United States – Washington excise tax on capital gains is constitutional and valid - KPMG Global (2023)

Pair chickens:More details ꟷ Taxes, filing and payments|Interim Guidelines on Allocation of Capital Gains and Domicile in Washington

The Washington State Supreme Court has ruled that the newly enacted excise tax on the sale or exchange of long-term capital goods is constitutional and valid.¹The tax, which applies to residents of the state of Washington, is effective January 1, 2022, with first payments due April 18, 2023.

In addition, the Washington State Department of Revenue recently issued new interim guidance on allocation rules and clarified the meaning of “domicile” for capital gains tax purposes.

This is the first time Washington state has imposed (and maintained) an individual tax return requirement. While the new tax does not apply to all Washington individuals, as long as there are several exemptions and a standard $250,000 deduction, those domiciled in Washington state now need to be aware of the new 7% tax on long-term sales assets. of capital that may create additional compliance obligations.

Tax professionals serving individuals in Washington should also familiarize themselves with the new rules.

International allocation program managers may want to consider the impact of these new rules on incoming and outgoing Washington assignees, who may be subject to the law, and determine whether their international allocation tax policies should be changed to account for this change. in tax law.

A 7% tax is levied on the sale or exchange of long-term capital assets, including stocks, bonds, business interests, tangible assets and other investments allocated to the state of Washington.²

Several assets are exempt from the tax, including but not limited to real estate and assets held in certain retirement accounts.³

A standard deduction of $250,000 is available per year for each individual or couple, whether they file jointly or separately. The standard deduction is adjusted annually for inflation.⁴

The capital gains tax return should only be filed by individuals who owe taxes.⁵

The deadline for submitting the capital gain declaration is the same as for the individual income tax return.⁶Taxpayers with an approved time extension for filing their federal returns also receive an extension for filing their capital gains tax returns, provided they send the department, by the original due date, the extension confirmation number or other evidence confirming the federal extension.⁷

The extension does not extend the payment period. Penalties and interest will apply to late returns and payments.⁸Underpayment penalties also apply to those who “substantially underpay” their capital gains tax, meaning they pay less than 80% of the tax due and the underpayment is at least $1,000.⁹

To file a capital gains tax return, make payment, or provide the Department with documentation confirming its federal extension, individuals must create a SecureAccess Washington (SAW) online account. For more information, visit the following Department of Revenue website"Capital Gains - My Help PAIN."

On April 27, 2023, the Washington State Department of Revenue issued interim guidance on allocation rules and clarified the meaning of “domicile” for capital gains tax purposes.¹⁰

There are generally three instances in which long-term capital gains or losses are allocated to the state of Washington and subject to the new tax.¹¹

1. Long-term capital gains or losses derived from intangible personal property are allocated to Washington if the taxpayer was domiciled in the state at the time the sale or exchange occurred.
2. Long-term capital gains or losses on the sale or exchange of tangible personal property are allocated to Washington if the property is located in the state at the time of the sale or exchange.
3. Long-term capital gains or losses from the sale or exchange of tangible personal property are also allocated to Washington, even if the property is not located in the state at the time of the sale or exchange if:

a) the property was located in Washington at any time during the taxable year in which the sale or exchange took place or the immediately preceding taxable year;

b) the taxable person was resident on the date of the sale or exchange;¹²e

c) the taxable person is not subject to the payment of income tax or excise tax legally levied on long-term capital gains or losses by another taxing jurisdiction.

The interim guidance also clarifies that the term “domicile” means “de facto residence” as well as the intention to make a place of residence your permanent home. An individual can only have one domicile at any given time. To change domicile, the individual must be physically present in their new domicile with the intention of making it their permanent home. The Department provides the following non-exclusive list of factors that may be evaluated to determine an individual's domicile:¹³

• Length of stay in one place;
• Express intent;
• Place of work, profession or employment;
• Location of bank accounts;
• Residence and address for federal and state income tax purposes;
• Individually Owned and Personally Owned Sites;
• Registration status of motor vehicles and other personal property;
• State of the motor vehicle driver's license;
• Location of schools attended by children;
• Voter registration status;
• Localization of professional or commercial licenses;
• Payment of in-state tuition as a Washington resident;
• Claim Washington as a residence to obtain a hunting or fishing license, eligibility to hold public office, or to file lawsuits;
• Mailing address.

With the implementation of the new capital gains tax comes planning opportunities for Washington individuals and their tax advisors. Those planning to sell some of their assets may want to consider whether a disposal of their long-term holdings will trigger a capital gains tax liability. It may be beneficial to limit the amount of long-term earnings recognized annually to fall under the $250,000 standard deduction.

Individuals who move into or out of Washington State during the year can also benefit from timing the recognition of significant long-term earnings outside of their Washington residency period.

Additionally, those who are subject to the tax may consider making estimated payments to mitigate underpayment penalties.

Pre-departure and/or arrival discussions with employees entering or leaving Washington should include a brief discussion of the new rules.

1 Court Opinion available at1007698.pdf (wa.gov).

2 seeRCW 82.87.040.

3 seeRCW 82.87.050.

4 seeRCW 82.87.060.

5 seeRCW 82.87.110.

6 Ibid.

7 Ibid.

8 Ibid.

9 VerRCW 82.32.090.

10 See “Provisional statement on the definition of domicile for the purpose of allocating excise tax on capital gains“ on the Washington Department of Revenue website (April 27, 2023).

11 VerRCW 82.87.100.

12RCW 82.87.020Defines “Resident” as any natural person (i) domiciled in this state during the taxable year, unless the natural person (A) has not maintained a permanent place of residence in this state for the entire taxable year, (B) has maintained a place of residence permanent residence resided outside of this state for the entire taxable year, and (C) spent in the household no more than 30 days of the taxable year in this state; or (ii) who is not domiciled in this State during the taxable year, but maintained a place of residence and was physically present in this State for more than 183 days during the taxable year.

13 See “Provisional statement on the definition of domicile for the purpose of allocating excise tax on capital gains” on the Washington Department of Revenue website.

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