt. Quinn Br. at 33 (quoting Grant County Fire Prot. Dist.
No. 5 v. City of Moses Lake, 150 Wn.2d 791, 813, 83 P.3d 419 (2004)). But we have
never recognized such a right. Plaintiffs root their argument in a misreading of Grant
County and State v. Vance, 29 Wash. 435, 70 P. 34 (1902). In those cases, we listed
immunities clause, which included the right “to be exempt . . . from taxes or
burdens which . . . citizens of some other state are exempt from.” Grant County,
150 Wn.2d at 813 (emphasis added) (quoting Vance, 29 Wash. at 458). This
privilege relates to the federal right of nonresidents to enter a state, compete for
business, and pay taxes on equal footing with residents of that state. See Lunding v.
N.Y. Tax Appeals Tribunal, 522 U.S. 287, 296, 118 S. Ct. 766, 139 L. Ed. 2d 717
(1998) (federal privileges and immunities clause protects “the right of a citizen of
40
Quinn v. State, No. 100769-8
any State to ‘remove to and carry on business in another without being subjected in
property or person to taxes more onerous than the citizens of the latter State are
subjected to’” (quoting Shaffer v. Carter, 252 U.S. 37, 56, 40 S. Ct. 221, 64 L. Ed.
445 (1920))). Neither Grant County nor Vance recognized a fundamental right of
Washington residents to enjoy the same tax exemptions enjoyed by all other
Washington residents.
Even assuming the capital gains tax grants a privilege or immunity implicating
a fundamental right, Plaintiffs’ claim still fails because reasonable grounds support
involved.” Grant County Fire Prot. Dist. No. 5 v. City of Moses Lake, 145 Wn.2d
702, 731-32, 42 P.3d 394 (2002), vacated in part on other grounds, 150 Wn.2d 791.
Because the legislature has broad discretion when making classifications for taxation
purposes, we will not void a tax under article I, section 12 if “‘any state of facts can
reasonably be conceived that would sustain the classification.’” Id. at 732 (quoting
United Parcel Serv., Inc. v. State, 102 Wn.2d 355, 369, 687 P.2d 186 (1984)).
The capital gains tax meets this standard. We have previously recognized that
“the equalization of the burdens of taxation” is a “lawful taxing policy of the state.”
Tex. Co. v. Cohn, 8 Wn.2d 360, 387, 112 P.2d 522 (1941). And the funding of public
41
Quinn v. State, No. 100769-8
duty.” WASH. CONST. art. IX, § 1; see also McCleary v. State, 173 Wn.2d 477, 529,
269 P.3d 227 (2012) (holding State failed in its affirmative constitutional duty to
amply fund K-12 education). The legislature’s express purpose in enacting the
capital gains tax is to help meet the State’s paramount duty to amply fund public
education and to make “material progress toward rebalancing the state’s tax code.”
RCW 82.87.010. Through targeted exemptions, this tax will generate substantial
their overall income in state taxes. Plaintiffs may disagree with the legislative policy
behind the capital gains tax, but they fall short of demonstrating that policy is
unreasonable under article I, section 12. The State is therefore entitled to summary
B. The Capital Gains Tax Does Not Violate the Dormant Commerce
Clause of the United States Constitution
Finally, we hold that Plaintiffs’ dormant commerce clause claim fails because
the capital gains tax satisfies federal constitutional requirements. The commerce
clause grants Congress the power to “regulate commerce . . . among the several
states.” U.S. CONST. art. I, § 8, cl. 3. Implicit in this affirmative grant lies “a further,
state taxation even when Congress has failed to legislate on the subject.” Okla. Tax
42
Quinn v. State, No. 100769-8
Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 179, 115 S. Ct. 1331, 131 L. Ed. 2d
261 (1995). Over the decades, the United States Supreme Court has construed the
dormant commerce clause to protect the flow of interstate commerce and to prevent
states from “retreating into economic isolation or jeopardizing the welfare of the
Nation as a whole.” Id. at 180. The Court’s dormant commerce clause jurisprudence
has evolved over the years, rejecting a formalistic approach in favor of a practical
one. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 278-79, 97 S. Ct. 1076, 51
L. Ed. 2d 326 (1977) (rejecting formalistic Spector Motor Serv. Inc. v. O’Connor,
340 U.S. 602, 71 S. Ct. 508, 95 L. Ed. 573 (1951), rule that believed “interstate
commerce should enjoy a sort of ‘free trade’ immunity from state taxation”); see
also Goldberg v. Sweet, 488 U.S. 252, 259-60, 109 S. Ct. 582, 102 L. Ed. 2d 607
rejecting the view that the States cannot tax interstate commerce, while at the same
Edison Co. v. Montana, 453 U.S. 609, 615-16, 101 S. Ct. 2946, 69 L. Ed. 2d 884
(1981) (holding that courts must apply a “‘consistent and rational method of
inquiry,’” which we get from Complete Auto (quoting Mobil Oil Corp. v. Comm’r
of Texas, 495 U.S. 425, 100 S. Ct. 1223, 63 L. Ed. 2d 510 (1980)).
determine whether a state tax violates the dormant commerce clause. See, e.g.,
43
Quinn v. State, No. 100769-8
Wash. Bankers Ass’n, 198 Wn.2d at 429. The Complete Auto test “requires a tax to
be (1) ‘applied to an activity with a substantial nexus with the taxing State,’ (2)
(4) ‘fairly related to the services provided by the State.’” Id. (quoting Complete
Auto, 430 U.S. at 279). “If a tax fails any one of these requirements, it is invalid.”
