Tax News Update    Email this document    Print this document  

The King County Superior Court (court), in granting a motion for summary judgement filed by the Washington Bankers Association, held the additional 1.2% Washington business and occupation (B&O) tax rate imposed on specified financial institutions under Ch. 420, Wash. 2019 Laws (Ch. 420) violates the Commerce Clause of the U.S. Constitution because it discriminates against interstate commerce.¹

The court has denied the state’s motion for reconsideration. It’s anticipated that the state will appeal.

Background

In May 2019, Ch. 420 was enacted and imposed an additional 1.2% B&O tax on the gross taxable service and other income of specified financial institutions. This tax was in addition to the existing 1.5% B&O tax applicable to such taxpayers and became effective on January 1, 2020. Under Ch. 420, a "specified financial institution" is defined as a financial institution that is a member of a consolidated financial institution group that reported on its consolidated financial statement for the prior calendar year annual net income of at least $1 billion, not including net income attributable to noncontrolling interests. If a specified financial institution is no longer required to file a consolidated financial statement, a specified financial institution means any person that was subject to the additional tax in at least two of the prior four calendar years.²

Following enactment of this additional B&O tax, the Washington Bankers Association and the American Bankers Association filed a complaint for declaratory relief stating that the tax violates the Commerce Clause of the U.S. Constitution. The banking associations argued that the tax "discriminates against interstate commerce by imposing a separate B&O surtax that applies exclusively to large financial institutions with headquarters out-of-state."³ Specifically the definition of specified financial institution in Ch. 420 "uses a metric — consolidated financial statements reporting at least one billion dollars in net income — that effectively applies only to financial institutions with a principal place of business outside of Washington." The banking associations further asserted that Ch. 420 "does not apply to or impose an additional B&O tax on any Washington-based financial institutions."

Additional tax on specified financial institutions ruled unconstitutional

In a one paragraph ruling, the court agreed with the banking associations and held the additional B&O tax on specified financial institutions is "illegal, invalid, and unenforceable because it discriminates in effect and in purpose against interstate commerce in violation of the dormant Commerce Clause of the United States Constitution."⁴

Implications

It could be years before there is an ultimate judicial ruling on the constitutionality of the additional 1.2% B&O tax on specified financial institutions. If the superior court's ruling stands, specified financial institutions will not be subject to this tax. Conversely, if the superior court's ruling is overturned and the additional tax is found to be valid and nondiscriminatory, specified financial institutions will be subject to the additional B&O tax, with a reporting and remitting obligation beginning January 1, 2020.

———————————————

———————————————
ENDNOTES

¹ Washington Bankers Assn et ano. v. Washington et al, Cause No. 19-2-29262-8 SEA (Wash. Super. Ct., King Cnty., May 15, 2020).

² For more information on this tax, see Tax Alert 2019-0922.

³ Washington Bankers Assn et ano v. Washington et al, Complaint for Declaratory Relief (filed Nov. 5, 2019).

⁴ Washington Bankers Assn et ano. v. Washington et al, Cause No. 19-2-29262-8 SEA (Wash. Super. Ct., King Cnty., May 15, 2020).