Opposition Brief — Chris Quinn, et al., Petitioners v. Washington, et al.

Supreme Court briefNov 3, 2023

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No. 23-171

In the Supreme Court of the United States

CHRIS QUINN; CRAIG LEUTHOLD; SUZIE BURKE; LEWIS

RANDALL; RICK GLENN; NEIL MULLER; LARRY AND

MARGARET KING, AS INDIVIDUALS AND THE MARITAL

COMMUNITY COMPRISED THEREOF; AND KERRY COX,

PETITIONERS,

STATE OF WASHINGTON; DEPARTMENT OF REVENUE; AND

VIKKI SMITH, DIRECTOR OF THE DEPARTMENT OF REVENUE,

RESPONDENTS.

ON PETITION FOR WRIT OF CERTIORARI

TO THE WASHINGTON SUPREME COURT

BRIEF IN OPPOSITION

ROBERT W. FERGUSON

Attorney General

NOAH G. PURCELL

Solicitor General

Counsel of Record

PETER B. GONICK

TERA M. HEINTZ

Deputy Solicitors General

CHARLES ZALESKY

Assistant Attorney General

1125 Washington Street SE

Olympia, WA 98504-0100

360-753-6200

noah.purcell@atg.wa.gov

QUESTIONS PRESENTED

Washington is one of forty-two states that apply

an excise tax on certain capital gains earned by their

residents. Washington’s tax applies to gains earned

from sales of tangible property in Washington and

sales of intangible property (e.g., stock) anywhere by

Washington residents. Petitioners effectively concede

that these applications of the tax are constitutional.

To prevent tax evasion, the tax also applies to gains

earned from selling certain tangible property removed

from Washington during the tax year. Petitioners

challenge this aspect of the tax even though (1) they

have offered no evidence that they paid the tax at all,

much less on out-of-state sales; (2) they have not cited

a single case invalidating anything like Washington’s

tax; (3) the tax provides credits to ensure that

Washingtonians do not face double taxation on the

same gains; and (4) other states’ capital gains taxes

likewise apply to gains earned by their own residents

from these types of transactions, so Washington’s tax

is substantively indistinguishable for Commerce

Clause purposes. The questions presented are:

Do Petitioners have standing to challenge

alleged out-of-state application of Washington’s

capital gains tax when they have not shown

that they pay the tax at all, much less based on

out-of-state activities?

If Petitioners have standing, should this Court

declare that state capital gains taxes cannot

apply to gains earned by their residents from

out-of-state transactions even though that is a

universal feature of such taxes and no court has

ever so held?

TABLE OF CONTENTS

INTRODUCTION ........................................................ 1

STATEMENT OF THE CASE .................................... 4

Washington Joins the Overwhelming

Majority of States to Have Enacted a

Capital Gains Tax ............................................. 4

The Washington Supreme Court

Upholds the Tax................................................ 8

REASONS TO DENY REVIEW................................ 10

Petitioners Lack Article III Standing

Because They Fail to Establish Injury

in Fact Related to their Claim ....................... 10

There Is No Conflict With This Court’s

Decisions ......................................................... 13

The Washington Supreme Court’s

Decision Does Not Conflict with

any of This Court’s Decisions

Newly Cited by Petitioners .................. 14

Petitioners Show No Conflict

with Complete Auto .............................. 22

Petitioners Demonstrate No Conflict

with Any Court of Appeals Decision .............. 26

Numerous Factors Make This Case

Unsuited for this Court’s Review .................. 28

This Case Involving Hypothetical

Facts Is a Poor Vehicle ........................ 29

iii

Even If Plaintiffs Prevail on Their

Primary Theory, the Broad Relief

They Seek Would be Unavailable........ 31

Petitioners Never Presented

their Lead Argument in the

State Courts ......................................... 32

Petitioners’ Claims Regarding the

Impact of the Decision Are Inaccurate

and Overblown ................................................ 34

CONCLUSION .......................................................... 36

Appendix

The Quinn Respondents’ Response To

State Of Washington’s Opening Brief,

Quinn v. State of Washington, No. 100769-8

(Wash. S. Ct. Sept. 8, 2022) ...................................... 1a

First Amended Complaint For Declaratory

and Injunctive Relief,

Quinn v. State of Washington, No. 21-2-00075-09

(Douglas County Superior Ct. May 17, 2021) ........ 55a

TABLE OF AUTHORITIES

Cases

American Oil Co. v. Neill

380 U.S. 451 (1965).............................. 10, 13, 18, 33

Ayer & Lord Tie Co. v. Kentucky

202 U.S. 409 (1906)................................................19

Ayotte v. Planned Parenthood of

N. New England

546 U.S. 320 (2006) ................................................31

Broadrick v. Oklahoma

413 U.S. 601 (1973) ..........................................11, 13

Brockett v. Spokane Arcades, Inc.

472 U.S. 491 (1985) ................................................32

Brushaber v. Union Pac. R.R. Co.

240 U.S. 1 (1916)................................................4, 35

Bullen v. Wisconsin

240 U.S. 625 (1916)................................................16

Cardinale v. Louisiana

394 U.S. 437 (1969) ................................................33

Central Hanover Bank & Trust Co. v. Kelly

319 U.S. 94 (1943)............................................15, 29

Champlin Refining Co. v. Corp. Comm’n

of Oklahoma

286 U.S. 210 (1932)................................................32

City Bank Farmers’ Trust Co. v. Schnader

293 U.S. 112 (1934)................................................19

Clapper v. Amnesty Int’l USA

568 U.S. 398 (2013) ................................................12

Commonwealth Edison Co. v. Montana

453 U.S. 609 (1981)................................................20

Complete Auto Transit, Inc. v. Brady

430 U.S. 274 (1977) ................................ 9, 22-23, 33

Comptroller of Treasury of Maryland v. Wynne

575 U.S. 542 (2015) ................................................24

Container Corp. of Am. v. Franchise Tax Bd.

463 U.S. 159 (1983) ................................................24

Curry v. McCanless,

307 U.S. 357 (1939).............................. 14, 16, 23, 29

D.H. Holmes Co. Ltd. v. McNamara

486 U.S. 24 (1988) ..................................................24

DaimlerChrysler Corp. v. Cuno

547 U.S. 332 (2006) ................................................12

Dooley v. City of Detroit

121 N.W.2d 724 (Mich. 1963) ..................................4

Doremus v. Bd. of Educ. of Borough

of Hawthorne

342 U.S. 429 (1952) ................................................11

Free Enter. Fund v. Pub. Co. Accounting

Oversight Bd.

561 U.S. 477 (2010) .......................................... 31-32

Frick v. Pennsylvania

268 U.S. 473 (1925)................................................23

Gen. Trading Co. v. Tax Comm’n of Iowa

322 U.S. 335 (1944) ................................................19

Goldberg v. Sweet

488 U.S. 252 (1989).................................... 20, 24-25

Graves v. Elliott

307 U.S. 383 (1939).................................... 15, 23, 29

Hale v. Iowa Bd. of Assessment & Revenue

302 U.S. 95 (1937) ....................................................4

Healy v. Beer Inst.

491 U.S. 324 (1989) .......................................... 27-28

Hollingsworth v. Perry

570 U.S. 693 (2013) ................................................11

Kerr-McGee Corp. v. Navajo Tribe of Indians

731 F.2d 597 (9th Cir. 1984),

aff ’d, 471 U.S. 195 (1985) ......................................27

Lawrence v. Tax Comm’n of Mississippi

286 U.S. 276 (1932)................................................16

McGoldrick v. Compagnie Generale

Transatlantique

309 U.S. 430 (1940) ................................................34

McLeod v. J.E. Dilworth Co.

322 U.S. 327 (1944) ...................10, 13, 16-18, 20, 32

Memphis Nat. Gas Co. v. Stone

335 U.S. 80 (1948)...........................10, 13, 17-18, 33

Nat’l Pork Producers Council v. Ross

596 U.S. 358 (2023) .................................... 23, 26-28

New York v. Ferber

458 U.S. 747 (1982) ................................................13

Oklahoma Tax Comm’n v. Jefferson Lines, Inc.

514 U.S. 175 (1995) .................................... 14, 19, 25

vii

Pearson v. McGraw

308 U.S. 313 (1939) ..........................................15, 29

People of New York ex rel. Cohn v. Graves

300 U.S. 308 (1937)................................................16

People of New York ex rel. New York Central

& Hudson River R.R. Co. v. Miller

202 U.S. 584 (1906)................................................19

Sam Francis Found. v. Christies, Inc.

784 F.3d 1320 (9th Cir. 2015)................ 3, 10, 26-28

South Dakota v. Wayfair, Inc.

138 S. Ct. 2080 (2018)............................................21

Steel Co. v. Citizens for a Better Env’t

523 U.S. 83 (1998) ............................................ 11-12

Tax Comm’n of Utah v. Aldrich

316 U.S. 174 (1942)................................................16

Thorpe v. Mahin

250 N.E.2d 633 (Ill. 1969)......................................35

Tyler Pipe Indus., Inc. v. Washington Dep’t

of Revenue

483 U.S. 232 (1987) ................................................31

United Haulers Ass’n v. Oneida-Herkimer

Solid Waste Mgmt. Auth.

550 U.S. 330 (2007) ................................................25

Valley Bank of Nevada v. Plus Sys., Inc.

914 F.2d 1186 (9th Cir. 1990)................................27

Village of Arlington Heights v. Metro. Hous.

Dev. Corp.

429 U.S. 252 (1977) ...............................................11

viii

Waller v. Georgia

467 U.S. 39 (1984) ..................................................11

West Lynn Creamery, Inc. v. Healy

512 U.S. 186 (1994) ................................................21

Wisconsin v. J.C. Penney Co.

311 U.S. 435 (1940) ................................................21

Constitutional Provisions

U.S. Const. art. I, § 8 .......................... 2-3, 8-10, 17-18,

22, 26-27, 33

U.S. Const. art. III ............................... 1, 10, 12, 16, 29

Wash. Const. art. I, § 12 ..............................................8

Wash. Const. art. VII, § 1............................................8

Wash. Const. art. VII, § 2............................................8

Statutes

2021 Wash. Sess. Laws 1229-39 (ch. 196) ..................4

2021 Wash. Sess. Laws 1239 (ch. 196, § 21).............32

Washington Revised Code 82.87 .................................4

§ 82.87.010 ............................................................5

§ 82.87.020(1)........................................................6

§ 82.87.020(13)......................................................6

§ 82.87.020(6)........................................................6

§ 82.87.040(1).................................................... 5-6

§ 82.87.050(1)........................................................7

§ 82.87.050(3)........................................................7

§ 82.87.060(1)........................................................7

§ 82.87.070(1)........................................................7

§ 82.87.100 ............................................................6

§ 82.87.100(1)........................................................2

§ 82.87.100(1)(a) .............................................6, 14

§ 82.87.100(1)(a)(i)-(iii) ....................... 6, 30-31, 35

§ 82.87.100(1)(b) ...................................................6

§ 82.87.100(2)(a) .............................................7, 35

Other Authorities

David Rae,

States with Low or No Capital Gains Taxes,

Forbes (Online) (July 10, 2023),

https://www.forbes.com/sites/davidrae/2023/

07/10/states-with-low-or-no-capital-gainstaxes/?sh=72e161b994c1 .........................................4

Elizabeth McNichol,

State Taxes on Capital Gains,

Ctr. on Budget & Policy Priorities (June 15,

2021), https://www.cbpp.org/research/statebudget-and-tax/state-taxes-on-capital-gains ..........4

INTRODUCTION

The question Petitioners ask this Court to

resolve is one they lack standing to raise and is not

presented by this case. Moreover, the decision below

creates no conflict with any decision of this Court or

any lower court. There is no basis for certiorari.

In 2021, Washington became the forty-second

state to adopt a capital gains tax. Most states that

tax capital gains do so through their income tax

systems, as a form of excise tax, and they tax their

residents’ gains regardless of where the transaction

that generated the gain took place. In terms of

its effect on interstate commerce, Washington’s tax is

nearly identical, but because Washington has no

income tax, its capital gains tax is structured as a

standalone excise tax. Washington’s tax applies to

fewer out-of-state gains than do the capital gains taxes

of other states, and Washington offers a full credit if

another state has taxed the same gain.

Petitioners are individuals who oppose the tax,

but they have never alleged or showed that they

actually pay it. They filed suit before the tax was even

signed into law, and although they were allowed to

proceed in state court under Washington’s liberal

standing rules, to invoke this Court’s jurisdiction they

must show Article III standing. They cannot.

Petitioners’ claim here is that Washington’s tax

violates the dormant Commerce Clause when applied

to gains earned from sales outside of Washington, but

they have not shown that they owe the tax at all, much

less based on out-of-state sales. They thus can show

no injury from the aspect of the tax they claim is

unconstitutional. They lack standing.

Even if Petitioners had standing to bring this

case, they misrepresent the question that this Court

would need to decide. The Petition describes the

question presented as whether a state may tax

“out-of-state transactions involving only out-of-state

property.” Pet. i. In fact, Washington’s tax applies to

gains earned from three types of transactions:

(1) sales of tangible property in Washington; (2) sales

of intangible property (like stocks) anywhere by

Washington residents; and (3) to prevent tax evasion,

sales of tangible property that was removed from

Washington during the taxable year. Pet. App. 113-14

(Wash. Rev. Code § 82.87.100(1)). Petitioners

explicitly concede that Washington may tax gains

from the first category of transactions. Pet. 12 n.2.

They effectively concede that Washington may tax

gains from the second category, Pet. 19, a concession

required by this Court’s many cases holding that

states may tax their residents’ transfers of intangible

property wherever they occur. Thus, if the Court were

to grant review, the only question presented would be

whether Washington’s tax may be applied to gains

from the third category of sales, a category Petitioners

have not even alleged they made. Even if they had,

Washington offers a full credit against its tax for any

tax paid to another state based on the same gains, a

practice this Court has long recognized as addressing

any potential Commerce Clause issue.

Besides lacking standing and twisting the

question presented, Petitioners have cited no case

conflicting with the decision below. They claim that

the Washington Supreme Court ignored a per se rule

created by three of this Court’s decisions that States

may never tax gains from out-of-state transactions.

But they never cited those cases to the Washington

Supreme Court, likely because they are inapposite

and involved dramatically different state taxes. In

reality, states routinely impose taxes on gains their

residents earn from activities in other states, a

practice this Court has upheld for decades. And the

Court has upheld a range of measures States have

used to prevent their residents from evading taxes by

moving property out of state. Meanwhile, the only

lower court case Petitioners cite, Sam Francis

Foundation v. Christies, Inc., 784 F.3d 1320 (9th Cir.

2015), did not involve state taxes at all and explicitly

emphasized that it was not applying this Court’s

dormant Commerce Clause tax cases. Id. at 1324.

Finally, although this Court has repeatedly

emphasized that the constitutionality of state taxes

depends on their real-world impact rather than

nomenclature, Petitioners ask this Court to invalidate

parts of Washington’s tax based on features

materially indistinguishable from the capital gains

taxes of forty-one other states. Under every state’s

capital gains tax system of which Washington is

aware, taxpayers residing in the state owe tax on

gains from out-of-state sales of tangible property, such

as artworks, gold, or real estate. Washington’s tax is

far more limited, because it applies only to gains from

selling tangible property removed from Washington

during the tax year and grants a full credit whenever

another state taxes the same gain. Petitioners do not

and cannot explain why Washington’s narrower tax

would be uniquely unconstitutional when its impact

on interstate commerce (if any) is substantively

indistinguishable from that of every other state’s

capital gains tax. The Court should deny certiorari.

STATEMENT OF THE CASE

Washington Joins the Overwhelming

Majority of States to Have Enacted a

Capital Gains Tax

Washington is one of forty-two states that

imposes an excise tax on capital gains. Pet. App. 10

(citing Elizabeth McNichol, State Taxes on Capital

Gains, Ctr. on Budget & Policy Priorities (June 15,

2021), https://www.cbpp.org/research/state-budgetand-tax/state-taxes-on-capital-gains).1 Most of these

states tax capital gains as part of their net income tax

regimes, not (like Washington) as a stand-alone excise

tax. But under decisional law from this Court and

virtually every state, income taxes are a type of excise

tax. See, e.g., Hale v. Iowa Bd. of Assessment &

Revenue, 302 U.S. 95, 104 n.7 (1937) (collecting cases);

Dooley v. City of Detroit, 121 N.W.2d 724, 728

(Mich. 1963) (same).2

Washington enacted its capital gains excise tax

in 2021. 2021 Wash. Sess. Laws 1229-39 (ch. 196). The

law, codified in Washington Revised Code 82.87,

1 The states that do not currently tax capital gains are

Alaska, Florida, Nevada, New Hampshire, South Dakota,

Tennessee, Texas, and Wyoming. David Rae, States with Low or

No Capital Gains Taxes, Forbes (Online) (July 10, 2023),

https://www.forbes.com/sites/davidrae/2023/07/10/states-with-lo

w-or-no-capital-gains-taxes/?sh=72e161b994c1.

2 The federal income tax is also considered an excise tax.

See Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 16-17 (1916)

(“[T]axation on income [is] in its nature an excise entitled to be

enforced as such[.]”).

implements a narrowly tailored, seven percent tax on

gains derived from the sale or exchange of certain

long-term capital assets.3

The Washington legislature’s stated objective

for the tax is two-fold. See generally Pet. App. 11

(Washington Supreme Court’s discussion of

legislative objectives). First, the tax is designed to

advance the “paramount duty of the state” to amply

fund education by “invest[ing] in the ongoing support

of K-12 education and early learning and child care[.]”