Id. (citing Ford Motor Co., 160 Wn.2d at 48). The State urges us to abandon the
Complete Auto test and instead reject Plaintiffs’ dormant commerce clause claim “if
there are any circumstances where the statute can constitutionally be applied.”
Wash. State Republican Party v. Pub. Disclosure Comm’n, 141 Wn.2d 245, 282
n.14, 4 P.3d 808 (2000). Because the State has cited no authority explaining why
we should abandon the Complete Auto test, and we can see no basis to depart from
The parties agree that the capital gains tax meets the fourth prong of the
Complete Auto test and that Washington may tax capital gains derived from the sale
or exchange of tangible property within its borders without violating the dormant
commerce clause. We must therefore determine whether the statute’s two other
intangible property or (b) tangible property located out-of-state at the time of the
44
Quinn v. State, No. 100769-8
The first prong of the Complete Auto test asks whether there is a substantial
nexus between the taxing state and the taxable event. South Dakota v. Wayfair, Inc.,
585 U.S. __,138 S. Ct. 2080, 2099, 201 L. Ed. 2d 403 (2018). A nexus exists when
[the State].” Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444-45, 61 S. Ct. 246, 85
L. Ed. 267 (1940); see also Commonwealth Edison Co., 453 U.S. at 626 (“[I]t is the
activities or presence of the taxpayer in the State that may properly be made to bear
a ‘just share of state tax burden.’” (emphasis added) (quoting W. Live Stock v. Bureau
of Revenue, 303 U.S. 250, 254, 58 S. Ct. 546, 82 L. Ed. 823 (1938))). Long-standing
precedent holds the taxpayer’s domicile state has tax jurisdiction over the sale or
exchange of intangible goods. Curry v. McCanless, 307 U.S. 357, 368-69, 59 S. Ct.
requirement. We reject this argument because it erroneously assumes that the capital
gains tax is levied on the property rather than on the incidents and rights associated
with the property. As explained, the capital gains tax is levied on capital
incident is the taxpayer’s exercise of their power to dispose of capital assets. That
45
Quinn v. State, No. 100769-8
power is exercised in the state where the taxpayer is domiciled. Curry is illustrative.
There, the Supreme Court determined a decedent’s domicile state (Tennessee) had
jurisdiction to tax the transfer of an interest in stocks and bonds held in trust by an
Alabama trustee. Curry, 307 U.S. at 370-71. It concluded Tennessee could tax the
transaction because
Id. Like the inheritance tax in Curry, the capital gains tax relates to the taxpayer’s
exercise of rights in and to property, including the power to dispose of that property.
Supreme Court has held that a domicile state can tax intangibles even when the
intangibles exist outside the state or when the taxpayer expands their activities
Curry, 307 U.S. at 368; see also In re Est. of Plasterer, 49 Wn.2d 339, 341-42, 301
P.2d 539 (1956) (domicile state had jurisdiction to impose inheritance tax on the
46
Quinn v. State, No. 100769-8
heirs’ right to receive payments from the sale of the decedent’s real property located
in another state because “[i]ntangible personal property has its situs at the domicile
of the owner at the time of [their] death”). We hold that the taxpayer’s in-state
domicile provides a sufficient nexus between Washington and capital gains derived
The second question in the Complete Auto test asks whether a tax is fairly
apportioned “to ensure that each State taxes only its fair share of an interstate
malapportionment, we must ask whether the tax is internally consistent, and, if so,
whether it is externally consistent as well. Jefferson Lines, 514 U.S. at 185. A tax
an identical tax, no multiple taxation would result.” Goldberg, 488 U.S. at 261.
Internal consistency looks to the structure of the tax, not its economic reality.
