Judge considers motion to dismiss capital gains tax lawsuit

Judge considers motion to dismiss capital gains tax lawsuit

Judge considers motion to dismiss capital gains tax lawsuit

Douglas County Superior Court Judge Brian Huber was understandably skeptical on Wednesday when presented with the state of Washington’s motion to dismiss a challenge to its recently adopted income tax masquerading as an excise tax on capital gains.

State attorneys insist neither the plaintiffs — including those represented by the Freedom Foundation — nor anyone else can legally challenge the tax because it was only signed into law in May and won’t be due until 2023.

The plaintiffs lack standing, the motion to dismiss asserts, because they cannot know yet the extent to which the tax will damage them — assuming they have to pay it at all.

Assistant Attorney General Noah Purcell even suggested Washington residents who want to avoid the tax entirely have the option of moving to a state that doesn’t tax capital gains.

What this reasoning disregards is that investors mainly care about the total amount they earn, and calculating how much tax would be owed is an important consideration in determining whether to sell now, before the tax goes into effect.

Huber wondered aloud why none of the other cases challenging income taxes over the years had advanced this novel argument. He specifically cited the example of the Freedom Foundation’s 2017 challenge to Seattle’s proposed income tax, which was ultimately decided by the Court of Appeals.

The ruling in that case noted the challenge was to an income tax residents would pay, not to a tax they had already paid and for which they were seeking a refund.

The plaintiffs in the new capital gains tax suit are requesting that Huber issue a ruling declaring the tax a tax on income — which would violate Washington’s constitution because the same tax rates do not apply to everyone.

The state, however, countered that Huber could not issue that ruling because the plaintiffs have an alternative remedy — paying the tax and challenging it afterwards in Thurston County.

Plaintiffs’ attorney Callie Castillo pointed out that the Supreme Court allows Judge Huber to issue a ruling declaring the tax unconstitutional because the rules have changed, and the cases the state relied on have since been overturned.

Freedom Foundation attorneys also argued the state was trying to invoke a statute that applies only to “excise” taxes, not income tax challenges. In so doing, the state is assuming an issue the court should decide later.

Because the excise statute applies only to excise taxes, not income taxes, it’s too early to apply the excise tax statute. The state’s lawyers, however, insist they’re not contesting the plaintiffs’ income tax challenge in the motion to dismiss and would be willing to debate the merits of the case in the future.

But in fact, their tactics are a lawyer’s trick to bait Huber into declaring this an excise tax without ever having to justify or argue for that position.

The state claimed it was good for the money, if ordered to refund taxes paid. But again, that argument ignores the necessity of deciding immediately whether to sell off taxable assets, and the state will surely argue that any claim for a “refund” is limited to the amount paid, with the plaintiffs having to suffer the loss from what they otherwise would have earned had they not been forced to sell.

Lastly, the state essentially insulted Judge Huber, claiming that even if the plaintiffs bring a constitutional claim, there is no principled way to determine whether the claim is correct, that the tax is unconstitutional.

Attorneys for the plaintiffs strongly pointed out that the tax is on the books now, and nothing more need be determined to rule on its constitutionality. In fact, that’s exactly what Superior Court judges are expected to do.

Huber said he anticipated issuing a written ruling sometime in the next week or two.

Chief Litigation Counsel
Eric Stahlfeld has practiced law in Washington State for 25 years, after graduating from the Marshall-Wythe School of Law at the College of William and Mary in Virginia. He previously worked in the administration of President Ronald Reagan. He lives outside Seattle with his wife Susan. They have two children, Marta and Karl.