Pet. App. 98 (Wash. Rev. Code § 82.87.010). The tax is

projected to raise nearly $2.5 billion over its first six

years to support these priorities. Pet. App. 13.

Second, the capital gains tax will “mak[e]

material progress toward rebalancing the state’s tax

code[,]” which is the “most regressive in the nation[.]”

Pet. App. 99 (Wash. Rev. Code § 82.87.010). Under

Washington’s historic tax system, “[t]he poorest

individuals bear the greatest tax burden due in large

part to [Washington’s] heavy reliance on sales taxes

and the lack of a graduated income tax[.]” Pet. App. 3.

The capital gains excise tax is a step towards a fairer

tax system that “works . . . to help all Washingtonians

grow and thrive.” Pet. App. 99 (Wash. Rev. Code

§ 82.87.010).

The tax is designed as an excise tax, not a

property tax. Pet. App. 103 (Wash. Rev. Code

§ 82.87.040(1)). That is, it is not imposed on the value

3 A copy of the complete Washington capital gains tax

code is at Pet. App. 98-121.

of assets as of a particular date, as would be the

case with a property tax, but rather when certain

long-term capital assets are sold or exchanged and the

taxpayer receives a gain. A long-term capital asset is

an asset such as stocks, bonds, or valuable artwork

held for more than one year. Pet. App. 101 (Wash. Rev.

Code § 82.87.020(6)).

The tax is measured by the taxpayer’s

“Washington capital gains.” Pet. App. 101 (Wash. Rev.

Code § 82.87.040(1)). That amount is computed by

starting with an individual’s federal net long-term

capital gain and making specific additions and

subtractions to arrive at the Washington taxable

gain. Pet. App. 99-100, 102 (Wash. Rev. Code

§ 82.87.020(1), (13)).

Most relevant here, the state legislature

excluded gains with no connection to Washington by

establishing a detailed allocation process in Wash.

Rev. Code § 82.87.100. See Pet. App. 113-15. In

general, that provision allocates to Washington the

long-term capital gains from the sale or exchange of

tangible personal property located in Washington and

intangible property (like stocks) owned by an

individual domiciled in the state. Pet. App. 113-14

(Wash. Rev. Code § 82.87.100(1)(a), (b)). Tangible

property that was formerly located in Washington

during the taxable year, but removed by a Washington

resident owner prior to sale, is included in the

measure of the tax so long as the gain is not subject to

an income or capital gains tax by another state.

Pet. App. 114 (Wash. Rev. Code § 82.87.100(1)(a)(i)(iii)). In this way, a Washington resident may not

avoid all state tax on gains from the sale or exchange

of tangible property by removing the property

temporarily to another state.

In addition to these detailed allocation

provisions, the Washington legislature included a

credit to prevent the tax from applying to “the amount

of any legally imposed income or excise tax paid by the

taxpayer to another taxing jurisdiction on capital

gains derived from capital assets within the other

taxing jurisdiction[.]” Pet. App. 114 (Wash. Rev. Code

§ 82.87.100(2)(a)). Together, the allocation and credit

provisions ensure that capital gains are subject to the

Washington tax only when there is a constitutional

connection with Washington and no other state is

lawfully taxing the same gains.

To achieve its goal of imposing the tax “without

exacerbating existing tax inequities,” Pet. App. 12, the

Washington legislature provided generous deductions

and exemptions. For example, an individual’s

first $250,000 in capital gains each year are

exempt from the tax. Pet. App. 109 (Wash. Rev.

Code § 82.87.060(1)). Gains derived from the sale

of a qualified family-owned small business are

also exempt. Pet. App. 109 (Wash. Rev. Code

§ 82.87.070(1)). In addition, the legislature exempted

gains from the sale or exchange of most real estate.

Pet. App. 105 (Wash. Rev. Code § 82.87.050(1)). Assets

held in various retirement accounts are also exempt

from the tax. Pet. App. 107 (Wash. Rev. Code

§ 82.87.050(3)).

The Washington Supreme Court Upholds

the Tax

Almost a year before Washington’s capital

gains excise tax took effect, and even before it was

signed into law, a group of nine Washington residents

(the “Quinn” plaintiffs, now Petitioners) filed an

action challenging the tax. A second, almost identical

lawsuit was filed soon after by a different group

of plaintiffs: the “Clayton” plaintiffs, who have not

petitioned for certiorari. The trial court consolidated

both actions. The State, along with a group of

intervenors, defended the tax. Pet. App. 13-14.

The Quinn and Clayton plaintiffs raised mostly

state

constitutional

claims,

asserting

that

Washington’s tax constituted a “property tax” that

violated certain aspects of the Washington

constitution, and that the tax violated the state’s

“privileges and immunities clause.” Pet. App. 2, 13;

see also Wash. Const. art. VII, §§ 1, 2 (imposing

uniformity and levy restrictions on property taxes);

Wash. Const. art. I, § 12 (Washington’s privileges and

immunities clause). Petitioners also alleged that the

tax violated the dormant Commerce Clause. Pet. App.

2, 13.

The State challenged Plaintiffs’ standing. The

trial court found that Plaintiffs had standing under

Washington law.

Because the opponents of the tax raised only

facial constitutional challenges, the trial court

determined the legality of the tax on cross motions for

summary judgment. Pet. App. 14.

The court invalidated the tax on state law

grounds, ruling that the tax had certain “hallmarks”

of a broad-based net income tax, rendering it a

property tax under state court precedent. Pet. App.

14, 31, 90. Having determined that the tax was a

property tax, the court held that it violated

Washington’s constitution. Pet. App. 14, 93. The court

did not address Plaintiffs’ other claims.

The Washington Supreme Court reversed.

Pet. App. 2, 49. It first rejected all of Plaintiffs’ state

constitutional claims, holding that the Washington

tax was an excise tax, not a property tax, and that the

tax did not implicate the state’s constitutional limits

on property taxes or violate any privileges or

immunities recognized under Washington law.

Pet. App. 17-40. The Court next thoroughly analyzed

and rejected Plaintiffs’ lone federal constitutional

claim, under the dormant Commerce Clause.

Pet. App. 40-49. Based on its application of this

Court’s modern dormant Commerce Clause

precedent, the Washington Supreme Court held that

the tax satisfied “all four elements of the Complete

Auto test” and, consequently, the opponents of the tax

“failed to demonstrate a dormant commerce clause

violation[.]” Pet. App. 49 (referring to Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274 (1977)).

Petitioners did not raise, and the Washington

Supreme Court therefore did not address, any

arguments under the Due Process Clause or other

principles of federal constitutional law. See generally

BIO App. 61a-65a (claims not raised below); Pet. App.

40-49 (unraised claims not addressed by the

Washington Supreme Court). Petitioners also did not

cite the primary cases they now rely on. BIO App.

5a-9a. (failing to cite McLeod v. J.E. Dilworth Co.,

322 U.S. 327 (1944), Memphis Nat. Gas Co. v. Stone,

335 U.S. 80 (1948), American Oil Co. v. Neill, 380 U.S.

451 (1965), and Sam Francis Found., 784 F.3d 1320).

REASONS TO DENY REVIEW

Petitioners fail to establish an injury in fact

related to their claims. None of them has

demonstrated that they have ever paid or imminently

will pay Washington’s capital gains tax, much less

that they will do so on allegedly out-of-state

transactions. Petitioners thus have not shown that

this Court has jurisdiction over this case.

Petitioners also fail to establish any basis for

review. The decision below involved mostly state

constitutional issues. On the federal side of the ledger,

Petitioners acknowledge that they raised only a

dormant Commerce Clause claim. Pet. 11; see also

Pet. App. 2 (listing petitioners’ state and federal

constitutional claims); Pet. App. 13 (same). The

Washington Supreme Court’s decision correctly

rejected that claim and presents no conflict with any

decision of this Court or any lower court.

Petitioners Lack Article III Standing

Because They Fail to Establish Injury in

Fact Related to their Claim

Petitioners lack Article III standing to seek

review by this Court. They claim that Washington’s

tax is unconstitutional when applied to gains from

transactions outside of Washington, but they have not

alleged or showed that they owe Washington’s capital

gains tax at all, much less that any of them paid tax

on gains from out-of-state transactions. They thus can

show no injury to themselves from the constitutional

violation they allege, and it is a bedrock principle

that “a person to whom a statute may constitutionally

be applied will not be heard to challenge that

statute on the ground that it may conceivably be

applied unconstitutionally to others[.]” Broadrick v.

Oklahoma, 413 U.S. 601, 610 (1973).

As the parties seeking to invoke federal

jurisdiction, Petitioners bear the burden of

establishing standing at each stage of the proceedings.

Doremus v. Bd. of Educ. of Borough of Hawthorne, 342

U.S. 429, 434-35 (1952); Steel Co. v. Citizens for a

Better Env’t, 523 U.S. 83, 103 (1998). This is no less

true when this Court is reviewing a decision from a

state court. Doremus, 342 U.S. at 434-35. While the

trial court here found that plaintiffs had standing

under Washington’s far more liberal standing

rules (and based on theoretical future injury),

that is irrelevant because “[t]he constitutional and

prudential considerations [of Article III standing] are

peculiarly federal in nature.” Village of Arlington

Heights v. Metro. Hous. Dev. Corp., 429 U.S. 252,

262 n.8 (1977). In other words, “the fact that

a State thinks a private party should have standing

to seek relief for a generalized grievance cannot

override [the Court’s] settled law to the contrary.”

Hollingsworth v. Perry, 570 U.S. 693, 715 (2013);

accord Waller v. Georgia, 467 U.S. 39, 43 n.3 (1984)

(“The fact that the Georgia Supreme Court found

standing does not permit us to avoid the responsibility

of ensuring that our order will be other than

advisory.”).

The “irreducible constitutional minimum” for

standing contains three requirements: (1) an “injury

in fact” that is “concrete” and “actual or imminent, not

conjectural or hypothetical”; (2) “causation—a fairly

traceable connection between the plaintiff ’s injury

and the complained-of conduct of the defendant”; and

(3) “redressability—a likelihood that the requested

relief will redress the alleged injury.” Steel Co., 523

U.S. at 102-03 (internal quotation marks omitted);

accord DaimlerChrysler Corp. v. Cuno, 547 U.S. 332,

342 (2006).

Here, Petitioners fail to meet the first “and

foremost” requirement of showing an actual injury on

multiple levels. See Steel Co., 523 U.S. at 103. To begin

with, they have presented no evidence that they have

ever been subject to Washington’s capital gains

tax at all. They filed suit before the capital gains

tax went into effect, and their Complaint includes no

allegations that any of Petitioners had been assessed

or would owe any tax. See generally BIO App. 55a-66a.

Instead, Petitioners alleged that they own capital

assets and “would be subject to the capital gains tax

in ESSB 5096 if they realized capital gains and would

incur a tax liability on capital gains in excess of

$250,000.” BIO App. 58a (emphases added). These

allegations are plainly insufficient to establish Article

III injury. Clapper v. Amnesty Int’l USA, 568 U.S. 398,

401 (2013) (theory of “future injury is too speculative

to satisfy the well-established requirement that

threatened injury must be ‘certainly impending’ ”).

Even if Plaintiffs could show that any of them

has paid Washington’s capital gains tax, their

constitutional claim is premised on the idea that

Washington is impermissibly taxing out-of-state

transactions, but they have offered no evidence

whatsoever that any tax they might owe is due to outof-state transactions. They thus lack standing to

challenge the tax’s constitutionality on this basis.

Broadrick, 413 U.S. at 610; New York v. Ferber, 458

U.S. 747, 767 (1982) (same).

The Court should deny the petition because it

lacks jurisdiction to hear the case.

There Is No Conflict With This Court’s

Decisions

The Washington Supreme Court’s

Decision Does Not Conflict with any

of This Court’s Decisions Newly

Cited by Petitioners

Petitioners claim that the Washington

Supreme Court created a conflict with this Court’s

decisions by ignoring three cases—cases Petitioners

never cited below—that supposedly create a per se

rule prohibiting taxes like Washington’s. See Pet. 15

(citing McLeod, 322 U.S. 327; Memphis Nat. Gas Co.,

335 U.S. 80; American Oil Co., 380 U.S. 451). But none

of those cases involved taxes remotely like

Washington’s. And contrary to Petitioners’ argument,

this Court has repeatedly upheld excise taxes based

on the taxpayer’s domicile regardless of where the

underlying transaction occurs. Accepting Petitioners’

view would upend longstanding state tax policies and

elevate form over substance, directly contrary to this

Court’s direction.

Washington’s tax applies to gains generated by

three types of transfers, as detailed in the part of the

statute allocating gains to Washington: (1) tangible

personal property sold in Washington; (2) intangible

personal property sold by a Washington-domiciled

resident; and (3) tangible personal property

temporarily removed from Washington State before

sale by a Washington-domiciled resident. Wash. Rev.

Code § 82.87.100(1)(a). None of the cases cited by

Petitioners involved any of these circumstances.

With respect to the first category, Petitioners

concede that Washington can tax tangible personal

property sold in Washington State. Pet. 12 n.2. This

“has long been settled” law. Oklahoma Tax Comm’n v.

Jefferson Lines, Inc., 514 U.S. 175, 184 (1995). None

of the cases cited by Petitioners suggest otherwise.

As to the second category, Petitioners concede

that “States can . . . tax residents’ sale of intangible

property, which has no location, even if the parties

designate the locus of the transaction to be

elsewhere[.]” Pet. 19. (citing Curry v. McCanless,

307 U.S. 357, 367-69 (1939)). Petitioners then

misrepresent a quote from Curry to suggest that this

rule applies only where “the owner of [the] intangibles

confines his activity to the place of his domicile.” Pet.

19-20 (alteration in original) (quoting Curry, 307 U.S.

at 369). In reality, Curry imposed no such limitation,

holding: “From the beginning of our constitutional

system control over the person at the place of his

domicile and his duty there, common to all citizens, to

contribute to the support of government have been

deemed to afford an adequate constitutional basis for

imposing on him a tax on the use and enjoyment of

rights in intangibles[.]” Curry, 307 U.S. at 366. When

the Court later discussed the taxpayer “confin[ing] his

activity to the place of his domicile[,]” Pet. 19-20

(quoting Curry, 307 U.S. at 369), it was addressing the

ability of another state besides the taxpayer’s domicile

to tax the same intangibles. The Court said that

“when the taxpayer extends his activities with respect

to his intangibles, so as to avail himself of the

protection and benefit of the laws of another state,”

then that other state could also impose a tax. Curry,

307 U.S. at 367. But “it is undeniable that the state of

domicile is not deprived, by the taxpayer’s activities

elsewhere, of its constitutional jurisdiction to tax[.]”

Id. at 368. Thus, it is black letter law that when a

person transfers intangible property, the state of their

domicile may tax that transfer, even if the transfer

occurred elsewhere. See, e.g., Curry, 307 U.S. at

366-67; Graves v. Elliott, 307 U.S. 383, 386 (1939)

(“[T]he power of disposition of property is the

equivalent of ownership. It is a potential source of

wealth and its exercise in the case of intangibles is the

appropriate subject of taxation at the place of the

domicile of the owner of the power.”); Pearson v.

McGraw, 308 U.S. 313, 318 (1939) (same); Central

Hanover Bank & Trust Co. v. Kelly, 319 U.S. 94 (1943)

(“It is much too late to contend that domicile alone is

insufficient to give the domiciliary state the

constitutional power to tax a transfer of intangibles

where the owner, though domiciled within the state,

keeps the paper evidences of the intangibles outside

its boundaries.”).4

None of the cases relied on by Petitioners for

their alleged extraterritoriality claim alters this black

letter law or even involves the sale of intangible

property. Each case instead dealt exclusively with the

sale of tangible property.

As to the third category of gains included in the

measure of the Washington tax, Petitioners’ cited

cases similarly do not apply to the sale of tangible

personal property temporarily removed from the

state. At the outset, Petitioners have not shown

they have even sold tangible personal property

outside the state or paid any Washington capital

gains taxes in such circumstances, and as explained

above, Petitioners thus cannot establish any injury

necessary to establish Article III standing to challenge

this aspect of the law.

Equally as important, Petitioners cannot

demonstrate a reviewable conflict because none of

their cases address the unique circumstances in which

the Washington capital gains tax applies. In McLeod,

for example, all aspects of the sale occurred in

4 This power extends not only to the right of the

domiciliary state to tax the sale itself, but to tax income derived

from the sale of intangibles. Lawrence v. Tax Comm’n of

Mississippi, 286 U.S. 276, 279 (1932); People of New York ex rel.

Cohn v. Graves, 300 U.S. 308, 313 (1937). This established

jurisdictional principle is over a century old. See Bullen v.

Wisconsin, 240 U.S. 625, 631 (1916). And the rule applies even if

another state has jurisdiction to tax intangible property for some

other reason. Curry, 307 U.S. at 368, 373; Tax Comm’n of Utah

v. Aldrich, 316 U.S. 174, 181 (1942).

Tennessee, including the seller’s domicile and the

consummation of the sale. On these facts, this Court

held that Arkansas lacked authority to tax the

“interstate transaction” under the then-prevailing

interpretation of the Commerce Clause. McLeod, 322

U.S. at 330. But Washington’s tax is not remotely

comparable. It applies only in the rare circumstance

where a Washington resident temporarily takes a

highly valuable capital asset, such as jewelry or fine

art, out of state to sell in a year in which they make

over $250,000 in qualifying capital gains. McLeod

does not address such circumstances.