Jefferson Lines, 514 U.S. at 185. “The external consistency test asks whether the
State has taxed only that portion of the revenues from the interstate activity which
reasonably reflects the in-state component of the activity being taxed.” Goldberg,
488 U.S. at 262. External consistency pertains to “the economic justification for the
State’s claim upon the value taxed.” Jefferson Lines, 514 U.S. at 185. “[T]he threat
of real multiple taxation (though not by literally identical statutes) may indicate a
47
Quinn v. State, No. 100769-8
We hold the capital gains tax is internally consistent. The statute allocates to
Washington long-term capital gains or losses from the sale or exchange of (1)
tangible personal property located in-state, (2) tangible personal property located
out-of-state if (i) the property was in-state any time during the present or previous
taxable year, (ii) the taxpayer was a resident at the time of sale, or (iii) another
jurisdiction does not subject the taxpayer to payment of an income or excise tax on
those capital gains, and (3) intangible property if the taxpayer was domiciled in
Washington. RCW 82.87.100(1). The statute also includes a tax credit to prevent
any possible multiple taxation. RCW 82.87.100(2)(a) (tax credit allowed “equal to
the amount of any legally imposed income or excise tax paid by the taxpayer to
another taxing jurisdiction on capital gains derived from capital assets within the
other taxing jurisdiction”). The United States Supreme Court has repeatedly held
infirmity. See, e.g., Comptroller of Treasury v. Wynne, 575 U.S. 542, 567-68, 135
S. Ct. 1787, 191 L. Ed. 2d 813 (2015) (suggesting “Maryland could remedy the
infirmity in its tax scheme by offering” tax credit); Goldberg, 488 U.S. at 264 (“To
the extent that other States’ [taxing schemes] pose a risk of multiple taxation, the
credit provision contained in the Tax Act operates to avoid actual multiple
taxation.”); D.H. Holmes Co. v. McNamara, 486 U.S. 24, 31, 108 S. Ct. 1619, 100
48
Quinn v. State, No. 100769-8
tax credit). 12
consistency merely because another taxing jurisdiction could tax the capital
invalidate” an entire tax scheme. Goldberg, 488 U.S. at 264. Multiple states may
apportionment concerns. See Mobil Oil Corp., 445 U.S. at 444-45. Plaintiffs have
failed to demonstrate how the statute would result in multiple taxation if all states
adopted the same tax. Hypotheticals are not sufficient to facially invalidate the tax,
and an as-applied challenge is the best remedy for a taxpayer if any of those
12
Plaintiffs claim the tax credit cannot save the capital gains tax because it extends only
“to capital gains paid by the taxpayer to another state ‘from capital assets within the other
taxing jurisdiction.’” Quinn Br. at 56-57 (quoting ESSB 5096, § 11(2)(a)); see also RCW
82.87.100(2)(a). They offer a hypothetical where a taxpayer with multiple residencies,
such as Washington and California, could experience multiple taxation. Id. But the
statutory definition of “residency” ensures that an individual can have only one residency.
RCW 82.87.020(10) (residency relates to domicile). Moreover, it appears Washington’s
capital gains tax would not apply in Plaintiffs’ example because California taxes capital
gains as income. RCW 82.87.100(1)(a)(iii) (gains allocated to Washington if “[t]he
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” (emphasis added)).
49
Quinn v. State, No. 100769-8
We also hold the capital gains tax is externally consistent. Plaintiffs complain
that a taxpayer’s residency does not give Washington an economic justification for
taxing capital gains derived from the sale or exchange of intangible property or
valid interest in taxing these gains. Plaintiffs also argue the capital gains tax lacks
extent to which the [capital gains tax] creates a risk of multiple taxation.” Goldberg,
488 U.S. at 262-63. The allocations found in RCW 82.87.100 detail when capital
gains are attributed to Washington, and the tax credit prevents any real risk of
multiple taxation. RCW 82.87.100(2)(a); D.H. Holmes, 486 U.S. at 31. The statute
also permits taxpayers to deduct from their Washington capital gains “[a]mounts that
the state is prohibited from taxing under the Constitution of this state or the
Constitution or laws of the United States.” RCW 82.87.060(2). Because the tax is
As to Complete Auto’s third prong, we hold the capital gains tax does not
50
Quinn v. State, No. 100769-8
Filo Foods, LLC v. City of SeaTac, 183 Wn.2d 770, 809, 357 P.3d 1040 (2015)
(citing Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 568 &
n.2, 117 S. Ct. 1590, 137 L. Ed. 2d 852 (1997)). A tax has a discriminatory effect if
U.S. at 549-50 (internal quotation marks omitted) (quoting Nw. States Portland
Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S. Ct. 357, 3 L. Ed. 2d 421 (1959)).
In this respect, “the anti-discrimination principle has not in practice required much
Franchise Tax Bd., 463 U.S. 159, 171, 103 S. Ct. 2933, 77 L. Ed. 2d 545 (1983).
The capital gains tax is not facially discriminatory because the plain text of the
statute does not treat out-of-state individuals unfavorably. And as discussed, the
capital gains tax does not subject an individual to multiple taxation because it
provides a method for allocating capital gains to Washington and the tax credit
Because the capital gains tax satisfies all four elements of the Complete Auto
test, Plaintiffs have failed to demonstrate a dormant commerce clause violation and
the State is entitled to summary judgment on this claim. While Plaintiffs’ facial
51
Quinn v. State, No. 100769-8
challenge fails, we note that our holding today does not foreclose future as-applied
challenges under the dormant commerce clause should factual circumstances arise
CONCLUSION
The capital gains tax is a valid excise tax under Washington law. Because it
is not a property tax, it is not subject to the uniformity and levy requirements of
article VII, sections 1 and 2 of the Washington Constitution. In light of this holding,
further hold the tax is consistent with our state constitution’s privileges and
immunities clause and the federal dormant commerce clause. We reverse the
superior court order invalidating the capital gains tax and remand for further
52
Quinn v. State, No. 100769-8
WE CONCUR:
___________________________ ____________________________
____________________________ ____________________________
____________________________ ____________________________
____________________________ ____________________________
53
No. 100769-8
(Gordon McCloud, J., dissenting)
No. 100769-8
1
A “capital gain” is “[t]he profit realized when a capital asset is sold or
exchanged.” BLACK’S LAW DICTIONARY 259 (11th ed. 2019); see also U.S. INTERNAL
REVENUE SERV. (IRS), Tax Topic No. 409: Capital Gains and Losses,
https://www.irs.gov/taxtopics/tc409 (last updated Jan. 26, 2023). A “capital-gains tax” is
therefore “[a] tax on income derived from the sale of a capital asset.” BLACK’S LAW
DICTIONARY, supra, at 1758. All 41 other states that tax capital gains treat such a tax as
an income tax. See Elizabeth McNichol, State Taxes on Capital Gains, CTR. ON BUDGET
& POL’Y PRIORITIES (June 15, 2021), https://www.cbpp.org/research/state-budget-and-
tax/state-taxes-on-capital-gains [https://perma.cc/TN7N-7EPR]. So does the IRS. IRS,
Tax Topic No. 409, supra.
