The opening briefs were filed yesterday in the capital gains income tax lawsuit. Included was a declaration I submitted to the court detailing a decade of my research on this topic with source emails from state revenue departments across the country, public records from WA’s DOR and a letter from the IRS directly confirming that a capital gains tax is an income tax.

Here are some of the notable points the plaintiffs’ brief makes:

• “Graduated taxes on personal income have been unconstitutional in Washington since the Washington Supreme Court first invalidated a non-uniform income tax in 1933. Since then, Washington courts have reaffirmed this ruling in multiple cases. Since a tax on income was first ruled unconstitutional, Washington voters have rejected proposed taxes on income ten times— including a half dozen proposed constitutional amendments.”
   
• “Cognizant of the nearly century-long constitutional prohibition on graduated income taxes, the Legislature has attempted to recharacterize this tax as an excise tax, but that attempt fails. Merely relabeling a tax cannot alter its essential character and cannot save it from constitutional scrutiny in the courts.”
   
• “The tax violates the dormant Commerce Clause of the U.S. Constitution, and it violates the Uniformity Clause and the rate limitation on taxes in Article VII of the Washington Constitution and the Privileges and Immunities clause in Article I, Section 12. Summary judgment that the tax is invalid can be decided as a matter of law on the face of the tax statute.”
   
• “The starting point for determining an individual’s tax liability begins with identifying the taxpayer’s ‘Washington capital gains.’ This requires ascertaining the individual’s ‘federal net long-term capital gain’ reported for ‘federal income tax purposes’ on the taxpayer’s federal tax return.”
   
• “Individuals owing the tax must report and pay the capital gains tax to Washington on or before the date that their federal annual income tax return must be filed. In addition to filing a Washington return, taxpayers must file a copy of their federal income tax return along with all schedules and supporting documentation for the federal return.”
   
• “Plaintiffs rely on the Declaration of Jason Mercier in Support of Plaintiffs’ Motion for Summary Judgment, together with attached exhibits, along with the pleadings and other records on file in this matter.”
   
• “In sum, ESSB 5096 violates the dormant Commerce Clause because the capital gains tax imposed impermissibly allocates the tax to Washington based on the taxpayer’s location instead of where the activity of sale or transfer of the asset occurs, imposes a tax that is not fairly apportioned to activities occurring within the state, and discriminates against interstate commerce.”
   
• “These three propositions are legally indisputable. First, capital gains are income. Second, income is property. Third, a tax on property that is either non-uniform, or at a rate exceeding one percent, violates Article VII, Section 1 of the Washington Constitution. Applying these three principles, this court should rule as a matter of law that ESSB 5096 levies a non-uniform tax at a rate exceeding one percent on personal income and is unconstitutional.”
   
• “The federal government and every other state in the country classify a tax on capital gains as income, and no other state imposes an excise tax on capital asset sales at all, much less an excise tax on capital asset sales regardless where they occur in the world. The Legislature’s attempt to evade constitutional scrutiny by misclassifying an income tax as an excise tax is without legal support, legal precedent, or grounding in reality.”
   
• “Moreover, if this were a true excise tax on transactions, the state would have no legitimate interest in compelling taxpayers to produce the entirety of their federal income tax returns, along with all schedules and supporting materials, unrelated to the capital asset sales being taxed.”
   
• “If there were any doubt, looking to the views of other jurisdictions dispels it. Every state revenue department in the country describes capital gains as income. And ‘those that tax capital gains do so via their income tax codes. No state taxes capital gains as an excise tax.’”
   
• Also, like an income tax, ESSB 5096 allows deductions for certain charitable donations, none of which has any relation to the underlying sales of assets but are prominent features of an income tax. Indeed, even the State Department of Revenue, in assessing ESSB 5096, concluded that the deduction for charitable donations—'is a common feature of income taxes’ that ‘may increase the chance that the courts will determine that the Washington capital gains tax is an income tax.’”
   
• “For these reasons, Plaintiffs ask the Court to grant their motion for summary judgment and declare ESSB 5096 constitutionally invalid on its face.”

Here is the remaining briefing schedule for the case:

• 12/20 – Amici Curiae briefs due
   
• 1/7 – Opposition briefs due
   
• 1/21 – Reply briefs due
   
• 2/4 – Summary Judgement hearing at 10:00 am

Among the coming amici briefs, we may see one joined by tax professors from across the country. This was from my interview earlier this year with University of Washington Law School Professor Scott Schumacher, Director, Graduate Program in Taxation:

In your opinion, is a capital gains tax an excise tax or an income tax? 

Professor Schumacher: “A capital gains tax is a tax on income. The federal tax laws define the term ‘income’ to include ‘gains derived from dealings in property,’ which includes capital gains. Notably, the new Washington State tax determines the amount to be taxed from the federal net long-term capital gains reported by the taxpayer. Thus, the Washington Capital Gains Tax takes an amount that is subject to income tax at the federal level and imposes an additional amount of tax on that income.” 

Are you aware of any tax jurisdiction in the world outside of Washington state calling a capital gains tax an excise tax?

Professor Schumacher: “I am not.”

No one in the world outside of Washington state calls a capital gains tax an excise tax and for good reason, it’s clearly an income tax. This is an indisputable fact the court should soon make clear to the Legislature and Governor.

Additional Information
Plaintiffs’ capital gains income tax brief
Declaration of Jason Mercier in Support of Plaintiffs’ Motion for Summary Judgment
Capital gains income tax quotes – who said it?
Capital gains income tax interview with University of Washington tax expert Professor Schumacher