Petitioners’ reliance on Memphis Natural Gas

Co. is even more tenuous. There, the Court upheld

Mississippi’s franchise tax on an out-of-state pipeline

company measured by the value of the taxpayer’s

in-state property. Memphis Nat. Gas Co., 335 U.S. at

80-81. Petitioners misquote Memphis Natural Gas Co.

as adopting a broad rule against a state taxing an

“event” occurring outside a state’s boundaries. What

Memphis Natural Gas Co. actually held is that a state

does not have the authority to tax a “taxable event

[that] is outside its boundaries or [ ] a privilege the

state cannot grant.” Memphis Nat. Gas Co., 335 U.S.

at 95 (emphasis added) (citation omitted). But in

identifying the taxable incident, Memphis Natural

Gas Co. also held that this Court is ordinarily “bound

by the construction of the state statute by the state

court[.]” Id. at 84-85. Thus, to the extent Memphis

Natural Gas Co. applies here at all, it supports the

State. Petitioners acknowledge that the Washington

Supreme Court determined that the taxable incident

for Washington’s capital gains tax is the “taxpayer’s

exercise of their power to dispose of capital assets,” a

power exercised within the state of domicile. Pet. 21.

Petitioners also concede that they and this Court are

“bound” by this interpretation of state law. Pet. 21.

Far from demonstrating a reviewable conflict,

Memphis Natural Gas Co. supports the decision below

by emphasizing that the Washington Supreme Court’s

interpretation of the incidence of its state tax as the

privilege to dispose of capital assets is controlling.

Petitioners similarly fail to show a conflict with

American Oil Co. In that case, Idaho imposed a motor

fuels tax on a licensed motor fuels distributor that

made a bulk purchase of gasoline in Utah. But there,

as in McLeod, “[e]ach and every phase of the

transaction had its locus outside of Idaho[,]” including

the domicile of the seller, the invitations for and

submissions of bids, the delivery of the motor fuels,

and the passage of title to the fuel. American Oil Co.,

380 U.S. at 458. Even more importantly, the state

courts had determined that the taxable incident there

was “a privilege tax upon the [out-of-state] dealer.”

Id. at 456-57. Petitioners thus mischaracterize

American Oil Co. as holding that the location of the

tangible property was dispositive of the dormant

Commerce Clause question. It was not. And nothing

in American Oil Co. says that a state automatically

loses the ability to tax tangible property temporarily

removed out of state even when such property has no

taxable situs in any other state. To the extent

American Oil Co. applies here at all, it again supports

accepting the Washington Supreme Court’s

interpretation of the taxable incident as on the

privileges exercised by its own residents.

Petitioners also conspicuously ignore more

relevant decisions of this Court that recognize state

power to mitigate tax-avoidance efforts by their

residents. For example, this Court has long recognized

a domiciliary state’s power to enact “a use tax, or some

equivalent on the consumption of services,” even

while acknowledging such taxes are designed to

“compensate the taxing State for its incapacity

to reach the corresponding sale[.]” Oklahoma Tax

Comm’n, 514 U.S. at 193-94; see also Gen. Trading Co.

v. Tax Comm’n of Iowa, 322 U.S. 335 (1944)

(upholding “a non-discriminatory excise laid on all

personal property” regardless of where the sale was

made).

The tax-avoidance aspect of Washington’s

capital gains law is a logical extension of this Court’s

recognition in People of New York ex rel. New York

Central & Hudson River Railroad Co. v. Miller,

202 U.S. 584 (1906), that tangible personal property

does not lose its tax situs through temporary removal

from the state. In Hudson River Railroad Co., this

Court held that a domiciliary state retains jurisdiction

to tax “its own corporations for all their property

within the state during the tax year, even if every item

of that property should be taken successively into

another state for a day, a week, or six months, and

then brought back.” Id. at 597. In that circumstance,

“the state of origin remains the permanent situs

of the property, notwithstanding its occasional

excursions to foreign parts.” Id. (citing Ayer & Lord

Tie Co. v. Kentucky, 202 U.S. 409 (1906)); see also City

Bank Farmers’ Trust Co. v. Schnader, 293 U.S. 112,

120 (1934) (domiciliary state lacks jurisdiction to tax

tangible property relocated to another state when the

relocation “was not merely transient, transitory, or

temporary, but [the property] was fixed in an

established abiding place in which [it] remained for a

long time” thereby becoming “subject to the taxing

power” of that state). Nothing in McLeod undercuts a

domiciliary state’s power to mitigate tax-avoidance

strategies by its residents by taxing privileges related

to property recently removed from the state.

In any event, if a taxpayer ever pays

Washington capital gains tax on tangible personal

property temporarily removed from the state (that is

not entirely offset by a credit), they can always raise

an as-applied challenge against the law at that time.

The Washington Supreme Court recognized as much,

concluding that Petitioners’ purely hypothetical

arguments about the reach of Washington’s laws are

“not sufficient to facially invalidate the tax, and an

as-applied challenge is the best remedy for a taxpayer

if any of those hypothetical circumstances materialize

and in fact result in multiple taxation.” Pet. App. 47

(citing Goldberg v. Sweet, 488 U.S. 252, 264 (1989)

(remote possibility of multiple taxation insufficient to

facially invalidate tax)).

Petitioners also elevate form over substance in

suggesting that the application of Washington’s

capital gains excise tax is somehow different from

application of other states’ capital gains taxes, in

direct contradiction to this Court’s longstanding

method of “focusing on the practical effect of a

challenged tax.” Commonwealth Edison Co. v.

Montana, 453 U.S. 609, 615 (1981) (internal quotation

marks omitted). An example helps illustrate the point.

Imagine a taxpayer whose only capital gains in a year

come from selling an artwork at auction in New York

City. Whether the taxpayer lives in Washington or in

a state that characterizes its capital gains tax as an

income tax, the taxpayer would still owe their state’s

capital gains tax (in Washington they would only owe

it if the painting had been in Washington earlier that

taxable year). In either case, the taxpayer owes their

state an excise tax based entirely on an out-of-state

sale of tangible personal property. But Petitioners

claim that Washington’s tax is somehow uniquely

unconstitutional, whereas the identical effect of the

capital gains taxes in forty-one other states is not.

That makes no sense.

Petitioners may respond that in other states,

the privilege being taxed is receiving income, whereas

in Washington it is the “power to dispose of capital

assets,” Pet. 21, but the outcome and practical effect

of the taxes are identical, and this Court has said

repeatedly that what matters are effects, not

nomenclature. See, e.g., Wisconsin v. J.C. Penney Co.,

311 U.S. 435, 443-44 (1940) (“[T]he descriptive pigeonhole into which a state court puts a tax is of no

moment

determining

the

constitutional

significance of the exaction. . . . [I]n passing on its

constitutionality we are concerned only with its

practical operation, not its definition or the precise

form of descriptive words which may be applied to it.”

(Internal quotation marks omitted.)); see also South

Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2094 (2018)

(“The Court’s Commerce Clause jurisprudence has

‘eschewed formalism for a sensitive, case-by-case

analysis of purposes and effects.” (Quoting West Lynn

Creamery, Inc. v. Healy, 512 U.S. 186, 201 (1994).));

Complete Auto Transit, Inc., 430 U.S. at 279

(in assessing constitutionality of a tax under the

dormant Commerce Clause, courts consider “not

the formal language of the tax statute but rather its

practical effect”).

In short, the Washington Supreme Court’s

decision creates no conflict with decisions of this

Court. Rather, it is Petitioners who argue for a rule

contrary to this Court’s longstanding precedent.

Petitioners Show No Conflict with

Complete Auto

Petitioners eventually get around to addressing

the claim actually presented to, and rejected by, the

Washington Supreme Court. Pet. 22. But they fail to

demonstrate a conflict with Complete Auto and its

progeny. Under Complete Auto, this Court has

consistently upheld application of a state tax if it (1)

applies to an activity with a substantial nexus with

the taxing state, (2) is fairly apportioned, (3) does not

impermissibly discriminate against interstate

commerce, and (4) is fairly related to services provided

by the state. Complete Auto Transit, Inc., 430 U.S. at

279. Petitioners fail to show a conflict with any

of these requirements.

Petitioners admit that the fourth prong of

Complete Auto is met here: Washington’s capital gains

tax is “fairly related to services provided by the state.”

Pet. 23-24. Petitioners, however, attempt to graft onto

the first three prongs a per se rule against

extraterritorial application of state laws that appears

nowhere in Complete Auto or in any case applying it.

Pet. 23. And as detailed below, this Court recently

rejected an argument that the dormant Commerce

Clause incorporates a per se rule against

extraterritorial application of state laws. Nat’l Pork

Producers Council v. Ross, 596 U.S. 358 (2023).

Petitioners present no basis to relitigate that

conclusion in applying the Complete Auto test.

Apart from advocating a per se rule this Court

has already rejected, Petitioners are left arguing that

the Washington Supreme Court erred in its

application of the Complete Auto test, hardly an issue

warranting review by this Court. See Rule 10

(“A petition for a writ of certiorari is rarely granted

when the asserted error consists of . . . misapplication

of a properly stated rule of law.”). Petitioners are also

wrong as a matter of law as to each point.

As to the first prong of Complete Auto,

Petitioners are wrong that Washington lacks a

sufficient nexus to tax either intangible property sold

by its residents or tangible property temporarily

removed from Washington as a tax avoidance

strategy. Pet. 23. As detailed above, this Court has

consistently held that a state has nexus to tax the sale

or transfer of intangible property such as stocks and

bonds owned by persons domiciled in the state. Curry,

307 U.S. at 366; Graves, 307 U.S. at 386. Washington

also has the requisite nexus to tax sales of tangible

property with a recognized situs in the state that has

been temporarily removed. This taxable nexus is not

lost until the tangible property obtains an actual situs

outside the state and is subject to that other state’s

taxing jurisdiction. Frick v. Pennsylvania, 268 U.S.

473, 489 (1925). And Washington offers a full credit

where another state taxes the same transaction. In

short, in any case where a taxpayer would actually

owe Washington’s tax, there is “ ‘nexus’ aplenty.” D.H.

Holmes Co. Ltd. v. McNamara, 486 U.S. 24, 33 (1988).

As to the second prong, Petitioners are

similarly wrong that Washington’s capital gains tax is

not “fairly apportioned.” Pet. 24. The “central

purpose” of the fair apportionment requirement “is to

ensure that each State taxes only its fair share of an

interstate transaction.” Goldberg, 488 U.S. at 260-61.

Consistent with that purpose, the dormant Commerce

Clause “imposes no single [apportionment] formula on

the States[.]” Id. at 261 (first alteration in original)

(quoting Container Corp. of Am. v. Franchise Tax Bd.,

463 U.S. 159, 164 (1983)). Fair apportionment can be,

and often is, satisfied through the use of a credit for

taxes paid to another state, and this Court has

“repeatedly held that a tax credit is an acceptable

method of avoiding dormant commerce clause

infirmity.” Pet. App. 46 (citing Comptroller of

Treasury of Maryland v. Wynne, 575 U.S. 542, 567-68

(2015), Goldberg, 488 U.S. at 264, and D.H. Holmes

Co. Ltd., 486 U.S. at 31)).5

For decades, this Court has upheld a state tax

as fairly apportioned when it is “internally and

externally consistent.” Goldberg, 488 U.S. at 261.

Internal consistency requires a tax to be structured so

that if every state imposed it, no multiple taxation

5 Petitioners mostly ignore Washington’s credit against

taxes paid to other states. They mention the credit only with

respect to their “discrimination” argument. See Pet. 24. They

completely ignore the credit when addressing “fair

apportionment.” Pet. 23-24.

would result. Goldberg, 488 U.S. at 261. External

consistency evaluates the “economic justification for

the State’s claim upon the value taxed[.]” Oklahoma

Tax Comm’n, 514 U.S. at 185. Petitioners here do not

even attempt to argue that the Washington capital

gains tax is internally or externally inconsistent. But

even if they did, the Washington tax easily satisfies

these requirements, as the Washington Supreme

Court correctly explained. Pet. App. 45-47.

Petitioners’ claims of discrimination also fail.

Pet. 24. “Discrimination” in the dormant Commerce

Clause context means “differential treatment of instate and out-of-state economic interests that benefits

the former and burdens the latter.” United Haulers

Ass’n v. Oneida-Herkimer Solid Waste Mgmt. Auth.,

550 U.S. 330, 338 (2007) (internal quotation marks

omitted). But under its plain text, the Washington tax

does not grant unfavorable treatment to out-of-state

persons, so the law is not facially discriminatory.

And Petitioners present no evidence of actual

discrimination, offering instead their ipse dixit

contention that the state’s credit mechanism is

unsatisfactory and “subject[s] interstate commerce to

the burden of multiple taxation.” Pet. 24 (internal

quotation marks omitted). Unproven assertions

cannot be a sufficient basis to invalidate Washington’s

tax, or the capital gains taxes imposed by every other

state would be struck down as “discriminatory” based

on pure conjecture by persons opposing the tax.

Petitioners’ discrimination claim contains no

substance and does not merit Supreme Court review.

Petitioners fail to show that the decision below

conflicts with this Court’s dormant Commerce Clause

precedent. Review should be denied.

Petitioners Demonstrate No Conflict with

Any Court of Appeals Decision

Petitioners also fail to identify a single Court of

Appeals decision striking down a tax like

Washington’s as violating the dormant Commerce

Clause. Lacking a genuine conflict on this core legal

issue, Petitioners attempt to manufacture a conflict

with a Ninth Circuit case, Sam Francis Foundation.

But that case presents no genuine conflict for at least

two reasons. First, Sam Francis Foundation is not a

tax case, and specifically declined to apply this Court’s

dormant Commerce Clause precedent governing state

tax laws. And second, the Ninth Circuit applied a “per

se” rule against extraterritorial application of state

laws that this Court just rejected last term in Ross.

Sam Francis Foundation is thus neither relevant nor

good law and provides no basis for this Court’s review.

To start, Petitioners cannot show a reviewable

conflict here because Sam Francis Foundation had

nothing to do with taxes. Sam Francis Found., 784

F.3d at 1324. The court specifically recognized that

the law at issue there, requiring the payment of

royalties to artists for the sale of fine art, bore no

resemblance to a tax because it regulated conduct

solely “among private parties” and required payment

to a private party, not the government. Id. The law

also required sellers’ agents to attempt to locate and

pay the artist, where “[n]othing of the sort is required

by ordinary tax law[.]” Id. Because the law was not a

tax, the Court explicitly declined to apply this Court’s

precedent governing state tax laws, including the

Complete Auto factors. Sam Francis Found., 784 F.3d

at 1324.

By contrast, when addressing an actual tax, the

Ninth Circuit acknowledges that Complete Auto

governs. See, e.g., Kerr-McGee Corp. v. Navajo Tribe of

Indians, 731 F.2d 597, 602 (9th Cir. 1984), aff ’d, 471

U.S. 195 (1985). Thus, contrary to Petitioners’

argument, Sam Francis Foundation would have no

application to a dormant Commerce Clause challenge

to Washington’s capital gains tax in federal court, and

cannot establish even a superficial conflict. Given its

obvious inapplicability, it is hardly surprising that

Petitioners failed to even cite Sam Francis

Foundation below.

Second, Sam Francis Foundation is no longer

good law because the Ninth Circuit applied a “per se”

rule against extraterritorial application of state laws

that this Court repudiated in Ross. Specifically, the

Ninth Circuit adopted an interpretation of Healy v.

Beer Institute, 491 U.S. 324, 336 (1989), as

“preclud[ing] the application of a state statute to

commerce that takes place wholly outside of the

State’s borders[.]” Sam Francis Found., 784 F.3d at

1323. It held that such laws are invalid per se

regardless of whether the state intended to inhibit

interstate commerce. Id. at 1323-24 (citing Valley

Bank of Nevada v. Plus Sys., Inc., 914 F.2d 1186, 1190

(9th Cir. 1990)). Applying this per se rule, the

Ninth Circuit struck down the California royalty law

without any determination that the state law

discriminated against out-of-state commerce or

consideration of any other factor. Id. at 1323-24.

This Court, however, has unequivocally

rejected this interpretation of Healy, holding

that a “close look” at the case reveals “nothing like” a

per se rule against extraterritorial application of state

laws, but instead “typifies the familiar concern

with preventing purposeful discrimination against

out-of-state economic interests.” Ross, 598 U.S. at 371.

Specifically, this Court found that concerns about

economic protectionism took “center stage” in Healy,

which identified the “essential vice” in the law at issue

as the “hoard[ing]” of commerce “for the ‘benefit of ’ instate merchants” and “discourag[ing] consumers from

crossing state lines to make their purchases from

nearby out-of-state vendors.” Id. at 372-73 (internal

quotation marks omitted) (quoting Healy, 491 U.S. at

340-41). Ross also recognized the extraordinary

disruption a per se extraterritoriality rule would have

on the “interconnected national marketplace” where

“many (maybe most) state laws have the ‘practical

effect of controlling’ extraterritorial behavior[,]”

including state tax laws. Id. at 374.

Ross thus not only abrogates Sam Francis

Foundation, it unequivocally rejects the per se rule

Petitioners seek to resurrect in this case. Petitioners

cannot show a reviewable conflict based on Sam

Francis Foundation.

Numerous Factors Make This

Unsuited for this Court’s Review

Case

There are at least three reasons, independent

of the lack of standing and conflict addressed above,

why the Court should not grant the petition: (1) the

hypothetical nature of the injuries would require

the Court to decide the issues in a factual vacuum;

(2) even if Petitioners are correct about the almost

exclusive focus of the petition—taxation of allegedly

out-of-state transactions involving tangible personal

property—the remedy would be to strike a relatively

minor portion of the capital gains tax, making this

case not sufficiently important for this Court’s review;

and (3) Petitioners’ lead argument was not presented

in state court, and as a matter of comity the Court

should not grant review and consider overturning a

state’s highest court based on arguments never

presented there.