2
As the United States Supreme Court has said, state law defines property rights:
“‘[p]roperty interests . . . are not created by the [United
States] Constitution. Rather, they are created and their dimensions are defined by existing
rules or understandings that stem from an independent source such as state law.’” Webb’s
Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 161, 101 S. Ct. 446, 66 L. Ed. 2d
358 (1980) (most alterations in original) (quoting Bd. of Regents of State Colls. v. Roth,
408 U.S. 564, 577, 92 S. Ct. 2701, 33 L. Ed. 2d 548 (1972)). Washington Constitution
article VII, section 1 has one of the broadest definitions of “property” in this country:
“The word ‘property’ as used herein shall mean and include everything, whether tangible
or intangible, subject to ownership.” Since “income” is obviously “subject to ownership”
(as recognized by states defining everything from “theft” to “forfeiture” recognize),
income obviously constitutes property.
3
The code reviser creates the titles for new chapters of the Revised Code of
Washington “without changing the meaning of any such law.” RCW 1.08.015(2)(l). The
title the code reviser gave to this law is “Capital Gains Tax.” See ch. 82.87 RCW.
1
No. 100769-8
(Gordon McCloud, J., dissenting)
The problem is that in Washington, our constitution limits any such property
new law, Engrossed Substitute Senate Bill (ESSB) 5096, 67th Leg., Reg. Sess.
(Wash. 2021), codified at ch. 82.87 RCW, which taxes “capital gains” at seven
percent annually. That’s more than one percent. This new “capital gains” tax
Washington Constitution, the judicial branch has the duty to uphold the
constitution.
The history and the language of this new law show that it taxes the net
The 2021 legislature enacted ESSB 5096. It imposes a seven percent annual
4
WASH. CONST. art. VII, § 2 (“the aggregate of all tax levies upon real and
personal property by the state and all taxing districts . . . shall not in any year exceed one
percent of the true and fair value of such property in money”).
2
No. 100769-8
(Gordon McCloud, J., dissenting)
LAWS OF 2021, ch. 196 (codified as ch. 82.87 RCW). The new statute defines the
term “Washington capital gains” as “an individual’s adjusted capital gain.” RCW
individual’s “net long-term capital gain reportable for federal income tax
purposes,” with some exceptions for losses carried forward or back. RCW
82.87.020(1), (3). The statute exempts certain long-term capital gains 5 and gains
not attributable to Washington from the reach of this new tax. RCW
82.87.020(1)(d), (e). Thus, the resulting “adjusted capital gain” represents the net
income realized by the taxpayer from the sale of qualifying long-term capital
assets.
may take a standard deduction of $250,000, or a total of $250,000 for spouses and
domestic partners; an adjusted deduction for gains derived from the sale or transfer
5
RCW 82.87.050 exempts certain categories of long-term capital gains, including real
estate transactions, assets held in retirement accounts, assets pursuant to or under
imminent threat of condemnation proceedings, certain depreciable property, certain
livestock, timber and timberland, commercial fishing privileges, and goodwill received
from the sales of auto dealerships.
3
No. 100769-8
(Gordon McCloud, J., dissenting)
multiplied by seven percent to determine the total tax liability. RCW 82.87.040(1).
“The tax applies when the Washington capital gains are recognized by the
“If an individual’s Washington capital gains are less than zero for a taxable year,
As detailed by the majority, the Quinn and Clayton Plaintiffs separately filed
suit in Douglas County Superior Court, challenging the new tax. See majority at
14-16. They argued (among other things) that the new tax constitutes a property
tax and that it therefore violates the state constitution’s one percent and uniformity
limits on property taxes. WASH. CONST. art. VII, §§ 1, 2. After consolidating the
the trial court ruled in favor of the plaintiffs on cross motions for summary
judgment. Majority at 15; Clerk’s Papers at 862. We granted direct review of the
STANDARD OF REVIEW
This case asks us to interpret both a statute and the constitution. We review
4
No. 100769-8
(Gordon McCloud, J., dissenting)
LLC, 146 Wn.2d 1, 9, 43 P.3d 4 (2002). When interpreting a statute, we begin with
“the plain language enacted by the legislature, considering the text of the provision
in question, the context of the statute in which the provision is found, related
Lenander v. Dep’t of Ret. Sys., 186 Wn.2d 393, 403, 377 P.3d 199 (2016) (citing
Campbell & Gwinn, 146 Wn.2d at 10-11). If a statute is ambiguous, we may turn
Legislature v. Inslee, 198 Wn.2d 561, 569, 498 P.3d 496 (2021). “The ultimate
power to interpret, construe and enforce the constitution of this State belongs to the
judiciary.” Seattle Sch. Dist. No. 1 v. State, 90 Wn.2d 476, 496, 585 P.2d 71 (1978)
(citing cases); see also Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177, 2 L. Ed.
