Kyle N. Richard recently joined Foster Garvey. Kyle’s practice is primarily focused on assisting our municipal clients with bonding and tax matters. With his tax background, however, he assists our clients in the Tax Practice Group on broader federal, state and local tax matters. We are delighted that Kyle is joining our tax team, adding to our already strong team.
The article below was written by Kyle. Expect to see more of Kyle’s contributions to Larry’s tax law in the future.
On September 30, 2021, the Washington State Supreme Court upheld the constitutionality of the additional 1.2% business and occupancy (B&O) tax imposed by Substitute House Bill 2167 (“SHB 2167”) on “specified financial institutions” – financial institutions with annual net income of more than $ 1 billion. SHB 2167 increases the tax rate for these institutions from 1.5% (the rate generally applicable to financial institutions) to 2.7%.
The tax has been codified in section 82.04.29004 Revised Code of Washington (“RCW”). Like other B&O taxes in Washington, the amount of tax owed is measured by the amount of the specified financial institution‘s gross income attributed to the state of Washington, which is generally based on an allocation formula (contained in RCW 82.04 .460-.462). The effect of this apportionment scheme is that a certain percentage of a financial institution’s total gross income for the year is considered to be earned in Washington and taxed under Washington law.
The Washington Bankers Association and the American Bankers Association (taxpayers) filed a lawsuit, arguing that the tax violated the Dormant Commerce Clause (“DCC”) of the US Constitution. At trial, the court found that taxpayers had standing to challenge the tax under the Uniform Declaratory Judgments Act (âUDJAâ) and found that the additional progressive tax rate discriminated against businesses located in outside the state, in violation of the DCC. The court of first instance refused to reconsider its decision. The Washington Department of Revenue then appealed directly to the Washington State Supreme Court.
The Washington Supreme Court ruled in favor of the trial court regarding standing and accepted the case. Although taxpayers argued that there was a disproportionate economic effect on large financial institutions outside the state, the court discussed the previous DCC (largely from the U.S. Supreme Court) that a disproportionate economic effect on its own does not make a tax discriminatory. Ultimately, the Washington Supreme Court concluded that the tax was both apparently neutral (the tax is not, by its terms, discriminatory against businesses located out of state. ) and non-discriminatory in its effects (the tax, in its application, is nevertheless not prejudicial to State taxpayers).
The Washington Supreme Court based this conclusion on the facial neutrality of the law (all financial institutions are subject to the same $ 1 billion threshold) and the absence of a burden on interstate commerce (the law simply increases the rate of d taxation of specified financial institutions, it does not prevent them from doing business in Washington, nor does it impede the flow of goods between states or distinguish between domestic and foreign financial institutions).
The Washington Supreme Court also considered the taxpayer’s argument that the tax failed the âinternal consistency testâ under the DCC. As the Washington Supreme Court stated, to pass this test, an individual “state tax [must be]consistent so that if applied by all jurisdictions there would be no unacceptable interference with free trade through multiple taxation. tax, distributed on the basis of income attributable to the State, this does not result in multiple taxation.
Finally, the Washington Supreme Court rejected the argument that the intention of the state legislature in enacting the tax was discriminatory, concluding that the express intention of the bill was to remedy Washington’s regressive tax code. and generate income for essential services. The court also assessed the statements of lawmakers during the review of the bill and found that these statements indicated an intention to benefit the people of Washington, but not an intention to impose a tax that treated specified financial institutions. in Washington State differently from non-state financial institutions. financial institutions. Together, the court ruled that this was enough to survive a rational basis review.
However, this case is unlikely to be over – taxpayers are large organizations with significant tax debt at stake. It wouldn’t be surprising to see taxpayers seeking certiorari from the United States Supreme Court. Given the many questions regarding the Washington state tax code (including the city’s income tax challenges and the likely capital gains tax challenges recently passed by the state) , as well as the DCC jurisprudence of the United States Supreme Court, this will be an interesting case to follow. We will keep you posted if this matter progresses further.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.