This Case Involving Hypothetical

Facts Is a Poor Vehicle

Even if the Court determined that Petitioners’

hypothetical injuries are sufficient to establish

Article III standing, the lack of factual context for

Petitioners’ arguments makes this case a poor vehicle

for addressing taxation of allegedly out-of-state

transactions. With respect to the sale of intangible

property, even Petitioners admit (as they must) that

the sale “has no location” and that states may tax

residents on such sales regardless of the “designat[ed]

locus” of the transaction. Pet. 19-20. Petitioners

attempt to impose an additional requirement that the

owner of the intangibles restrict his activity to the

place of his domicile, but as detailed above, that

simply misrepresents the case law. See supra 14-15

(discussing Curry, 307 U.S. at 366-67; Graves, 307

U.S. at 386; Pearson, 308 U.S. at 318; Central Hanover

Bank, 319 U.S. 94). Even if this Court were to adopt

such a requirement, it would be impossible for the

Court to determine here whether any Petitioner

sufficiently “restricted his activity” when there are no

facts in the record about what gains from what

transactions are actually being taxed.

A factual record is even more important to

address Washington’s law as applied to out-of-state

sales of tangible personal property that had been

present in Washington within the prior year. A

determination that a state has a “substantial nexus”

to tax a resident or transaction will inevitably be

impacted by the facts and circumstances of a

particular case. Petitioners’ argument encompasses

situations where, for example, a Washington resident

purchases a stockpile of gold and holds it in

Washington for thirty years, negotiates a sale to

another Washington resident, but on the day of sale,

drives ten miles from Vancouver, Washington, to

Portland, Oregon, to finalize the transaction for the

express purpose of avoiding Washington’s excise tax.

The bars of gold will not have changed taxable situs

in just one day and there is no question that

Washington would have a “substantial nexus” to the

transaction sufficient to justify taxing the transaction.

If, on the other hand, the seller kept the gold bars in

Oregon for a year before the transaction was finalized,

Washington’s capital gains tax would not even apply.

Wash. Rev. Code § 82.87.100(1)(a)(i)-(iii). The facts of

each case will determine whether the tax applies in

the first instance, any credits that will offset a tax, the

State’s nexus to the transaction, and any injury in fact

to the taxpayer, highlighting the unsuitability of this

case for this Court’s consideration.

Even If Plaintiffs Prevail on Their

Primary Theory, the Broad Relief

They Seek Would be Unavailable

Although Petitioners seek invalidation of

Washington’s capital gains tax, the near-exclusive

focus of their arguments is on a minor tax-avoidance

provision of the tax that applies to gains from sales

of tangible personal property recently removed from

the state. They concede the tax is constitutional as to

in-state sales. Pet. 19. And they all but concede that

the tax can constitutionally be applied to gains from

the sale of intangibles, Pet. 20, which in any event is

established from precedent as discussed above. That

leaves only how the tax applies to gains from the sale

of property recently removed from the state. Wash.

Rev. Code § 82.87.100(1)(a)(i)-(iii).

Even if they prevailed with respect to this

narrow tax-avoidance provision, the correct remedy

would be to invalidate just that portion of the tax.

Generally, this Court will not invalidate an entire

tax scheme when it can instead invalidate only the

offending portion. E.g., Tyler Pipe Indus., Inc. v.

Washington Dep’t of Revenue, 483 U.S. 232, 248 (1987)

(invalidating a specific tax exemption in Washington’s

gross receipts tax code while leaving the rest of the tax

code intact). This is consistent with the Court’s

practice in other areas, because “ ‘when confronting a

constitutional flaw in a statute, we try to limit the

solution to the problem,’ severing any ‘problematic

portions while leaving the remainder intact.’ ” Free

Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561

U.S. 477, 508 (2010) (quoting Ayotte v. Planned

Parenthood of N. New England, 546 U.S. 320, 328-29

(2006)). This approach is entirely logical because

“ ‘[t]he unconstitutionality of a part of an Act does not

necessarily defeat or affect the validity of its

remaining provisions[.]’ ” Free Enter. Fund, 561 U.S.

at 508 (first alteration in original) (quoting Champlin

Refining Co. v. Corp. Comm’n of Oklahoma, 286 U.S.

210, 234 (1932)). Consistent with law and logic, “the

‘normal rule’ is ‘that partial, rather than facial,

invalidation is the required course[.]’ ” Id. (quoting

Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 504

(1985)). And this would also be consistent with the

intent of Washington’s legislature, which included a

severability provision when enacting the tax: “If any

provision of this act or its application to any person or

circumstance is held invalid, the remainder of the act

or the application of the provision to other persons or

circumstances is not affected.” 2021 Wash. Sess. Laws

1239 (ch. 196, § 21).

In short, the gravamen of the Petition involves

a relatively minor aspect of Washington’s capital

gains tax that does not merit this Court’s review, and

which can be the subject of as-applied challenges if

any Petitioners are ever subject to it.

Petitioners Never Presented their

Lead Argument in the State Courts

As a prudential matter, the Court should reject

the petition because it presents issues that Petitioners

did not argue below and that the Washington

Supreme Court thus had no opportunity to consider.

Petitioners’ lead argument here is that the

Washington Supreme Court ignored a per se rule

against taxing out-of-state gains allegedly created by

three of this Court’s decisions: McLeod, 322 U.S. 327,

Memphis Natural Gas Co., 335 U.S. 80, and American

Oil Co., 380 U.S. 451. But Petitioners never even cited

these cases in their briefing to the Washington

Supreme Court. It would be inequitable and contrary

to basic principles of comity to consider overturning a

decision of a state’s highest court based on an

argument never presented to it.

To be sure, Petitioners did argue that the tax

impermissibly allocated capital gains to Washington

based on activities occurring outside its borders. BIO

App. 40a-51a. But they made this argument solely in

the context of claiming the tax failed to meet the

“substantial nexus” or “fair apportionment” prongs of

the Complete Auto test, a very different argument

than their lead claim here.

The State recognizes that the argument below

still fell under the rubric of the dormant Commerce

Clause, so the State does not argue that this is an

entirely new issue such that failure to raise these

arguments deprives this Court of jurisdiction. That

said, many of the same longstanding rationales from

this Court’s jurisdictional analysis militate against

accepting the petition, including: (1) federal questions

not raised below are likely to have an inadequate

record; (2) “it is important that state courts be given

the first opportunity to consider the applicability of

state statutes in light of constitutional challenge,

since the statutes may be construed in a way

which saves their constitutionality[,]” Cardinale v.

Louisiana, 394 U.S. 437, 439 (1969); and (3) “due

regard for the appropriate relationship of this

Court to state courts” in deciding questions

“affecting the validity of state statutes not urged or

considered there.” McGoldrick v. Compagnie Generale

Transatlantique, 309 U.S. 430, 434 (1940).

This Court should decline to consider a petition

that primarily raises arguments not raised to the

state court below.

Petitioners’ Claims Regarding the Impact

of the Decision Are Inaccurate and

Overblown

Contrary to Petitioners’ arguments that the

opinion below conflicts with precedent, it is

Petitioners’ argument, if accepted by this Court, that

would unsettle principles previously understood as

black-letter law and call into question taxes that

states have relied on for decades. In addition,

Petitioners’ mischaracterization of Washington’s tax

leads them to wildly exaggerate the potential impact

of the decision below. In reality, the practical impact

of the decision is that Washington, like forty-one other

states and the federal government, can impose an

excise tax on capital gains that is carefully crafted to

avoid double taxation.

First, Petitioners consistently conflate sales of

tangible personal property with sales of intangible

property, despite the plethora of cases discussed above

that enshrine the common-sense notion that the two

types of transactions are fundamentally different.

Intangible property, as even Petitioners recognize,

has no singular location. Pet. 19-20. In Petitioners’

view, parties would be free to designate the location of

a sale or transfer anywhere in the world, thus

providing a ready means of evading any taxation of

such transactions.

Second, Petitioners’ nightmare scenarios of

states taxing their residents’ transactions of all kinds

no matter where they occur bears no resemblance to

Washington’s capital gains tax. Petitioners routinely

ignore several important features of the tax that

demonstrate its purpose as preventing tax avoidance

rather than seeking to impose extraterritorial taxes;

namely, that the property must have been located in

Washington within the prior year, and Washington’s

inclusion of robust credits for any tax (including

an income tax) imposed in the state where the

sale occurs. See Pet. App. 114 (Wash. Rev. Code

§ 82.87.100(1)(a)(i)-(iii), (2)(a)). Petitioners’ parade of

horribles is predicated on hypothetical taxes with no

such features. E.g., Pet. 27-28.

In reality, the practical effect of Washington’s

tax mirrors the excise tax on capital gains imposed by

nearly every other state, albeit with a slightly

different mechanism. This Court and state courts

have universally recognized that an income tax is “in

its nature an excise entitled to be enforced as such[.]”

Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 17

(1916); see also Hale, 302 U.S. at 104-05 & n.7

(observing that most state courts have held that “a net

income tax is to be classified as an excise”); Thorpe v.

Mahin, 250 N.E.2d 633, 365-36 (Ill. 1969) (discussing

Hale and other authorities). And as detailed above,

Washington’s capital gains tax actually applies to

fewer gains from out-of-state transactions than

do the capital gains taxes of other states. The

opinion below does not represent the harbinger

of doom theorized by Petitioners, but rather the

unobjectionable continuance of the status quo.

CONCLUSION

The petition for writ of certiorari should be

denied.

RESPECTFULLY SUBMITTED.

ROBERT W. FERGUSON

Attorney General

NOAH G. PURCELL

Solicitor General

Counsel of Record

PETER B. GONICK

TERA M. HEINTZ

Deputy Solicitors General

CHARLES ZALESKY

Assistant Attorney General

November 3, 2023

1125 Washington Street SE

Olympia, WA 98504-0100

360-753-6200

APPENDIX

Appendix

The Quinn Respondents’ Response To

State Of Washington’s Opening Brief,

Quinn v. State of Washington, No. 100769-8

(Wash. S. Ct. Sept. 8, 2022) ...................................... 1a

First Amended Complaint For Declaratory

and Injunctive Relief,

Quinn v. State of Washington, No. 21-2-00075-09

(Douglas County Superior Ct. May 17, 2021) ........ 55a

No. 100769-8

SUPREME COURT OF

THE STATE OF WASHINGTON

CHRIS QUINN, an individual; CRAIG LEUTHOLD,

an individual; SUZIE BURKE, an individual; LEWIS

and MARTHA RANDALL, as individuals and the

marital community comprised thereof; RICK

GLENN, an individual; NEIL MULLER, and

individual; LARRY and MARGARET KING, as

individuals and the marital community comprised

thereof; and KERRY COX, an individual,

Respondents,

vs.

STATE OF WASHINGTON, DEPARTMENT OF

REVENUE an agency of the State of Washington,

and VIKKI SMITH, in her official capacity as

Director of the Department of Revenue,

Appellants.

EDMONDS SCHOOL DISTRICT, TAMARA GRUBB,

MARY CURRY, and WASHINGTON EDUCATION

ASSOCIATION,

Intervenors

______________

APRIL CLAYTON, an individual; KEVIN

BOUCHEY, an individual; RENEE BOUCHEY, an

individual; JOANNA CABLE, an individual;

ROSELLA MOSBY, and individual; BURR MOSBY,

an individual; CHRISTOPHER SENSKE, an

individual; CATHERIN SENSKE, an individual;

MATTHEW SONDEREN, an individual; JOHN

MCKENNA, an individual; WASHINGTON FARM

BUREAU; WASHINGTON STATE TREE FRUIT

ASSOCIATION; WASHINGTON STATE DAIRY

FEDERATION,

Respondents,

vs.

STATE OF WASHINGTON, DEPARTMENT OF

REVENUE an agency of the State of Washington,

and VIKKI SMITH, in her official capacity as

Director of the Department of Revenue,

Appellants.

EDMONDS SCHOOL DISTRICT, TAMARA GRUBB,

MARY CURRY, and WASHINGTON EDUCATION

ASSOCIATION,

Intervenors

THE QUINN RESPONDENTS’ RESPONSE TO

STATE OF WASHINGTON’S OPENING BRIEF

SCOTT M. EDWARDS (WSBA #26455)

edwardss@lanepowell.com

CALLIE A. CASTILLO (WSBA #38214)

castilloc@lanepowell.com

LANE POWELL, PC

1420 5th Ave., Suite 4200

Seattle, WA 98101

Telephone: +1 206 223 7000

Facsimile: +1 206 223 7107

ERIC R STAHLFELD (WSBA #22002)

estahlfeld@freedomfoundation. com

FREEDOM FOUNDATION PO Box 552

Olympia, WA 98507

Telephone: +1 360 956 3482

Facsimile: +1 360 839 2970

Attorneys for Quinn Respondents

TABLE OF CONTENTS

Page

INTRODUCTION ................................................. 1

II. ISSUES ON APPEAL ........................................... 4

III. STATEMENT OF THE CASE ............................. 5

A. The Legislature Imposed a Capital

Gains Tax on Individuals .............................. 5

B. The Superior Court Found ESSB5096

Unconstitutional ............................................ 9

IV. ARGUMENT ....................................................... 12

A. ESSB 5096 Violates Article VII Of The

Washington Constitution............................. 13

The Capital Gains Tax Is Assessed

Based on Individual Ownership of

Long-Term Capital Assets, Not

Voluntary Activity ................................. 14

The Measure of the Capital Gains

Tax Is the Amount of Gains Reported

on Federal Income Tax Returns, Not

the Amount of the Transaction

Purportedly Being Taxed ...................... 22

The Superior Court Correctly

Analyzed ESSB 5096 to Determine

its Proper Nature and Measure ............ 25

The Capital Gains Tax Is a NonUniform Property Tax That Exceeds

Constitutional Rate Limitations. .......... 29

B. ESSB 5096 Violates the Privileges and

Immunities Clause of the Washington

Constitution ................................................. 31

C. ESSB 5096 Violates The Commerce

Clause Of The United States

Constitution ................................................. 37

The Commerce Clause Analysis

Requires The Court To Determine

Whether Application Of The Tax

Is Unconstitutional ............................... 38

ESSB 5096 Impermissibly Allocates

Capital Gains to Washington Based

on Activities Occurring Outside

its Borders ............................................. 45

ESSB 5096 Lacks Fair

Apportionment ...................................... 53

ESSB 5096 Discriminates Against

Interstate Commerce ............................ 62

V. CONCLUSION ................................................... 65

TABLE OF AUTHORITIES

Cases

Page(s)

Allied-Signal, Inc. v. Dir., Div. of Tax’n,

504 U.S. 768, 112 S. Ct. 2251,

119 L. Ed. 2d 533 (1992) ..................................47, 49

Arborwood Idaho, L.L.C. v. City of Kennewick,

151 Wn.2d 359, 89 P.3d 217 (2004) ..................... 20

Armco, Inc. v. Hardesty,

467 U.S. 638, 104 S. Ct. 2620,

82 L. Ed. 2d 540 (1984)............................. 56, 63, 64

Black v. State,

67 Wn.2d 97, 406 P.2d 761 (1965) ............... passim

Bromley v. McCaughn,

280 U.S. 124, 50 S. Ct. 46,

74 L. Ed. 226 (1929).............................................. 15

City of Chicago v. Morales,

527 U.S. 41, 119 S. Ct. 1849,

144 L.Ed.2d 67 (1999) .......................................... 40

Commonwealth Edison Co. v. Montana,

453 U.S. 609, 101 S. Ct. 2946,

69 L. Ed. 2d 884 (1981)................................... 42, 47

Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 97 S. Ct. 1076,

51 L. Ed. 2d 326 (1977)................................... 38, 46

Comptroller of Treasury of Md. v. Wynne,

575 U.S. 542, 135 S. Ct. 1787,

191 L. Ed. 2d 813 (2015)............................... passim

Container Corp. of America v. Franchise Tax Bd.,

463 U.S. 159, 103 S. Ct. 2933,

77 L. Ed. 2d 545 (1983) .................................. 55, 62

Cullitan v. Chase,

174 Wash. 363, 25 P.2d 81 (1933) ........................ 21

Curry v. McCanless,

307 U.S. 357, 59 S. Ct. 900,

83 L. Ed. 1339 (1939)................................ 50, 51, 53

In re Estate of Hambleton,

181 Wn.2d 802, 335 P.3d 398 (2014) ................... 23

Filo Foods, LLC v. State,

183 Wn.2d 770, 357 P.3d 1040 (2015) ........... 62, 63

Gordon v. Holder,

721 F.3d 638 (D.C. Cir. 2013) .............................. 40

Grant Cty. Fire Protection Dist. No. 5,

150 Wn.2d at 806...................................... 32, 33, 36

Gwin, White & Prince v. Henneford,

305 U.S. 434, 59 S. Ct. 325,

83 L. Ed. 272 (1939)...................................... passim

Harbour Vill. Apartments v. City of Mukilteo,

139 Wn.2d 604, 989 P.2d 542 (1999) ................... 13

High Tide Seafoods v. State,

106 Wn.2d 695, 725 P.2d 411 (1986) ............. 23, 25

Jensen v. Henneford,

185 Wash. 209, 53 P.2d 607 (1936) .............. passim

Kraft Gen. Foods Inc v. Iowa Dep’t of

Rev. & Finance,

505 U.S. 71, 112 S. Ct 2365,

120 L. Ed. 2d 59 (1992)......................................... 40

Kunath v. City of Seattle,

10 Wn. App. 2d 205 (2019) ................................... 25

Lee v. State,

185 Wn.2d 608, 374 P.3d 157 (2016) ................... 13

Mahler v. Tremper,

40 Wn.2d 405, 243 P.2d 627 (1952) ..................... 22

MeadWestvaco Corp. ex rel. Mead Corp. v.