60 (1803) (“It is emphatically the province and duty of the judicial department to
say what the law is.”). “When interpreting constitutional provisions, we look first
to the plain language of the text and will accord it its reasonable interpretation.”
Wash. Water Jet Workers Ass’n v. Yarbrough, 151 Wn.2d 470, 477, 90 P.3d 42
(2004) (citing Anderson v. Chapman, 86 Wn.2d 189, 191, 543 P.2d 229 (1975)).
“In construing constitutional language, words are given their ordinary meaning
5
No. 100769-8
(Gordon McCloud, J., dissenting)
unless otherwise defined.” Zachman v. Whirlpool Fin. Corp., 123 Wn.2d 667, 670,
869 P.2d 1078 (1994) (citing State ex rel. O’Connell v. Slavin, 75 Wn.2d 554, 557,
452 P.2d 943 (1969) (citing State ex rel. Albright v. Spokane, 64 Wn.2d 767, 394
provision. Id.; Wash. Water Jet Workers Ass’n, 151 Wn.2d at 477 (citing Yelle v.
ANALYSIS
We begin with the language of our state constitution. Article VII, sections 1
All taxes shall be uniform on 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. . . .
6
No. 100769-8
(Gordon McCloud, J., dissenting)
(Emphasis added.)
In sum, the state constitution says that the word “property,” as used in the
That’s pretty broad. It does not limit that definition—instead, it provides enlarging
The only possible limiting factor is that the piece of “everything” being
considered must be “subject to ownership.” The parties do not seriously deny that
capable of ownership by the law, in every context from criminal statutes to civil
forfeiture statutes.
We therefore start with the axiom that income is subject to ownership and,
II. The new “capital gains tax” taxes income; since income is a species of
property, the new capital gains tax constitutes a property tax—not an
excise tax
The key question in this case is whether the capital gains tax taxes capital
As discussed above, every state that taxes “capital gains” treats such gains as
7
No. 100769-8
(Gordon McCloud, J., dissenting)
Washington “capital gains tax” constitutes a property tax that is subject to our
The majority tries to avoid this conclusion by advancing one main argument:
that the new “capital gains tax” is really a “capital transactions” tax that just
way the majority does this is by calling the taxable incident of the new law the
capital transaction, rather than the “recognized” gain from the transaction, as the
text of the statute says. Majority at 20. Another way the majority does this is by
describing this new law as an “excise tax” exempt from the state constitutional
limit on property taxes—despite the fact that this court has never before treated a
“‘determined by its incidents,’” not by the label the legislature uses. Majority at 22
(internal quotation marks omitted) (quoting Morrow v. Henneford, 182 Wash. 625,
628, 47 P.2d 1016 (1935)). And I agree with the majority that an excise tax is one
that “tax[es] ‘a particular use or enjoyment of property or the shifting from one to
8
No. 100769-8
(Gordon McCloud, J., dissenting)
property.’” 6
The majority takes these rules and concludes that the capital gains tax
constitutes an excise tax because “it taxes transactions involving capital assets—
not the assets themselves or the income they generate.” Majority at 20.
But that’s not what the statute says. The plain language, context, and
practical impact of the statute all compel the opposite conclusion: RCW 82.87.040
First, let’s define some terms. As outlined above, the statute imposes a tax
on certain long-term capital gains. The statute says the starting point for calculating
the tax is the “net long-term capital gain reportable for federal income tax
6
In re Est. of Hambleton, 181 Wn.2d 802, 811, 335 P.3d 398 (2014)
(quoting Fernandez v. Wiener, 326 U.S. 340, 352, 66 S. Ct. 178, 90 L. Ed. 116 (1945));
see also Morrow, 182 Wash. at 627, 630 (defining excise tax as a tax imposed “upon
licenses to pursue certain occupations, and upon corporate privileges” or “‘upon a
particular use of property or the exercise of a single power over property incidental to
ownership’” (quoting Bromley v. McCaughn, 280 U.S. 124, 136, 50 S. Ct. 46, 74 L. Ed.
226 (1929))); Jensen v. Henneford, 185 Wash. 209, 218, 53 P.2d 607 (1936) (plurality
opinion) (“When a tax is, in truth, levied for the exercise of a substantive privilege
granted or permitted by the state, the tax may be considered as an excise tax and
sustained as such.”); BLACK’S LAW DICTIONARY, supra, at 1759 (defining “excise tax” as
a tax “imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on
an occupation or activity (such as a license tax or an attorney occupation fee)”).
