When a Court Misses the Mark

The BR State + Local Tax Spotlight

The Washington Supreme Court recently reviewed the much-maligned additional Business & Occupation (“B&O”) tax on certain financial institutions. Washington Bankers Ass’n v. Dep’t of Revenue, No. 98760-2 (Wash. Sept. 30, 2021) (“Decision”). The Court reversed the trial court and held that the additional tax did not discriminate against interstate commerce—a finding that requires a (very large) stretch of the imagination.

Beginning in 2020, financial institutions with consolidated net income of at least one billion dollars were subject to an additional 1.2 percent B&O tax. This tax was in addition to the standard tax rate of 1.5percent, thereby almost doubling the tax imposed on those financial institutions. The Court stated that the tax was collected from 153 taxpayers, three of which were based in Washington (or less than 2 percent). Decision, p. 4.        

The Court concluded that the additional tax did not discriminate against interstate commerce because it applied equally to financial institutions located both in state and out of state. Id. at 10. However, despite many unfavorable statements by the legislature, the Court explained away the discriminatory intent of the law. The Court went so far as to state that the “legislature asked the wealthy few to contribute more to funding essential services and programs to the benefit of all Washingtonians.” Id. at 26. There is no doubt that those 153 financial institutions would be surprised to learn that they were only “asked” to pay the additional tax and not mandated to do so.

While the Washington high court only examined the additional tax for discrimination, it is hard to imagine that the tax would pass muster under the remaining prongs of the Complete Auto test. Specifically, the fourth prong of the Complete Auto four-part test requires that the tax be “fairly related to the services provided by the State.” Id. at 7, citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). The Court found that Washington legislature enacted “the increased tax rate on the ‘wealthy few who have profited the most from the recent economic expansion’ and ‘can contribute to the essential services and programs all Washington families need.’” Decision, pg. 24 (citing LAWS OF 2019, ch. 420, § 1). Thus, the tax was to provide services and programs to Washington families, not to provide additional services to financial institutions or state-wide infrastructure. It is hard to imagine how the services and programs for Washington families relate to the limited number of financial institutions that the tax is being imposed upon.

This decision serves as an important reminder to taxpayers that when challenging a tax, all aspects of the tax should be disputed. This is especially true in a constitutional challenge to a tax.

This article is one in a series of articles written for the October 2021 edition of The BR State + Local Tax Spotlight.