Ill. Dep’t of Rev.,

553 U.S. 16, 128 S. Ct. 1498,

170 L. Ed. 2d 404 (2008)....................................... 47

Mobil Oil Corp. v. Comm’r of Taxes of Vermont,

445 U.S. 425, 100 S. Ct. 1223,

63 L. Ed. 2d 510 (1980) ...................... 46, 51, 56, 60

Morrow v. Henneford,

182 Wash. 625, 47 P.2d 1016 (1935) ........ 15, 22, 34

State ex rel Namer Inv. Corp. v. Williams,

73 Wn.2d 1, 435 P.3d 975 (1968) ................... 11, 12

Oklahoma Tax Comm’n v. Jefferson Lines, Inc.,

514 U.S. 175, 115 S. Ct. 1331,

131 L. Ed. 2d 261 (1995)............................... passim

Power, Inc. v. Huntley,

39 Wn.2d 191, 235 P.2d 173................................. 30

Robinson v. City of Seattle,

102 Wn. App. 795, 10 P.3d 452 (2000) ................. 40

Safe Deposit & Trust Co. of Baltimore, Md. v.

Commonwealth of Virginia,

280 U.S. 83, 50 S. Ct. 59, 74 L. Ed. 180 (1929) ... 53

Schroeder v. Weighall,

179 Wn.2d 566, 316 P.3d 482 (2014) ....... 32, 33, 35

Sheehan v. Cent. Puget Sound Reg'l

Transit Auth.,

155 Wn.2d 790, 123 P.3d 88 (2005) ... 15, 18, 22, 23

Sierra Club v. Bosworth,

510 F.3d 1016 (9th Cir. 2007) .............................. 40

Silver v. Rudeen Mgmt. Co., Inc.,

197 Wn.2d 535, 484 P.3d 1251 (2021).................. 14

South Dakota v. Wayfair, Inc.,

138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018) ........... 46

State Board of Tax Comm'rs of Indiana v.

Jackson,

283 U.S. 527, 51 S. Ct. 540,

75 L. Ed. 1248 (1931) ........................................... 12

State ex rel Stiner v. Yelle,

174 Wash. 402, 25 P.2d 91 (1933) ........................ 28

Supply Laundry Co. v. Jenner,

178 Wash. 72, 34 P.2d 363 (1934) ........................ 34

Texas Co. v. Cohn,

8 Wn.2d 360, 112 P.2d 522 (1941) ................. 35, 36

Trinova Corp. v. Mich. Dep’t of Treasury,

498 U.S. 358, 111 S. Ct. 818,

112 L. Ed. 2d 884 (1991)....................................... 24

Tyler Pipe Industries, Inc. v.

Department of Revenue,

483 U.S. 232, 107 S. Ct. 2810,

97 L. Ed. 199 (1987)........................................ 40, 58

United States v. Salerno,

481 U.S. 739, 107 S. Ct. 2095 (1987) ............. 39, 40

Wash. Pub. Ports Ass’n v. Dep’t of Revenue,

148 Wn.2d 637, 62 P.3d 462 (2003) ..................... 14

Washington Banker’s Ass’n v. State,

198 Wn.2d 418, 495 P.3d 808 (2021) ............. 62, 63

Washington Dept. of Revenue v. Association of

Washington Stevedoring Cos.,

435 U.S. 734, 98 S. Ct. 1388,

55 L.Ed.2d 682 (1978)........................................... 41

Washington Public Ports,

148 Wn.2d at 642–43............................................ 23

Washington State Republican Party,

141 Wn.2d 245, 4 P.3d 808 (2000)........................ 40

Western Live Stock v. Bureau of Revenue,

303 U.S. 250, 58 S. Ct. 546,

82 L. Ed. 823 (1938) ............................................. 54

Wheeling Steel Corp. v. Fox,

298 U.S. 193, 56 S. Ct. 773,

80 L. Ed. 1143 (1936)............................................ 61

Statutes

26 U.S.C. Sec. 1221 .................................................... 26

Cal. Rev. & Tax Code § 17014 ................................... 58

RCW 82.04.020 .......................................................... 35

RCW 82.27.020 .......................................................... 23

RCW 82.87 ................................................................... 5

RCW 82.87.100(2) ...................................................... 56

RCW 83.100.020(9) .................................................... 35

RCW 83.100.040 ........................................................ 23

RCW 84.04.075 .......................................................... 35

10a

Other Authorities

United States Constitution, Article I,

Section 8, clause 3 ........................................ passim

Washington Constitution, Article I,

Section 7 ............................................................... 10

Washington Constitution Article I,

Section 12...................................................... passim

Washington Constitution, Article VII ............... passim

11a

I. INTRODUCTION

The State opens its brief to this Court not with

a defense of the capital gains tax, but an appeal of its

policy. The State also attempts to deflect by recasting

the actual nature of the capital gains tax and

mischaracterizing the decision of the court below.

However, scrutiny of the statute adopted by the

Legislature and the governing authority confirms that

the superior court was correct when it found the

capital gains tax unconstitutional. The capital gains

tax is a tax on income that violates both the state and

federal constitutions.

First, the capital gains tax violates Article VII

of the Washington Constitution because it is a tax on

property that does not satisfy the constitutional

requirements of uniformity and rate limitations.1 The

capital gains tax does not meet the definition of an

excise tax, despite the State’s arguments otherwise.

The capital gains tax is imposed by reason of an

individual’s legal or beneficial ownership of property;

applies when long-term capital gains attributed to

“Washington” are recognized by the owner for federal

income tax purposes; and is not imposed on individual

transactions or any privilege conferred by Washington

but is imposed on an aggregate amount measured by

the total “Washington” capital gains recognized by the

individual over a given calendar year after netting

deductions and exclusions. In other words, the capital

gains tax is an “absolute and unavoidable” demand on

an individual’s property—income—a quintessential

1 The Quinn Plaintiffs join the arguments made by the

Clayton Plaintiffs in response to the brief filed by Intervenors.

12a

property tax.

Second, the capital gains tax violates the

Privileges and Immunities Clause of the Washington

Constitution because the Legislature impermissibly

taxed certain persons while exempting others within

the same class with no stated, reasonable ground for

granting an immunity from the tax.

Finally, the capital gains tax structured by the

Legislature violates the dormant Commerce Clause of

the United States Constitution regardless of whether

it is deemed a property tax, excise tax, or something

other. The State impermissibly taxes activity

occurring outside the state as to which it lacks any

nexus, imposes a tax that is not fairly apportioned to

activities occurring within the state, and

discriminates against interstate commerce by

exposing gains derived across state lines to the risk of

multiple state taxation. The State tries to save the

capital gains tax by relying on an inapt principle

applied to facial challenges in other contexts which

requires proof that no set of circumstances exists in

which the law could be constitutionally applied. But a

state tax that violates the Commerce Clause must be

stricken in toto— even if there are some

circumstances in which imposition of the tax may be

permissible.

In sum, the capital gains tax cannot survive

constitutional scrutiny. This Court should affirm the

superior

court’s

order

declaring

the

tax

unconstitutional and invalid, and therefore void and

inoperable as a matter of law.

13a

II. ISSUES ON APPEAL

1. Does the capital gains tax violate Article VII

of the Washington Constitution when it imposes a tax

on individuals based on their ownership of property,

lacks uniformity, and exceeds the permissible tax

rate?

2. Does the capital gains tax violate the

Privileges and Immunities Clause of the Washington

Constitution when the Legislature granted a privilege

of exemption from the tax to certain persons while

subjecting other persons to the tax that fall within the

same class and the Legislature did not provide any

reasonable ground for granting that privilege?

3. Does the capital gains tax violate the

Commerce Clause of the United States Constitution

when it (1) impermissibly taxes gains derived from

out-of-state activity, (2) imposes a tax that is not fairly

apportioned to activities occurring within the state,

and (3) discriminates against interstate commerce by

exposing gains derived from out-of-state transactions

to multiple state taxation?

III. STATEMENT OF THE CASE

The Legislature Imposed a Capital Gains

Tax on Individuals.

In 2021, the Legislature levied for the first time

a tax on the annual long-term capital gains of

individuals. Laws of 2021, 67th Leg., Ch. 196

(Engrossed Substitute Senate Bill (“ESSB”) 5096) § 5.2

2 ESSB 5096 is codified at Chapter 82.87 RCW. This brief

cites to the session law as adopted by the Legislature. A copy of

ESSB 5096 is attached as Appendix A.

14a

Beginning January 1, 2022, the tax is imposed on an

individual’s annual “Washington capital gains.” Id. §

5 (imposing the tax on individuals); § 4(13) (defining

“Washington capital gains” as “adjusted capital gain”)

and (4(1) defining “adjusted capital gain” as “federal

net long-term capital gain”).

Capital gains incurred by pass-through entities

(e.g., partnerships, limited liability companies, S

corporations, or grantor trusts) are taxed against the

entity’s “legal or beneficial owner” to the extent of the

individual’s ownership interest in the entity “as

reported for federal income tax purposes.” Id. § 5(1),

(4). In other words, an individual need not voluntarily

act to sell or exchange any long-term capital asset to

be subject to the capital gains tax—mere legal or

beneficial ownership of the capital asset and

recognition of the gains is sufficient

The starting point for determining an

individual’s tax liability begins with identifying the

taxpayer’s “Washington capital gains,” which are

derived directly from the individual’s “federal net

long-term capital gain” reported for “federal income

tax purposes” on the taxpayer’s IRS tax return with

some exceptions for losses carried forward or back. §§

4(1), (3), 5(3). Next, long-term capital gains that are

excluded from Washington’s capital gains tax are

subtracted from that amount. Id. § 4(a). Then,

amounts of long-term capital gains that are not

allocated to Washington under the statute are

subtracted. Id. § 4(1)(a). Long-term capital gains

derived from tangible personal property (e.g., physical

capital assets) are allocated to Washington if either (1)

the property was located in this state at the time of

sale or exchange; or (2) the property was located in

15a

Washington at some time during the taxable year, the

taxpayer was a resident of Washington at the time of

the sale or exchange, and the taxpayer is not

otherwise subject to the payment of an income or

excise tax on the long-term capital gains by another

state. Id. § 11(1)(a). Long-term capital gains derived

from intangible personal property (e.g., stocks, bonds,

goodwill) will be taxed by Washington if the taxpayer

was domiciled in Washington at the time the sale or

exchange occurred, regardless of whether the assets

can be allocated to a state other than Washington or

the transaction that creates the gain occurs in a

jurisdiction other than Washington. Id. § 11(1)(b). A

credit is allowed against the tax equal to the amount

of any income or excise tax paid to another taxing

jurisdiction but only if the gains are derived from

assets “within” the other jurisdiction. Id. § 11(2)(a).

After the initial “Washington capital gains” are

calculated, the taxpayer may deduct from the amount

(1) a standard deduction of $250,000, or a total of

$250,000 for spouses and domestic partners; (2) an

adjusted deduction for gains derived from the sale or

transfer of certain family-owned small business; and

(3) a $100,000 deduction for charitable donations

over $250,000 made to certain Washington-based

nonprofit organizations. Id. §§ 7-9. The sum total of the

final “Washington capital gains” is then multiplied by

seven percent to determine the ultimate tax liability.

Id. § 5.

The tax, as structured by the Legislature, will

require all individuals both inside and outside the

State who incur Washington capital gains to go

through this calculation each year to determine if they

are liable for the tax. Id. §§ 5, 12. Individuals owing the

16a

capital gains tax to Washington must report and pay

the amount due on or before the date that their federal

income tax return must be filed. Id. § 12(1). In

addition to filing a Washington return, taxpayers

must file a copy of their federal income tax return

along

with

all

schedules

and

supporting

documentation for the federal return. Id. § 12(2).

Failure to comply subjects the taxpayer to civil and

criminal penalties. Id. § 15.

The Superior Court Found ESSB 5096

Unconstitutional.

Individual and associational plaintiffs filed

separate lawsuits in Douglas County Superior Court

to obtain declaratory judgment that ESSB 5096 is

constitutionally invalid under both the federal and

state constitutions. CP Vol. I 1-9 (Quinn Compl.); CP

Vol. II 1-17 (Clayton Compl.). Each asserted that ESSB

5096 (1) violates Article VII, Sections 1 and 2, of the

Washington Constitution because it imposes a nonuniform tax on income and exceeds the one percent

limit on taxes upon personal property; (2) violates

Article I, Section 12, of the Washington Constitution

by imposing a tax on certain persons while exempting

others; and (3) violates the Commerce Clause of the

United States Constitution because it allocates

taxable gain to Washington based on the taxpayer’s

location instead of the location of the activity,

discriminates against interstate commerce, and is

not fairly apportioned. See id.3 The cases were

consolidated. CP Vol. I 107-111. Both sets of Plaintiffs

3 The Quinn Plaintiffs did not move for a ruling on their

privacy claim under Article I, Section 7, of the Washington

Constitution so that claim is not at issue on appeal.

17a

later amended to add more parties challenging the

constitutionality of the tax. See CP Vol. I 16-24; CP

Vol. I 607-25.

A school district and individuals involved in

education were allowed to intervene as party

defendants in the case after the State entered its

appearance in the case. CP Vol. I 136-40. The State

unsuccessfully sought to dismiss the lawsuits and to

transfer venue. See CP Vol. I 189-97. Thereafter, the

parties cross-moved for summary judgment. CP Vol. I

227-31.

After considering the “wealth of material” filed

by both sides, CP Vol. I 866, the Superior Court

granted summary judgment for the Plaintiffs. CP Vol.

I 872, 876. The court first noted that it had

disregarded the policy considerations put forth by the

State and Intervenors as being inapplicable to

determining the legality of the tax. CP Vol. I 866

(citing State ex rel Namer Inv. Corp. v. Williams, 73

Wn.2d 1, 7, 435 P.3d 975 (1968)). The court next

summarized “nearly a century of case law” setting

forth how tax statutes should be analyzed to

determine their proper nature and incidents. CP Vol.

I 867-69. It then described multiple aspects of ESSB

5096 which establish that the capital gains tax is not

an excise tax, but an “absolute and unavoidable” tax

meeting the definition of a property tax under the case

law. See CP Vol. I 871-72. The Superior Court

concluded that ESSB 5096 violates Article VII,

Sections 1 and 2, of the Washington Constitution

because the tax lacks uniformity and exceeds the one

percent rate limit for property taxes. CP Vol. I 872.

The Superior Court did not reach the Plaintiffs’ other

constitutional arguments for the invalidity of ESSB

18a

5096, having found the law invalid under Article VII.

Id.

The State and Intervenors appealed directly to

this Court.

IV. ARGUMENT

The capital gains tax enacted by the

Washington Legislature does not withstand

constitutional scrutiny. The State attempts to save the

capital gains tax by recasting the nature and structure

of the tax and appealing to policy interests. However,

as long ago recognized by this Court, “[i]t is not the

function of this court in cases like this to consider the

propriety of the tax, or to seek for the motives or to

criticize the public policy which may have prompted

adoption of the legislation.” State ex rel. Namer Inv.

Corp. v. Williams, 73 Wn.2d 1, 7, 435 P.2d 975 (1968)

(citing State Board of Tax Comm'rs of Indiana v.

Jackson, 283 U.S. 527, 51 S. Ct. 540, 75 L. Ed.

1248 (1931)). The Court determines whether the law

adheres to constitutional strictures placed on the

State’s authority to impose a specific tax in dispute. See

id.

Here, regardless of the policy reasons

advocated by the State for the capital gains tax, the

tax enacted by the Legislature cannot survive

constitutional scrutiny. The plain text of ESSB 5096

belies the State’s arguments about its true incident

and measure and confirms the law’s invalidity. The

superior court correctly found ESSB 5096 to be

unconstitutional. This Court in its de novo review

should conclude the same. See Lee v. State, 185 Wn.2d

608, 614, 374 P.3d 157 (2016).

19a

ESSB 5096 Violates Article VII Of The

Washington Constitution.

ESSB

5096

violates

the

Washington

Constitution because it is a tax on property that fails

to comply with the constitutional restrictions of

uniformity and rate limitations set forth in Article

VII. The State tries to recast the capital gains tax into

an excise tax to avoid this conclusion. See State’s Br.

at 31-47. However, “[t]he character of a tax is

determined by its incidents, not by its name.” Harbour

Vill. Apartments v. City of Mukilteo, 139 Wn.2d 604,

607, 989 P.2d 542 (1999) (quoting Jensen v. Henneford,

185 Wash. 209, 217, 53 P.2d 607 (1936)). Analyzing

ESSB 5096’s true subject matter and its incidents,

“i.e., the manner in which it is assessed and the

measure of the tax,” id. at 607 n.1 (citation omitted),

confirms that that the capital gains tax is a property

tax on income. See, e.g., Wash. Pub. Ports Ass’n v. Dep’t

of Revenue, 148 Wn.2d 637, 650 & n. 12, 62 P.3d 462

(2003) (collecting cases recognizing that income is

property and taxes on the receipt of income are

property taxes).4

The Capital Gains Tax Is Assessed

Based on Individual Ownership of

Long-Term Capital Assets, Not

Voluntary Activity.

The State spends over ten pages of its brief

4 In a different context, this Court recently held that a

security deposit—which is money held in deposit under

contractual lease terms—is the “ personal property” of the tenant

and subject to the three-year statute of limitations for recovery

of personal property. See Silver v. Rudeen Mgmt. Co., Inc., 197

Wn.2d 535, 538, 484 P.3d 1251 (2021).