9
No. 100769-8
(Gordon McCloud, J., dissenting)
purposes.” RCW 82.87.020(3). Federal law defines “net long-term capital gain” as
“the excess of long-term capital gains for the taxable year over the long-term
capital losses for such year.” 26 U.S.C. § 1222. In other words, a “capital gain” is
“[t]he profit realized when a capital asset is sold or exchanged.” BLACK’S LAW
DICTIONARY, supra, at 259; see also U.S. INTERNAL REVENUE SERV. (IRS): Tax
updated Jan. 26, 2023). A “capital-gains tax,” then, is “[a] tax on income derived
from the sale of a capital asset.” BLACK’S LAW DICTIONARY, supra, at 1758.
noting that the IRS and all 41 states that tax capital gains treat such gains as
7
McNichol, supra; IRS, Tax Topic No. 409, supra; see also, e.g., Capital Gains
and Losses, STATE OF CAL. FRANCHISE TAX BD. (“All capital gains are taxed as ordinary
income.”), https://www.ftb.ca.gov/file/personal/income-types/capital-gains-and-
losses.html; Capital Gains, IDAHO STATE TAX COMM’N (“A capital gain can be short-
term (one year or less) or long-term (more than one year), and you must report it
on your income tax return.”), https://tax.idaho.gov/taxes/income-tax/individual-
income/filing/capital-gains/; M ICH . DEP ’T OF TREASURY , 2022 TAX TEXT 122,
https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/MISC/Tax-
Professionals/2022_Tax_Text.pdf#page=122; Individual Income Tax FAQs: What Is
the Mississippi Tax Treatment of Long-Term Capital Gains?, M ISS. DEP ’T OF
REVENUE , https://www.dor.ms.gov/individual/individual-income-tax-faqs; Capital
Gains, N.J. D IV . OF T AX ’N , N.J. TREASURY,
https://www.state.nj.us/treasury/taxation/njit9.shtml#:~:text=If%20you%20are%20a%20
New,your%20basis%20in%20the%20property.
10
No. 100769-8
(Gordon McCloud, J., dissenting)
What is dispositive in determining the nature of the tax is the plain language
of the tax statute. Ford Motor Co. v. City of Seattle, 160 Wn.2d 32, 40, 156 P.3d
185 (2007). I agree with the majority that to determine the nature of the tax, we
look at the “‘taxable incident,’” or “the activity that triggers the tax,” and the
measure of the tax, or the “‘base that represents the value of the taxable incident.’”
But I disagree with the majority’s analysis of what constitutes the taxable
incident in this case. The plain language of the statute shows that taxable incident
is not the sale or transfer of the capital asset itself. Rather, the taxable incident is
the realization of income derived from the sale of qualifying capital assets.
Because the taxable incident or event is the realization of income—not the mere
transfer of the asset—the tax is an income tax, regardless of the label placed on it
by the legislature. Jensen v. Henneford, 185 Wash. 209, 217, 53 P.2d 607 (1936)
(plurality opinion). The measure of the tax is indisputably the amount of income
gained from the transaction. The fact that the tax is measured by the amount of net
income only reinforces the conclusion that the taxable incident is receipt of income
11
No. 100769-8
(Gordon McCloud, J., dissenting)
The first step in determining the nature of the tax is determining the “taxable
incident,” or the activity that triggers the tax. Ford Motor Co., 160 Wn.2d at 40.
The State and the majority repeatedly assert that the taxable incident is the sale or
exchange of a qualifying capital asset. But the language of the statute makes clear
The statute’s plain language provides that “[t]he tax applies when the
Washington capital gains are recognized by the taxpayer in accordance with this
chapter.” ESSB 5096, § 5(4)(a) (emphasis added). That is quite different from
saying that the transfer itself is the taxable incident. If there’s no recognized gain,
there’s no tax: “If an individual’s Washington capital gains are less than zero for a
taxable year, no tax is due under this section.” ESSB 5096, § 5(3). Thus, the
taxable incident is the sale or transfer of a qualifying asset only if that transaction
The majority appears to concede this at times. For instance, the majority
must acknowledge that the capital gains tax “narrowly applies to capital
12
No. 100769-8
(Gordon McCloud, J., dissenting)
critical distinction showing that the incident of this tax is the receipt of income.
analyzing a “net corporate income tax” in 1951. In Power, Inc. v. Huntley, a statute
business in this state.’” 39 Wn.2d 191, 193, 235 P.2d 173 (1951) (quoting LAWS OF
1951, 1st Ex. Sess., ch. 10, § 7). After examining the statute, we concluded that the
tax was “a mere property tax ‘masquerading as an excise.’” Id. at 196. We came to
this conclusion because the tax applied only if the corporation realized net
income—in other words, only if the corporation realized a gain. We explained that
“the tax is levied because the corporation has net income, not because it does any
business in this state or exercises its corporate franchise; conversely, if it has done
a million dollars[’] worth of business in this state but has no net income, it would
We have the exact same situation with the new capital gains tax. If an
transactions but realizes no gain, they are not subject to the tax. That weighs
heavily in favor of concluding that the incident of this tax is not really “capital
transactions” but rather realization of gain—income. See also Jensen, 185 Wash.
