(Journal of Business) - Spokane financial advisers and accountants say they’re somewhat surprised the Washington state Supreme Court upheld the state’s new tax on certain capital gains, and they’re renewing efforts to examine its effects on high-net worth clients, sales of businesses, and business succession plans.
The new tax applies to capital gains over $250,000, which are now subject to a 7% excise tax and applies to such gains generated beginning January 2022, meaning some Washington residents may need to make payments to the state by April 18, they note.
Paul Viren, president of Spokane-based Viren and Associates Inc., says, from a financial planning perspective, there will be an impact on higher-net-worth clients that have appreciated stocks and securities.
“It is really trying to capture these highly appreciated stocks that are in client portfolios,” he says. “Seven percent is not a small number in the world of capital gains.”
Viren says that because 2022 was a volatile year for stocks, he doesn’t anticipate any of his clients will have to pay the capital gains tax this year.
The opinion rendered by the state Supreme Court was released on March 24, and the court determined the Washington capital gains tax is a constitutional excise tax on the sale or exchange of capital assets and not an income tax, which is prohibited under the state constitution.
According to the Washington state Department of Revenue, the new 7% tax applies to the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments or tangible assets.
The capital gains law exempts assets held in certain retirement accounts, real estate, small businesses, farmland, timber, or livestock.
The capital gains tax originally was passed in 2021 and went into effect at the start of 2022. It is expected to generate $500 million per year, which is earmarked to fund early learning and child care programs in the state.
Adam Sweet, principal and certified public accountant with the Spokane office of Eide Bailly LLP, says he expects the new ruling will apply to fewer than 20 Spokane-based clients, because 2022 wasn’t a strong year for stocks and bonds, unlike a year earlier.
Sweet says the state will look to capital gains reported on individual’s federal tax returns, and individuals who reported a capital gain of over $250,000 will need to submit an additional form to the Washington state Department of Revenue.
“Most states for the last 100 years have regarded capital gains as an income tax, so it’s surprising (the court) ruled it not as an income tax but an excise tax,” he says.
An excise tax is levied on the sale of assets such as vehicles or property, while an income tax is based on wages and operating income, Sweet explains.
The Department of Revenue for the past year has been notifying the public of its intent to collect taxes on applicable gains, he says. His firm received a reminder of that intent shortly after the ruling.
Sweet says his firm can file extensions for clients that allow for federal tax returns to be submitted by Oct. 15, however if a client does owe the tax, that payment is due April 18.
Sweet says it’s important to note the impact the tax will have on small businesses. He points out that, for a family-owned business to be exempt from owing a capital gains tax, it would need to generate under $10 million in revenue per year.
Mike Vickerman Jr., president of Vickerman Investment Advisors Inc., of Spokane, says business owners will have to evaluate how the new capital gains tax will impact them.
“It hurts our state's ability to attract businesses,” Vickerman says. “And it will lead to businesses leaving the state.”
He points to Camas, Wash.-based Fisher Investments, which, following the ruling announced the company will move its headquarters to Austin, Texas, from Vancouver, Washington.
Vickerman adds that the tech and startup industry will be especially hurt, as these types of ventures typically offer stock options to employees.
Sarah Carlson, financial planner with Spokane-based Fulcrum Financial Group, agrees that the tax raises a new potential obstacle for startups and shareholders.
Now that the capital gains tax has been upheld in the state Supreme Court, Vickerman contends the worry for him and many others is whether the state will target other sources of income. “Will the threshold be reduced?” he asks.
By Karina Elias
April 13th, 2023