20a

walking through a history of cases describing excise

taxes and property taxes. See State’s Br. at 19-29. Yet

the principles this Court applies to assess whether the

subject matter of a particular tax is one of property or

one of excise are not in dispute. This Court has held a

tax on property is one that is “an absolute and

unavoidable demand,” Black v. State, 67 Wn.2d 97, 99,

406 P.2d 761 (1965), that “falls upon the owner

merely because he is owner [of property].” Morrow v.

Henneford, 182 Wash. 625, 631, 47 P.2d 1016 (1935)

(quoting Bromley v. McCaughn, 280 U.S. 124, 137, 50

S. Ct. 46, 74 L. Ed. 226 (1929). In contrast, an excise

tax is “imposed upon a voluntary act of the taxpayer,

which affords the taxpayer the benefits of the

occupation, business, or activity that triggers the

taxable event” and which is “based upon the extent to

which the taxpayer enjoys the taxable privilege.”

Sheehan v. Cent. Puget Sound Reg'l Transit Auth., 155

Wn.2d 790, 800, 123 P.3d 88 (2005) (emphasis added);

see also Black, 67 Wn.2d at 99 (“the obligation to pay

an excise is based upon the voluntary action of the

person taxed in performing the act, enjoying the

privilege or engaging in the occupation which is the

subject of the excise, and the element of absolute and

unavoidable demand, as in the case of a property tax,

is lacking”) (emphasis added).

The State contends that ESSB 5096 imposes an

excise tax on the privilege of selling or exchanging

long-term capital assets. State’s Br. at

31.

Examination of the text of ESSB 5096

demonstrates that the State mischaracterizes the true

object of the tax. The express language of the statute

provides that only individuals are subject to payment

of the tax:

21a

(4)(a) The tax imposed in this section applies to

the sale or exchange of long-term capital assets

owned by the taxpayer, whether the taxpayer

was the legal or beneficial owner of such assets

at the time of the sale or exchange. The tax

applies when the Washington capital gains are

recognized by the taxpayer in accordance with

this chapter.

(b) For purposes of this chapter:

(i) An individual is considered to be a beneficial

owner of long-term capital assets held by an

entity that is a pass-through or disregarded

entity for federal tax purposes, such as a

partnership, limited liability company, S

corporation, or grantor trust, to the extent of the

individual’s ownership interest in the entity as

reported for federal income tax purposes.

(ii) . . . A grantor of [incomplete gift non-grantor

trusts] is considered the beneficial owner of the

capital assets of the trust for purposes of the tax

imposed in this section and must include any

long- term capital gain or loss from the sale or

exchange of a capital asset by the trust in the

calculation [of their Washington capital gains.]

ESSB 5096 § 5(4) (emphasis added). The capital gains

tax is thus imposed when three conditions are met: (1)

an individual owns or possesses a legal or beneficial

interest in capital assets for a period of at least 12

months; (2) the assets are sold or exchanged for gain

without regard to whether the individual had any

involvement in the sale or exchange; and (3) the

individual recognizes the capital gains on their federal

income tax returns. Id.; see also § 4(1), (3), (13)

22a

(defining “adjusted capital gains,” “federal net longterm capital gain,” and “Washington capital gains”).

The tax is not imposed on the activity of selling or

exchanging long-term capital assets, as the State

contends. It is imposed on the recognition of capital

gains, i.e. income, for which the State confers no right

or privilege.

Further, the fact that the capital gains tax does

not apply to every sale or transfer of capital assets

belies the State’s arguments that ESSB 5096 imposes

a valid excise tax on activities. Unlike excise taxes on

specific activity (e.g., the real estate excise tax on

sales of Washington real estate, or the sales tax on

retail sales in Washington), the capital gains tax does

not apply to every capital asset transaction occurring

in the state. And unlike both the real estate excise tax

and the sales tax, the capital gains tax is not imposed

on the legal owner that is the party to the taxed sale

or exchange.

Indeed, an individual need not engage in any

voluntary act to be subject to the capital gains tax. See

Sheenhan, 155 Wn.2d at 800. For example, an

individual residing in Washington who is the

beneficiary of a grantor trust domiciled elsewhere will

be subject to the capital gains tax when the trustee

sells or exchanges long-term capital assets held by the

trust because the income is passed through to the

beneficiary under both federal income tax law and

ESSB 5096. Likewise, a Washington resident who

owns shares in an S corporation domiciled outside

Washington will be subject to the capital gains tax

when the Board of Directors or manager of the entity

sells or exchanges long-term capital assets held by the

entity because the income is passed through to

23a

shareholders to the extent of their interest in the

entity. See, e.g., CP Vol. I 697-99. So too with a

Washington citizen who happens to own stock in a

foreign corporation that is acquired in a merger or

acquisition or which engages in a stock redemption,

neither requiring a nexus to Washington or any action

from the individual. See, e.g., CP Vol. I 693-95. Any of

these individuals will be subject to the capital gains

tax even if they do not deliberately, intentionally, or

voluntarily take any action to cause the sale or

exchange of long-term capital assets held by the

related entities. So long as the individual reports nonexempt long-term capital gains on their federal

income tax returns, they will be subject to the state

capital gains tax. The State is simply wrong when it

asserts that the capital gains tax applies “only to those

that sell or transfer” capital assets. State’s Br. at 31.

The tax is triggered by the ownership of income in the

form of capital gains, not by an individual’s voluntary

action to transfer long-term capital assets.

The State also wrongly asserts that the capital

gains tax is an excise tax because it is imposed based

on “the exercise of one of the rights to use property, i.e.

to sell or transfer ownership.” State’s Br. at 32. As the

examples above demonstrate, the assertion is wrong.

And the State cites no authority for the proposition

that an excise tax can be imposed on an individual

based on a third-party’s voluntary exercise of rights to

sell or exchange the property. Cf. Arborwood Idaho,

L.L.C. v. City of Kennewick, 151 Wn.2d 359, 367, 89

P.3d 217 (2004) (holding “a valid excise tax” is one

where “the obligation to pay” is “based upon the

voluntary action of the person taxed”) (emphasis

added). Moreover, to the extent the State is

24a

suggesting that the taxpayer’s “exercise of one of the

right’s to use property” is the voluntary receipt of

gains, this Court has already rejected the notion that

such a tax is an excise in Jensen v. Henneford, 185

Wash. 209, 219, 53 P.2d 607 (1936).

In Jensen, this Court rejected the State’s

argument that a 1935 tax was a valid excise on the

“privilege of receiving income,” instead of a direct tax

on the income itself. 185 Wash. at 218. Having

previously concluded that a tax on income was

subject to the constitutional requirements for

property tax in Cullitan v. Chase, 174 Wash. 363, 25

P.2d 81 (1933), the Court in Jensen further concluded

that:

The right to receive, the reception, and the

right to hold are progressive incidents of

ownership and indispensable thereto. To tax

any one of these elements is to tax their sum

total, namely, ownership, and therefore the

property (income) itself. Despite its change of

designation, we are convinced that the 1935 act

imposes a tax on net income, and is therefore a

property tax.

185 Wash. at 219. The Court expressly rejected the

notion advocated again here by the State that the

beneficial receipt of income from property’s use can be

subject to an excise tax because “to tax by reason of

ownership of property is to tax the property itself.” Id.

Here, like the net income tax in Jensen, the

subject matter of the capital gains tax is not the

privilege of using or transferring a class of property

within the state. Rather, the subject of the tax is the

income that individuals receive simply because of

25a

their direct or beneficial ownership of property,

regardless of whether the transactions from which the

gains are derived are undertaken voluntarily or

entirely passively. These characteristics make the

capital gains tax an “absolute and unavoidable”

demand on property, i.e. income, which cannot be an

excise tax under this Court’s precedents.

The Measure of the Capital Gains

Tax Is the Amount of Gains

Reported on Federal Income Tax

Returns, Not the Amount of the

Transaction

Purportedly

Being

Taxed.

In every excise case highlighted by the State,

the measure of the excise is based on the total value

of the privilege being taxed. See Sheehan, 155 Wn.2d

at 800 (“[E]xcise taxes are directly imposed based

upon the extent to which the taxpayer enjoys the

taxable privilege.”). For example, the business and

occupation (“B&O”) tax upheld in Morrow v.

Henneford, was imposed on the privilege of engaging

in business activity in the state and measured by the

total gross income earned from business activity in

Washington. 182 Wash. at 631. The real estate excise

tax upheld in Mahler v. Tremper, 40 Wn.2d 405, 243

P.2d 627 (1952), was imposed on the selling price of

the property located in the state and transferred

under state law. In Black v. State, the measure of the

sales tax was the total cost of the in-state lease. 67

Wn.2d at 98. So too with the leasehold excise tax in

Washington Public Ports, which was measured by the

total taxable rent for in-state facilities. 148 Wn.2d at

642–43. In High Tide Seafoods v. State, the measure

of the tax on enhanced fish food was the total value of

26a

the fish at transfer. 106 Wn.2d 695, 700, 725 P.2d 411

(1986) (citing RCW 82.27.020). In Sheehan, 155 Wn.2d

at 800, the measure of the motor vehicle excise tax was

the value of the vehicle at registration. And the estate

tax upheld in In re Estate of Hambleton, 181 Wn.2d

802, 335 P.3d 398 (2014), was measured by the total

value of the property at the time of the decedent’s

death and is apportioned to the extent any of the

property was located outside of Washington. See RCW

83.100.040.

Unlike in each of those cases, the measure of

the capital gains tax at issue here is not measured by

the extent to which the taxpayer engages in any

privilege conferred by or an activity regulated by

Washington. This makes it markedly unlike the B&O

tax highlighted by the State, see State’s Br. at 34,

which is measured by the value of the taxable

privilege—business— engaged in by the taxpayer. The

State in fact never identifies the “taxable privilege”

that only individuals allegedly engage in to be subject

to the capital gains tax—other than to suggest that

capital gains are income for the wealthy. See id. But,

as the United States Supreme Court has said in

another context, “[a] tax on sleeping measured by the

number of pairs of shoes you have in your closet is a

tax on shoes.” Trinova Corp. v. Mich. Dep’t of Treasury,

498 U.S. 358, 374, 111 S. Ct. 818, 829, 112 L. Ed. 2d

884 (1991).

Here, the capital gains tax is measured by an

individual’s total, annual long-term Washington

capital gains for the federal taxable year. ESSB 5096

§§ 4(1), (13), 5. ESSB 5096 defines Washington capital

gains as the aggregate sum of the individual’s federal

net long-term capital gains adjusted by the amounts

27a

of long-term capital losses and gains that are either

exempt or not allocated to Washington, less the

amounts of standard and itemized deductions set

forth in the statute. See ESSB 5096 §§4(1), (4)(13), 7,

8, 9. In other words, the capital gains tax is imposed

on the value of the individual’s annual net income.

The capital gains tax is a property tax on annual

income. See High Tide Seafoods, 106 Wn.2d at 699 (a

property tax is imposed on the value of property);

Black, 67 Wn.2d at 99 (same).

The Superior Court Correctly

Analyzed ESSB 5096 to Determine

its Proper Nature and Measure.

The State also misses its mark when it

complains about the superior court’s letter ruling and

the “hallmarks” of the capital gains tax described

there. See State’s Br. at 33-47. The “hallmarks”

identified by the superior court do not delineate a new

test for what constitutes a property tax versus an

excise tax under this Court’s precedents, as the State

contends. See State’s Br. at 33-47. The superior court

correctly reviewed these factors to determine “who is

being taxed [under ESSB 5096], what is being taxed,

and how the tax is measured.” See CP Vol. I 869

(quoting Kunath v. City of Seattle, 10 Wn. App. 2d 205

(2019)). The superior court’s conclusion was correct.

Analysis of ESSB 5096’s relevant attributes make

clear that the capital gains tax is a tax on property

(income), not an excise tax. See CP Vol. I 869.

The superior first court noted that ESSB 5096

is expressly connected to federal income taxes. CP Vol.

I 869. ESSB 5096 tethers its definition of capital

assets to Subtitle A of the Internal Revenue Code,

28a

which governs federal income taxes. See ESSB 5096 §

4(2) (“‘Capital asset’ has the same meaning as

provided by Title 26 U.S.C. Sec. 1221”); see also § 4(3)

(“‘Federal net long-term capital gain’ means the net

long-term capital gain reportable for federal income

tax purposes”). ESSB 5096 further relies on the

amount of total gains reported on an individual’s

federal income tax returns as the starting bases for

determining the amount of capital gains tax owed to

Washington. While these federal attributes are not in

and of themselves determinative of ESSB 5096’s

incident, they highlight that the object of the capital

gains tax is to tax individual income.

The superior court also observed that the

capital gains tax is directly imposed on the net total

gain recognized by an individual on their federal

income tax returns after adjustments are made based

on Washington’s designated allocations and

exemptions. The superior court noted that these

features make ESSB 5096 unlike each of the excise

taxes described by the State in its briefing that are

imposed on a transactional basis measured by the

gross value of the transaction engaged in. See CP Vol.

I. 869, n. 2 (listing cases cited by State). Nothing is

remarkable about the superior court’s observation or

comparison in that regard.

The superior court also correctly ascertained

that the capital gains tax is levied on all “Washington

capital gains” regardless of whether the gains were

derived from transactions within Washington. Setting

aside that Washington lacks authority to impose such

taxes without apportionment, as discussed later in

this brief, the capital gains tax is not tethered to

Washington-based activity, privileges, or rights. The

29a

superior court correctly concluded that the State

imposed the capital gains tax “without concern

whether the State conferred any right or privilege to

facilitate the underlying transfer,” and thus entitling

the State to charge an excise. CP Vol. I 870 (citing

Jensen, 185 Wash. at 218). The State was concerned

only with reaching acquired income. Contrast ESSB

5096 with State ex rel Stiner v. Yelle, 174 Wash. 402,

407, 25 P.2d 91 (1933) (“This act does not concern itself

with income which has been acquired, but only with

the privilege of acquiring”).

The superior court finally observed, that unlike

the excise taxes cited by the State, the capital gains

tax is not imposed on every transfer of title or

ownership of capital assets, or even necessarily

assessed on the person engaging in the transfer. CP

Vol. I 871. This too supports the superior court’s

conclusion that while the State has characterized the

tax as a levy on the “sale or exchange” of capital assets,

its extra-territorial reach shows it is in fact not. The

capital gains tax set forth in ESSB 5096 is a tax on

income.

The Capital Gains Tax Is a NonUniform Property Tax That Exceeds

Constitutional Rate Limitations.

Because capital gains fall within the definition

of “property” and the capital gains tax falls under the

definition of “property tax” recognized by this Court,

ESSB 5096 must comply with the Washington

Constitution, Article VII, Sections 1 & 2. It does not.

The Uniformity Clause set forth in Article VII,

Section 1 requires that “[a]ll taxes shall be uniform

upon the same class of property within the territorial

30a

limits of the authority levying the tax . . . .The word

‘property’ as used herein shall mean and include

everything, whether tangible or intangible, subject to

ownership.” “‘[N]et income.’ . . . under the Fourteenth

Amendment, constitutes one class of property.”

Jensen, 185 Wn. at 222–23. If net income is a single

class of property, it follows that net income in the form

of gains derived from the sale of long- term capital

assets is one class of property, and any tax on such

gains must satisfy the constitutional principles of

uniformity.

The capital gains tax is non-uniform in at least

two ways. First, the State imposes the capital gains of

individuals but not other residents, such as

corporations, that sell or exchange capital assets. This

is non-uniform taxation. Power, Inc. v. Huntley, 39

Wn.2d 191, 195, 235 P.2d 173 (1951) (“If the four per

cent tax on corporate net incomes is a tax on property,

it violates the principle of uniformity in that it levies

no tax on the incomes of individuals and

copartnerships which may be in competition with

corporations required to pay the tax.”) (citing

authorities).

Second, taxpayers will pay a seven percent tax

on their “Washington capital gains” ESSB 5096 §5.

But after a standard deduction, the first $250,000 of

Washington capital gains are subject to zero tax.

ESSB 5096 § 7. Additional deductions for qualifying

sales of small businesses and charitable deductions

are also allowed. Id. As a result, ESSB 5096 imposes

a graduated, non-uniform tax on a single class of

capital gains. See Culliton, 174 Wn. at 382 (“The

constitutional amendment speaks of the same class of

property. One who pays a tax on a $2,000 taxable

31a

income pays a tax on precisely the same class of

property as one who pays a tax on a $1,000 taxable

income, and to tax the one at a progressively higher

rate than the other positively violates the other clause

of the amendment, that all taxes shall be uniform upon

the same class of property.”).

ESSB 5096 must also comply with Article VII,

Section 2, which places a ceiling on the aggregate taxes

that can be imposed on property. Section 2 restricts

the aggregate of all tax levies on property to a rate of

one percent annually without a supermajority vote of

the people. Seven percent is obviously more than one

percent, so ESSB 5096 also violates the Washington

Constitution by levying a tax that exceeds the

maximum rate permitted under Section 2. The

superior court was correct to invalidate the capital

gains tax imposed under ESSB 5096 on these state

constitutional grounds.

ESSB 5096 Violates the Privileges and

Immunities Clause of the Washington

Constitution.