13
No. 100769-8
(Gordon McCloud, J., dissenting)
209 (holding that personal net income tax purportedly levied upon “the privilege of
receiving income” was actually levied on the property (income) on which the
amount of the tax was to be calculated, not on the abstract privilege of receiving
income).
When we compare the capital gains tax with taxes we’ve previously found to
be excise taxes, the same conclusion applies: the capital gains tax is not an excise
because the incident of the tax is something more than a transaction per se.
Consider, for example, retail sales taxes, which we have repeatedly upheld as
excise taxes. The incident of a retail sales tax is a transaction involving the relevant
profit to the seller. See, e.g., Morrow, 182 Wash. 625; Vancouver Oil Co. v.
Wn.2d 373, 130 P.2d 880 (1942); Mahler v. Tremper, 40 Wn.2d 405, 243 P.2d 627
(1952). That makes sense. If the real incident of the tax is the transaction—if the
state is truly taxing the exercise of a privilege or the specific use of property—then
the financial outcome of that transaction should not logically determine whether
But that’s not what we have here. Here, the financial outcome of the capital
transaction determines whether the tax applies. The capital gains tax applies only
14
No. 100769-8
(Gordon McCloud, J., dissenting)
when the seller realizes a profit. Thus, there is no sense in which the “activity that
triggers the tax” is a capital transaction per se. Contra majority at 33.
Under our controlling cases, the taxable incident of this capital gains tax is
the capital gain, meaning the income (or property) realized by the transferrer—not
B. The measure of the tax is the net income received following the
transfer of the asset—not the gross income or value of the transaction,
as is typical of excise taxes
tax is income. Majority at 28. This obviously militates in favor of considering this
But the majority counters that “[o]ur cases unequivocally hold that excise
measured by income, and this does not transform the fundamental nature of the
tax.” Id. (citing State ex rel. Stiner v. Yelle, 174 Wash. 402, 407, 25 P.2d 91
(1933)).
I agree that our cases have held that an excise tax may be measured by some
kind of income. But in every case where this court upheld an excise tax that was
measured by income, the tax was measured by gross income—not by net income,
such as capital gains. E.g., Stiner, 174 Wash. at 404 (excise tax measured by
15
No. 100769-8
(Gordon McCloud, J., dissenting)
“‘values, gross proceeds of sales, or gross income’” (quoting LAWS OF 1933, ch.
191, § 2); Supply Laundry Co. v. Jenner, 178 Wash. 72, 34 P.2d 363 (1934)
(same); Morrow, 182 Wash. 625 (excise tax measured by gross sale price of
tangible personal property); Vancouver Oil Co., 183 Wash. 317 (same); P.
Lorillard Co. v. City of Seattle, 83 Wn.2d 586, 521 P.2d 208 (1974) (excise taxes
measured by gross proceeds of wholesale cigarette sales and by set price per
cigarette, respectively).
Similarly, this court has upheld excise taxes measured by the gross value of
a transaction, item, or contract, not by the value of net income such as capital
gains. State ex rel. Hansen v. Salter, 190 Wash. 703, 70 P.2d 1056 (1937) (excise
tax measured by fair market value of vehicle); Mahler, 40 Wn.2d 405 (excise tax
measured by gross sales price of real estate); St. Paul & Tacoma Lumber Co. v.
State, 40 Wn.2d 347, 243 P.2d 474 (1952) (excise tax on certain products
measured by value of product); Black v. State, 67 Wn.2d 97, 406 P.2d 761 (1965)
(excise tax measured by contract price of lease); High Tide Seafoods v. State, 106
Wn.2d 695, 725 P.2d 411 (1986) (excise tax measured by value of enhanced food
fish at the point of landing); Wash. Pub. Ports Ass’n v. Dep’t of Revenue, 148
Wn.2d 637, 62 P.3d 462 (2003) (excise tax measured by contract price of lease);
Sheehan v. Cent. Puget Sound Reg’l Transit Auth., 155 Wn.2d 790, 123 P.3d 88
16
No. 100769-8
(Gordon McCloud, J., dissenting)
(2005) (excise tax measured by fair market value of motor vehicle); In re Est. of
Hambleton, 181 Wn.2d 802, 335 P.3d 398 (2014) (excise tax measured by total
value of estate).
measure of the tax was net income or gain. Instead, such taxes have consistently
been invalidated as nonuniform property taxes. Culliton v. Chase, 174 Wash. 363,
25 P.2d 81 (1933) (plurality opinion) (tax on net income was property tax); Petrol.
Navigation Co. v. Henneford, 185 Wash. 495, 55 P.2d 1056 (1936) (same); Jensen,
185 Wash. 209 (same); Power, Inc., 39 Wn.2d 191 (same); Kunath v. City of
Seattle, 10 Wn. App. 2d 205, 221, 444 P.3d 1235 (2019) (same).