Article I, Section 12 of the Washington

Constitution provides that “No law shall be passed

granting to any citizen, class of citizens, or

corporation other than municipal, privileges or

immunities which upon the same terms shall not

equally belong to all citizens, or corporations.” Const.

art. I, § 12. This provision, which is more protective

than the federal equal protection clause, “protects . . .

against laws serving the interest of special classes of

citizens to the detriment of the interests of all

citizens.” Grant Cnty. Fire Prot. Dist. No. 5 v. City of

Moses Lake, 150 Wn.2d 791, 806–07, 83 P.3d 419

32a

(2004). Courts subject legislation implicating Article

I, Section 12 to a two-part test. Schroeder v. Weighall,

179 Wn.2d 566, 572–73, 316 P.3d 482 (2014). First,

the Court must ask whether the law grants a

“privilege” or “immunity” within the meaning of the

constitution. Id. If the answer is yes, then the Court

must ask whether there is a “reasonable ground” for

granting that privilege or immunity. Id.

In the case of ESSB 5096, the answer to the

first question of whether the statute implicates a

“fundamental right[] of state citizenship” is yes. See

Schroeder, 179 Wn.2d at 573. This Court has

recognized that the term “privileges and immunities”

“as used in the state constitution should receive a like

definition and interpretation as that applied to them

when interpreting the federal constitution.” Grant

Cnty. Fire Prot. Dist. No. 5, 150 Wn.2d at 812-13. The

federal constitution’s “privileges and immunities”

clause includes the fundamental right “to be exempt,

in property or persons, from taxes or burdens which

the property or persons of citizens of some other state

are exempt from.” Id. Thus, “[b]y analogy,” the

Washington

Constitution’s

“privileges

and

immunities” clause also includes the fundamental

right to be exempt from taxes which other citizens or

corporations are also exempt from. See id.

The State argues that there is no fundamental

right to be exempt from a state tax that the state has

granted to other persons. State’s Br. at 50. The cases

relied on by the State for this proposition, however,

concerned citizens seeking similar exemptions as that

granted to others engaged in different activity. For

example in Supply Laundry Co. v. Jenner, the

petitioners challenged on equal protection grounds

33a

exemptions under the B&O tax for various businesses

and professions. 178 Wash. 72, 78, 34 P.2d 363 (1934).

The Court rejected the notion that the Legislature

could not “draw fine distinctions between

classifications.” Id.; accord Morrow, 182 Wash. at 634;

Black, 67 Wn.2d at 100. The Court in these cases did

not endorse the notion advocated by the State here

that the Legislature can draw distinctions within the

same class.

ESSB 5096 imposes a capital gains tax on any

sale or exchange of long-term capital assets. § 5(1).

The tax thus generally applies to any person5 who

owns long-term capital assets and engages in the sale

or exchange of those assets. The same provision also

specifies however that “[o]nly individuals are subject

to payment of the tax,” meaning that any non-natural

person that also derives capital gains is not subject to

payment of the tax. Id. ESSB 5096 on its face subjects

only certain persons owning and selling capital assets

to the tax, while exempting any other person with the

exact same circumstances from the tax.

The second question when applied to state

5 The tax code generally applies to any “person” meaning

interchangeably “any individual, receiver, administrator,

executor, assignee, trustee in bankruptcy, trust, estate, firm,

copartnership, joint venture, club, company, joint stock company,

business trust, municipal corporation, political subdivision of the

state of Washington, corporation, limited liability company,

association, society, or any group of individuals acting as a unit,

whether mutual, cooperative, fraternal, nonprofit, or otherwise

and the United States or any instrumentality thereof.” RCW

82.04.020 (excise tax purposes); see also RCW 83.100.020(9)

(estate and transfer tax; same); RCW 84.04.075 (property taxes;

same).

34a

taxes asks whether there is a “reasonable ground” for

the legislature to have taxed one class and exempted

other classes from the same tax. Schroeder, 179 Wn.2d

at 573; cf. Texas Co. v. Cohn, 8 Wn.2d 360, 376, 112

P.2d 522 (1941) (applying federal equal protection

analysis to tax law).6 “Under the reasonable ground

test a court will not hypothesize facts to justify a

legislative distinction . . . . Rather, the court will

scrutinize the legislative distinction to determine

whether it in fact serves the legislature’s stated goal.”

Id. at 574 (internal citations omitted). The

Legislature’s stated purpose for imposing the tax in

ESSB 5096 purportedly is to “rebalance” the state’s

tax code so that its “wealthiest residents” pay more

taxes on their share of income than those residents at

the bottom of the income spectrum. ESSB 5096 § 1.

This stated purpose, however, speaks only to the

difference in levying the tax on individuals whose

“profit is in excess of $250,000,” id., it says nothing of

a legislative basis for imposing the tax only on

individuals as opposed to imposing the tax on any

person owning the capital assets and selling those

assets for gain.7 And there is no discernable basis in

the legislative text for the State to treat individuals

incurring capital gains discriminatively from other

“persons” incurring capital gains, when the purported

This Court has since held that Article I, Section 12

provides greater constitutional protections than equal

protection. Grant Cty. Fire Protection Dist. No. 5, 150 Wn.2d at

806–07. The test applied in Texas Co, which looked to “any

conceivable basis” to uphold the classification, therefore no

longer applies.

7 Such a distinction, of course, also violates Article

VII, Section 1’s uniformity provision for property taxes.

35a

reason is to raise revenue, except for the Legislature

to reach individual income. Cf. Comptroller of

Treasury of Md. v. Wynne, 575 U.S. 542, 554, 135 S.

Ct. 1787, 191 L. Ed. 2d 813 (2015) (disparate

treatment of corporate and personal income cannot be

justified based on the state services enjoyed by two

groups of taxpayers). This arbitrary distinction does

not in fact support the Legislature’s stated purpose,

and thus unconstitutionally burdens the tax against

only a select set within the relevant class of taxpayers

in violation of Article I, Section 12. ESSB 5096 should

be invalidated on these state constitutional grounds

as well.

ESSB 5096 Violates The Commerce Clause

Of The United States Constitution.

The Supreme Court has long held that Article I,

Section 8, clause 3 (“the Commerce Clause”) of the

United States Constitution contains a dormant

prohibition against certain state taxation involving

interstate commerce. See Oklahoma Tax Comm’n v.

Jefferson Lines, Inc., 514 U.S. 175, 179–80, 115 S. Ct.

1331, 131 L. Ed. 2d 261 (1995) (analyzing history of

the dormant Commerce Clause). To survive

Commerce Clause scrutiny, a state tax must meet a

four-part test that focuses on the practical effect of the

challenged tax. Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326

(1977). The tax must (1) apply to an activity with a

substantial nexus with the taxing state; (2) be fairly

apportioned; (3) not discriminate against interstate

commerce, and (4) be fairly related to the services that

the state provides. Id. at 279. ESSB 5096 violates this

inquiry because the statute (1) impermissibly imposes

the tax based on the location of the taxpayer and not

36a

the location of the activity from which the income is

derived; (2) imposes the tax without fairly

apportioning it to activities occurring only within

Washington; and (3) discriminates against interstate

commerce by subjecting income derived outside the

state to risk of multiple state taxation. The State’s

attempt to validate the capital gains tax in the face of

these deficiencies must fail.

The Commerce Clause Analysis

Requires The Court To Determine

Whether Application Of The Tax Is

Unconstitutional.

The State first asks this Court to apply a test

for facial challenges that the United States Supreme

Court has never applied when analyzing a state tax

law under the Commerce Clause. Specifically, the

State asserts—citing only non-tax, non- Commerce

Clause cases—that Plaintiffs must establish that there

are “no set of circumstances” in which the capital

gains tax can constitutionally be imposed to invalidate

the tax. See State’s Br. at 15-17, 54-55, 58. Not so. As

discussed below, the Supreme Court has not hesitated

to find a state tax scheme invalid under the Commerce

Clause even if there may be scenarios in which some

imposition of the tax could be constitutionally

permissible.

The State’s facial argument derives from a

principle applicable in other contexts that a challenge

to a legislative act generally requires the challenger

to “establish that no set of circumstances exists

under which the Act would be valid.” United States

v. Salerno, 481 U.S. 739, 745, 107 S. Ct. 2095 (1987)

(analyzing substantive due process challenge to

37a

federal bail legislation); Washington State Republican

Party, 141 Wn.2d 245, 282, n. 14, 4 P.3d 808 (2000)

(analyzing First Amendment challenge to state

campaign finance law). Yet the State does not cite any

case in which this “no set of circumstances” principle

has been applied in a Commerce Clause challenge to

a state tax law, nor are Plaintiffs aware of any such

case.8

The State misleadingly references Tyler Pipe

Industries, Inc. v. Department of Revenue, 483 U.S.

232, 248, 107 S. Ct. 2810, 97 L. Ed. 199 (1987), as

purportedly supporting its position because the

Supreme Court invalidated a specific business and

occupation (B&O) tax exemption while leaving the

B&O tax code intact. See State’s Br. at 16. But,

contrary to the State’s suggestion, the petitioners in

Tyler Pipe did not challenge the entirety of the B&O

tax code or bring an as-applied challenge; instead they

brought a facial challenge against a provision in the

8 Application of Salerno has been called into question by

the Supreme Court and other courts, including in tax challenges.

See, e.g., City of Chicago v. Morales, 527 U.S. 41, 55 n. 22, 119

S. Ct. 1849, 144 L.Ed.2d 67 (1999) (questioning Salerno’s

application); Gordon v. Holder, 721 F.3d 638, 654 (D.C. Cir. 2013)

(rejecting Salerno’s application when a tax statute “erases the

boundaries that define a sovereign’s jurisdiction”); Sierra Club v.

Bosworth, 510 F.3d 1016, 1023–24 & n.4 (9th Cir. 2007) (collecting

cases in which Supreme Court has not applied Salerno, including

Kraft Gen. Foods Inc v. Iowa Dep’t of Rev. & Finance, 505 U.S. 71,

112 S. Ct 2365, 120 L. Ed. 2d 59 (1992), a state tax Commerce

Clause challenge); accord Robinson v. City of Seattle, 102 Wn.

App. 795, 806-08, 10 P.3d 452 (2000) (discussing Salerno’s

application and declining to apply the “no set of circumstances”

test in a constitutional challenge to a city tax ordinance under

the Washington Constitution).

38a

State’s tax code that assessed the B&O tax “only on

those goods manufactured in Washington that are

sold outside the State.” Id. at 240. The Supreme Court

agreed with the challengers that the provision had

“facially discriminatory consequences” because it

treated transactions differently depending on

whether they were in-state or out of it. Id. at 241. The

Court thus found the challenged statute invalid under

the Commerce Clause because it “unfairly burden[ed]

commerce by exacting more than a just share from the

interstate activity.” Id. at 247 (quoting Washington

Dept. of Revenue v. Association of Washington

Stevedoring Cos., 435 U.S. 734, 748, 98 S. Ct. 1388,

1393, 55 L.Ed.2d 682 (1978)).

The Supreme Court’s analysis in Tyler Pipe is

consistent with its Commerce Clause analysis in other

tax cases in which the Court has applied a “practical”

analysis that looks at whether application of the tax

would violate the Commerce Clause. See, e.g., Wynne,

575 U.S. at 552 (Commerce Clause requires a

“practical approach” that looks to the economic impact

of the tax); Commonwealth Edison Co. v. Montana,

453 U.S. 609, 616, 101 S. Ct. 2946, 69 L. Ed. 2d 884

(1981) (applying a “consistent and rational method of

inquiry focusing on the practical effect of a challenged

tax”); Gwin, White & Prince v. Henneford, 305 U.S. 434,

439–40, 59 S. Ct. 325, 83 L. Ed. 272 (1939) (looking at

tax statute in its “practical operation” to find it

discriminated against interstate commerce). Contrary

to the State’s argument, the Supreme Court has not

saved state tax statutes by asking whether it could

find any instance that the tax would not violate the

Commerce Clause. The Supreme Court has instead

consistently invalidated state tax laws when the

39a

“practical operation” of the tax scheme exceeds a

state’s taxing authority or discriminates against

interstate commerce.

For example, in Gwin, the fact that

Washington’s B&O tax applied equally to income

earned from activities entirely in Washington and

those earned both within and outside Washington did

not save the tax from being struck down as facially

invalid. Notwithstanding that the tax could

constitutionally apply to the exclusively in-state

activity, the Supreme Court held the entire tax

scheme discriminated against interstate commerce

because it involved “risk of a multiple burden to which

local commerce is not exposed.” See Gwin, 305 U.S. at

439.

Similarly in Wynne, the Supreme Court agreed

that Maryland’s personal income tax structure

violated the Commerce Clause because the system

allowed a credit for income tax paid to another

jurisdiction for one portion of the state’s income tax

but not another. Wynne, 575 U.S. at 545. The Court

noted that the tax could be separated into three

categories depending on who and where the income

was earned. See id. at 566-67. Yet the fact that the tax

could constitutionally apply to income earned solely

in-state did not save the law because the scheme as a

whole discriminated against interstate commerce. Id.

at 567; see also id. at 565 n. 8 (“In applying the

dormant Commerce Clause, [the categories] must be

considered as one.”) As explained in detail in the

next sections, ESSB 5096 suffers from similar

structural defects under the Commerce Clause as

the state taxes invalidated in Gwin and Wynne. Even

the State tacitly acknowledges that there could be

40a

circumstances where application of the capital gains

tax would violate the dormant Commerce Clause. See

State’s Br. at 57-58; see also CP Vol. I 663 (admitting

“circumstances

where

the

tax

might

not

constitutionally apply). Those unconstitutional

“circumstances” doom the capital gains tax when the

well-established Commerce Clause analysis is

applied.9

ESSB 5096 Impermissibly Allocates

Capital Gains to Washington Based

on Activities Occurring Outside its

Borders.

The Commerce Clause limits Washington’s

power to tax to only those activities within its

jurisdictional reach. See Gwin, 305 U.S. at 438-39.

“State taxation, whatever its form, is precluded if it

discriminates against interstate commerce or

undertakes to lay a privilege tax measured by gross

receipts derived from activities in such commerce

which extend beyond the territorial limits of the

taxing state.” Id. (citations omitted). This

extraterritoriality principle applies whether the tax

imposed by the State is a tax on sales, a gross receipts

tax on the privilege of engaging in activity, or a tax on

income. See Wynne, 575 U.S. at 551–52 (Commerce

Clause does not “distinguish[]” between taxes on gross

9 The State also notes that the legislature included a

severability clause in ESSB 5096 and suggests that this aspect

could save the statute in an as-applied challenge. State’s Br. at 17

n. 2. However, as discussed next, ESSB 5096’s constitutional

defects concern not only what is included in the text, but also

what the text is missing. Attempting to sever only select

provisions of the statute would not save its unconstitutionality

under the Commerce Clause.

41a

receipts or net income); Jefferson Lines, Inc., 514 U.S.

at 184 (states may only tax sales or services occurring

within its borders). The Complete Auto test thus

requires that the tax only apply to activities connected

to the State and that there be a fair relation between

the tax and the activities of the taxpayer in the State.

See Jefferson Lines, Inc., 514 U.S. at 184, 199.

determine

whether

state

tax

impermissibly extends beyond the state’s territorial

limits, the court must ask “whether the tax applies to

an activity with a substantial nexus with the taxing

State.” South Dakota v. Wayfair, Inc., 138 S. Ct. 2080,

2099, 201 L. Ed. 2d 403 (2018) (emphasis added). “Such

a nexus is established when the taxpayer . . . ‘avails

itself of the substantial privilege of carrying on

business’ [i.e., the taxed activity] in that jurisdiction,”

id. (internal citation omitted), or there is “nexus

between [the] tax and transactions within [the] state

for which the tax is an exaction.” Mobil Oil Corp. v.

Comm’r of Taxes of Vermont, 445 U.S. 425, 437, 100 S.

Ct. 1223, 63 L. Ed. 2d 510 (1980). Likewise, the

measure of the tax, i.e., what is included in the

calculation of the tax, must be reasonably related to

the taxpayer’s presence or activities in the state.

Jefferson Lines, Inc., 514 U.S. at 199. “When the

measure of a tax bears no relationship to the

taxpayers’ presence or activities in a State . . . the

State is imposing an undue burden on interstate

commerce.” Commonwealth Edison Co., 453 U.S. at

629. Both inquiries ensure “the taxing power . . . bears

fiscal relation to protection, opportunities and

benefits given by the state—that is whether the state

has given anything for which it can ask return.”

MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep’t of

42a

Rev., 553 U.S. 16, 24–25, 128 S. Ct. 1498, 170 L. Ed.

2d 404 (2008) (citation omitted); accord Allied-Signal,

Inc. v. Dir., Div. of Tax’n, 504 U.S. 768, 777, 112 S.

Ct. 2251, 119 L. Ed. 2d 533 (1992) (“The principle

that a State may not tax value earned outside its

borders rests on the fundamental requirement of both

the Due Process and Commerce Clauses that there be

‘some definite link, some minimum connection,

between a state and the person, property or

transaction it seeks to tax.’”) (citation omitted).

ESSB 5096 overreaches the bounds of the

Commerce Clause because it allocates gains to

Washington that are not derived from activity with

nexus to the State. Specifically, Washington allocates

to itself all gains:

(1) derived from sales or exchanges of

tangible property located in the state at the

time of the sale or exchange (§ 11(1)(a));

(2) derived from sales or exchanges of

tangible property previously located in the

state if the taxpayer was a resident at the time

of the sale/exchange and the taxpayer is not

otherwise subject to the payment of another tax

by another jurisdiction (§ 11(1)(a)(i)-(iii)); and

(3)derived from sales or exchanges of

intangible personal property if the taxpayer

was domiciled in the state at the time of the

sale or exchange. (§ 11(1)(b)).

See ESSB 5096 § 11(1) (a)-(b). For two of these

allocations, the State impermissibly sources the tax

not based on the location of activity purportedly being

taxed—i.e., the sale or exchange of the property—but

43a

rather on the taxpayer’s residency or domicile in the

State.