All of this makes sense when considering the nature of an excise. An excise
the privilege of engaging in that entire transaction (or exercising that entire
property right) and using the value of that entire transaction (or the full value of the
tax is “directly imposed based upon the extent to which the taxpayer enjoys the
taxable privilege.” Sheehan, 155 Wn.2d at 800 (citing Harbour Vill. Apts. v. City of
Mukilteo, 139 Wn.2d 604, 611, 989 P.2d 542 (1999) (Talmadge, J., dissenting));
17
No. 100769-8
(Gordon McCloud, J., dissenting)
the extent to which the conferred privileges have been enjoyed or exercised by the
reasonable proxy for the amount of business done or the extent to which a taxpayer
But the new capital gains tax statute taxes only net income or gain. It
therefore looks much more similar to the taxes we’ve invalidated as property taxes
To summarize, “capital gains” means income. This capital gains tax is not
triggered by each and every sale of a qualifying capital asset, as one might expect
of an excise tax. And this capital gains tax is not measured by gross income or by
the full value of the asset, as one might expect of an excise tax. Rather, the new
capital gains tax is triggered only if the taxpayer realizes a gain from the sale of the
asset, and the measure of the tax is the amount of gain realized. Under our
controlling cases, the new capital gains tax is an income tax—not an excise tax.
18
No. 100769-8
(Gordon McCloud, J., dissenting)
III. The capital gains tax violates the constitutional limitations on property
taxes
To repeat, our constitution states that the term “property” “shall mean and
CONST. art. VII, § 1 (emphasis added). Our previous cases interpreting this
provision, beginning with Culliton, consistently hold that “income” falls within the
held that an income tax is a property tax. Id. at 374. We reasoned that “[i]ncome is
either property under our fourteenth amendment, or no one owns it.” Id. Since
Culliton, this court has consistently held that income is property for purposes of
article VII, section 1. E.g., Jensen, 185 Wash. at 217; Power, Inc., 39 Wn.2d at
194.
As the majority notes, we will overrule precedent only upon a showing that
(1) an established rule is incorrect and harmful or (2) the legal underpinnings of
Pierce, 195 Wn.2d 230, 240, 455 P.3d 647 (2020) (plurality opinion)). The
Intervenors, but not the parties, argue that we should overrule Culliton on both of
these bases. Intervenors’ Opening Br. at 16-18. To be sure, I agree with the
19
No. 100769-8
(Gordon McCloud, J., dissenting)
Culliton incorrectly asserted that Aberdeen Savings & Loan Ass’n v. Chase, 157
Wash. 351, 289 P. 536 (1930), had already decided the issue whether an income
tax is a property tax under the state constitution. 174 Wash. at 376; see
Intervenors’ Opening Br. at 25-27. Culliton also stated that “[t]he overwhelming
weight of judicial authority is that ‘income’ is property and a tax upon income is a
tax upon property,” a statement that appears to have been inaccurate or at least
overbroad at the time. 174 Wash. at 374; see Intervenors’ Opening Br. at 31-34.
section 1’s uniquely broad definition of “property.” That language is plain and
see also BLACK’S LAW DICTIONARY, supra, at 1470. “Income” is “[t]he money or
other form of payment that one receives, usu[ally] periodically, from employment,
business, investments, royalties, gifts, and the like.” BLACK’S LAW DICTIONARY,
20
No. 100769-8
(Gordon McCloud, J., dissenting)
broad definition. 8
To be sure, this court has clearly held that the constitution was “not intended
be, and is, a living document with current effectiveness.” Seattle Sch. Dist., 90
Wn.2d at 517. When we deal with broad, general constitutional rights and values
apply those rights and values in a way that will protect all Washingtonians, not just
the few whom the framers might have had in mind when drafting them. But in this
case, we are not interpreting such a broad, general term, right, or value. Instead, we
are interpreting a narrow definitional phrase comprising words whose meaning and
context have not drastically changed in the past century. Article VII, section 1
Since the capital gains tax is a property tax, it is subject to the one percent
levy cap contained in article VII, section 2. This tax clearly violates that provision
8
I disagree with Intervenors’ argument that Culliton’s legal underpinnings have
eroded for the same reason: the constitutional language that the Culliton court considered
has not changed since Culliton was decided.
21
No. 100769-8
(Gordon McCloud, J., dissenting)
I would affirm the trial court’s decision that the tax is unconstitutional on that
ground and decline to reach the other constitutional issues raised by the petitioners.
CONCLUSION
A tax is determined by its incidents, not by its legislative label. The structure
of the capital gains tax shows that it is a tax on income resulting from certain
transactions—not a tax on a transaction per se. Therefore, the tax is an income tax,
not an excise tax. Under our constitution and case law, an income tax is a property
tax. As enacted, this income tax or “capital gains tax” violates the one percent levy
more equitable one is up to the legislature through legislation and the people
through constitutional amendment. The duty of the judiciary when faced with a
direct conflict between a statute and the constitution is to uphold the constitution.
The new capital gains tax violates article VII, section 2 of the Washington
22
No. 100769-8
(Gordon McCloud, J., dissenting)
22