With respect to the first sentence in section

11(1)(a), it is true that the State has nexus to tax sales

of tangible personal property located in the state when

the sale is consummated there. See State’s Br. at 56

(citing Jefferson Lines, 514 U.S. at 184). The State

however ignores entirely the second sentence of the

same provision, which allocates to Washington gains

on the sale of tangible property “even though the

[tangible personal] property was not located in the

state at the time of the sale or exchange.” See ESSB

5096 § 11(1)(a)(i)–(iii). This provision indisputably

imposes the tax based on the residency of the

taxpayer,

disregarding

the

constitutionally

determinative fact that the activity on which the excise

tax is purportedly based (i.e., the sale or exchange)

occurred outside the jurisdictional reach of the State.

See Allied-Signal, Inc., 504 U.S. at 777 (“[W]e have

not abandoned the requirement that, in the case of a

tax on an activity, there must be a connection to the

activity itself, rather than a connection only to the

actor the State seeks to tax.”).

With respect to the provision in section 11(1)(b)

allocating gains derived from intangibles solely based

on the taxpayer’s domicile, the State overstates the

rule. See State’s Br. at 56. States have authority to

impose taxes on the sale or transfer of intangible

property in cases “where the owner of the intangibles

confines his activity to the place of his domicile.” Curry

v. McCanless, 307 U.S. 357, 367, 59 S. Ct. 900, 83

44a

L. Ed. 1339 (1939) (emphasis added).10 The Supreme

Court also explained that the maxim of mobilia

sequuntur personam11 applied in this context is one of

convenience that must yield to factual reality when

the activity involves more than one state:

[W]hen the taxpayer extends his activities with

respect to his intangibles, so as to avail himself

of the protection and benefit of the laws of

another state, in such a way as to bring his

person or property within the reach of the tax

gatherer there, the reason for a single place of

taxation no longer obtains, and the rule is not

even a workable substitute for the reasons

which may exist in any particular case to

support the constitutional power of each state

concerned to tax.

Id. at 367 (emphasis added); accord Mobile Oil Corp. v.

The State contends Curry held that transactions in

intangible property are deemed to occur only in the state of the

owner’s domicile. State’s Br. at 56. The Supreme Court created

no such black-letter rule in Curry. Addressing a Fourteenth

Amendment challenge, Curry refused to impose a one-size-fitsall rule, explaining “[w]e find it impossible to say that taxation

of intangibles can be reduced in every case to the mere

mechanical operation of locating at a single place, and there

taxing, every legal interest growing out of all the complex legal

relationships which may be entered into between persons.” Id. at

908–09. The Court declined to hold “that the Fourteenth

Amendment may be invoked to compel the taxation of

intangibles by only a single state by attributing to them a situs

within that state.” Id. at 909 (citation omitted).

11 The maxim means “that it is the identity or

association of intangibles with the person of their owner at his

domicile which gives jurisdiction to tax.” Curry, 307 U.S. at 367

(emphasis added).

45a

Comm’r of Taxes of Vermont, 445 U.S. 425, 444–45,

100 S. Ct. 1223, 63 L. Ed. 2d 510 (1980) (permitting

sourcing based on a state’s connection to the activity

generating the income from intangibles). The State

disregards that ESSB 5096 allocates all income

derived from the sale or exchange of intangible capital

assets entirely to Washington based only on the

taxpayer’s domicile, without regard to whether the

capital gains resulted from activity outside the state.

See ESSB 5096 § 11(1)(b).

The State also disregards the fact that a

taxpayer may have no control over sale or exchange of

the intangibles at issue because the capital gains tax

applies based solely on “whether the taxpayer was the

legal or beneficial owner” of the assets at the time of

sale or exchange. ESSB 5096 § 5(4)(a). In other words,

the taxpayer may not engage in any activity or even

have power to do so to be subject to the tax, such as in

the case of a beneficiary of a trust or the minority

shareholder of a corporation. See, e.g., CP Vol. I 63995, 697-99. Yet the capital gains tax here is imposed

“to the extent of the individual’s ownership interest”

or to the extent the individual recognizes the gains on

their personal federal income tax forms. See id. at §

5(4)(a), (b)(i)-(ii). The Supreme Court, however, has

explicitly rejected the notion that “intangibles—

stocks, bonds—in the hands of the holder of the legal

title with definite taxable situs at its residence” may

be taxed based on the equitable owner’s domicile.

Safe Deposit & Trust Co. of Baltimore, Md. v.

Commonwealth of Virginia, 280 U.S. 83, 92–93, 50 S.

Ct. 59, 74 L. Ed. 180 (1929). Just as in Curry, the

Supreme Court found in Safe Deposit & Trust Co. that

“the fiction of mobilia sequuntur personam” must yield

46a

to the “established fact of legal ownership, actual

presence and control elsewhere.” Id. (emphasis

added). Here, the State has tried to reinstate the

“fiction” that the power to tax transactions involving

intangible personal property should be based

exclusively on domicile, instead of where the activity

related to the intangible occurs. See id. at 93.

sum,

the State

unconstitutionally

overreached its jurisdiction with the capital gains tax.

ESSB 5096 Lacks Fair Apportionment.

The fact that ESSB 5096 taxes transactions

that occur entirely outside Washington’s borders also

dooms the Act under Complete Auto’s fair

apportionment requirement. Income earned from

interstate commerce must be “fairly apportioned” to

the activities carried on within that state. See

Western Live Stock v. Bureau of Revenue, 303 U.S.

250, 255, 58 S. Ct. 546, 82 L. Ed. 823 (1938). This

principle of “fairness” derives from the Commerce

Clause’s prohibition against “multiple taxation, which

is threatened whenever one State’s act of overreaching

combines with the possibility that another State will

claim its fair share of the value taxed.” Jefferson Lines,

Inc., 514 U.S. at 184– 85 (emphasis added). Despite

the State’s claim, ESSB 5096 contains no method for

apportioning gains derived from the sale or exchange

of long-term capital assets outside of the state.

assess

ESSB

5096’s

“threat

malapportionment” the court must ask “whether the

tax is ‘internally consistent’ and, if so, whether it is

‘externally consistent’ as well.” Jefferson Lines, Inc.,

514 U.S. at 185 (citation omitted). “Internal

47a

consistency is preserved when the imposition of a tax

identical to the one in question by every other State

would add no burden to interstate commerce that

intrastate commerce would not also bear.” Id. This

test requires “hypothetically assuming that every

State has the same tax structure” to determine

whether the state “tax scheme[]” “inherently

discriminates against interstate commerce without

regard to the tax policies of other States.” Wynne,

575 U.S. at 562. External consistency, in contrast,

looks “to the economic justification for the State’s

claim upon the value taxed, to discover whether a

State’s tax reaches beyond that portion of value that

is fairly attributable to economic activity within the

taxing State.” Jefferson Lines, Inc., 514 U.S. at 185.

There must be “a rational relationship between the

income attributed to the State and intrastate values

of the [business being taxed].” Container Corp. of

America v. Franchise Tax Bd., 463 U.S. 159, 165-66,

103 S. Ct. 2933, 77 L. Ed. 2d 545 (1983). If the income

apportioned to the State is “out of all appropriate

proportion to business transacted in that State,” the

tax lacks “fair apportionment.” See id. at 180–81.

ESSB 5096 fails these requirements.

The State contends that ESSB 5096 is internally

consistent because it allocates gains based on where

the property is located for tangible personal property

and based on domicile of the owner for purposes of

intangible personal property. State’s Br. at 59. The

State again ignores the second sentence of ESSB 5096

§ 11(1)(a), which allocates gains based on the

taxpayer’s Washington residency when the state

where the transaction actually occurs chooses not to

tax. The very fact that another state could tax means

48a

that ESSB 5096 fails the test for internal consistency.

See Armco, Inc. v. Hardesty, 467 U.S. 638, 644–45 and

n.8, 104 S. Ct. 2620, 82 L. Ed. 2d 540 (1984) (validity of

one state’s tax does not turn on how another state has

chosen to exercise its taxing authority); Mobile Oil

Corp., 445 U.S. at 444 (constitutionality of state’s law

does not depend on proof of actual multiple taxation;

fact that another state could tax governs the analysis).

Further, the State grossly mischaracterizes the

tax credit provision in ESSB 5096 § 11(2)(a), when it

asserts the provision “eliminates any chance of

multiple taxation.” State’s Br. at 60 (referencing RCW

82.87.100(2)). The credit is extended only to capital

gains paid by the taxpayer to another state “from

capital assets within the other taxing jurisdiction to

the extent such capital gains are included in the

taxpayer’s Washington capital gains,” ESSB 5096 §

11(2)(a) (emphasis added). In short, a credit is allowed

but only if the gains were derived from capital assets

within the other state—for example, the value of

goodwill in an out of state business. No credit is

allowed against another state’s taxes on the same

capital gains sourced to that state by other means,

such as if the taxpayer has multiple residencies. For

example, consider a situation in which Washington

allocates for itself capital gains derived from the sale

or exchange of tangible personal property solely

because the taxpayer was a resident of Washington at

the time of the event. If the taxpayer is also a resident

of California, the taxpayer runs the risk of being taxed

on the entirety of the income from the sale or exchange

twice— once by Washington and once by California,

49a

without any apportionment between the two under

ESSB 5096.12

Contrary to the State’s assertion, the lack of full

credit by Washington for other states’ taxes does

create a “genuine risk” that gains derived from the

transfer of long-term capital assets will be taxed by

multiple states. See State’s Br. at 59. ESSB 5096 lacks

internal consistency and thus impermissibly burdens

interstate commerce. See Wynne, 575 U.S. at 545

(striking down part of state income tax that did not

offer residents a full credit against income taxes paid

to other states); Tyler Pipe Indus., 483 U.S. at 247–48

(version of Washington’s B&O tax unconstitutionally

discriminated against interstate commerce because it

was internally inconsistent).

The State next repeats its same arguments

regarding allocation for tangible and intangible

personal property in defense of ESSB 5096’s external

inconsistency. See State’s Br. at 60. However,

Washington’s alleged economic justification for

allocating the gains to itself (i.e., the residency or

domicile of the taxpayer) cannot overcome the fact

12 ESSB 5096 § 4(10)(a) defines “resident” as someone

who is “domiciled in this state” or who “maintained a place of

abode here and was physically present in this state for more than

183 calendar days.” For purposes of its income tax (of which

capital gains are included), California defines resident as any

individual who is (1) in California for other than a temporary or

transitory purpose; or (2) domiciled in California, but who is

outside California for a temporary or transitory purpose. Cal. Rev.

& Tax Code § 17014. Thus, a person can be both a resident of

Washington at the time of sale and also a resident of California

for purposes of the tax.

50a

that the State is reaching “beyond that portion of

value that is fairly attributable to economic activity”

within the state. Jefferson Lines, Inc., 514 U.S. at

185 (emphasis added). As previously stated, external

consistency requires that gross receipts taxes or taxes

on income “be apportioned to reflect the location of the

various interstate activities by which [the amount]

was earned.” Jefferson Lines, Inc., 514 U.S. at 190.

Allocating capital gains derived from a sale or

exchange of tangible personal property that occurs

outside Washington entirely to Washington solely

because the beneficial owner happened to be a

Washington resident is externally inconsistent

because the state in which the sale occurred has power

to tax the income.

The Legislature here failed to incorporate any

principles of apportionment in ESSB 5096 so that the

capital gains tax is constitutionally imposed only on

that portion of income reasonably attributed to the

taxpayer’s in-state activities in connection with the

sale. This is the same defect that doomed

Washington’s early B&O tax. See Gwin, 305 U.S. at

438–39 (striking down Washington privilege tax

derived from gross receipts incurred from sales in

interstate commerce and without apportionment).

The State’s arguments also suggest it believes

that apportionment is not required for income earned

from intangible personal property at all by application

of its legally unsupported “fiction” that all intangible

personal property is sourced to its owner’s domicile.

See State’s Br. at 60. But, as previously discussed, the

State is wrong. See also Mobil Oil Corp., 445 U.S. at

445 (“The Court also has recognized that the reason

for a single place of taxation no longer obtains when

51a

the taxpayer's activities with respect to the intangible

property involve relations with more than one

jurisdiction

Moreover, cases upholding allocation

to a single situs for property tax purposes have

distinguished income tax situations where the

apportionment principle prevails.”) (emphasis added;

citations omitted); Wheeling Steel Corp. v. Fox, 298

U.S. 193, 212, 56 S. Ct. 773, 80 L. Ed. 1143 (1936)

(recognizing that tax on net profits from intangible

property demands a method of apportionment among

different jurisdictions with respect to the processes by

which the profits are earned).

ESSB 5096 tries to allocate taxable gains

derived from the sale of certain capital assets to

Washington solely because the taxpayer resides or is

domiciled within the State. But the act of simply living

in the State does not bear a rational relationship to

the amounts earned from the long-term ownership

and eventual sale or transfer of those assets. And,

even if some link were identified, there would still be

no basis for Washington to allocate to itself —as it

does in ESSB 5096—all of the gains earned without

any apportionment for the value earned in other

jurisdictions. By doing so, the gains allocated to

Washington are “out of all appropriate proportion” to

the activities conducted here. Container Corp. of

America, 463 U.S. at 180–81. The State here has

unconstitutionally extended its taxing authority to

activities conducted wholly or predominantly outside

its borders with no rational relationship between the

income on which the state’s tax is measured and the

activity purportedly being taxed.

52a

ESSB 5096 Discriminates Against

Interstate Commerce.

Last, the State’s arguments against ESSB

5096’s discriminatory nature focus on the wrong test.

See State’s Br. at 60-61. The State focuses only on the

portion of the Commerce Clause inquiry that seeks to

identify discriminatory tax treatment of in-state and

out-of-state interests. See id. (quoting Washington

Banker’s Ass’n v. State, 198 Wn.2d 418, 430, 495

P.3d 808 (2021) and Filo Foods, LLC v. State, 183

Wn.2d 770, 809, 357 P.3d 1040 (2015)).13 But that

aspect of the test for discrimination under the

Commerce Clause has never been asserted here and is

not the only way a state can discriminate against

interstate commerce. As the Supreme Court has

explained:

among other things, [] a State may not tax a

transaction or incident more heavily when it

crosses state lines than when it occurs entirely

within the State. Nor may a State impose a tax

which

discriminates

against

interstate

commerce either by providing a direct

commercial advantage to local business, or by

subjecting interstate commerce to the burden of

multiple taxation.

Wynne, 575 U.S. at 549-50 (citations omitted;

emphasis added); see also Armco, Inc. v. Hardesty, 467

U.S. 638, 644–45 and n.8, 104 S. Ct. 2620, 82 L. Ed.

13 In both cases, the petitioners had asserted that the

statute at issue discriminated against interstate commerce

by unfairly taxing out-of-state businesses. See Wash. Bankers

Ass’n, 198 Wn.2d at 426; Filo Foods, LLC, 183 Wn.2d at 809.

53a

2d 540 (1984) ((“A tax that unfairly apportions income

from other States is a form of discrimination against

interstate commerce.”). ESSB 5096 discriminates

against interstate commerce because it subjects

income earned across state lines to risk of multiple

taxation. See Wynne, 575 U.S. at 549-50. While gains

earned from sales of tangible personal property

located in Washington are subject to tax only once by

Washington, gains earned from out-of-state tangible

personal property or gains earned from intangible

personal property can be taxed not just by Washington

but other states as well—simply because Washington

has chosen to allocate the gains based on the

taxpayer’s residency or domicile and without

apportionment. This tax treatment burdens interstate

commerce, which the State cannot constitutionally do.

Armco, 467 U.S. at 644; see also Gwin, 305 U.S. at

438–39.

***

In sum, ESSB 5096 violates the dormant

Commerce Clause because the capital gains tax

imposed impermissibly allocates the tax to

Washington based on the taxpayer’s location instead

of where the activity of sale or transfer of the asset

occurs, imposes a tax that is not fairly apportioned to

activities occurring within the state, and

discriminates against interstate commerce. The

legislation cannot stand.

V. CONCLUSION

For these reasons, the Court should hold that

the capital gains tax in ESSB 5096 is unconstitutional

and void in its entirety.

54a

This document contains 11,750 words,

excluding the parts of the document exempted from

the word count by RAP 18.17.

Respectfully submitted September 8, 2022,

LANE POWELL PC

By: s/Callie A. Castillo

Scott M. Edwards (WSBA #26455)

edwardss@lanepowell.com

Callie A. Castillo (WSBA #38214)

castilloc@lanepowell.com

1420 5th Ave., Suite 4200

Seattle, WA 98101

Telephone: +1 206 223 7000

Facsimile: +1 206 223 7107

FREEDOM FOUNDATION

Eric R. Stahlfeld (WSBA #22002)

estahlfeld@freedomfoundation.com

PO Box 552

Olympia, WA 98507

Telephone: +1 360 956 3482

Facsimile: +1 360 839 2970

Attorneys for Quinn Respondents

55a

SUPERIOR COURT OF WASHINGTON

FOR DOUGLAS COUNTY

CHRIS QUINN, an

individual; CRAIG

LEUTHOLD, an individual;

SUZIE BURKE, an individual;

LEWIS and MARTHA

RANDALL, as individuals and

the marital community

comprised thereof; RICK

GLENN, an individual; NEIL

MULLER, an individual;

LARRY AND MARGARET

KING, as individuals and the

marital community comprised

thereof; and KERRY COX, an

individual.

Case No.

21-2-00075-09

FIRST AMENDED

COMPLAINT FOR

DECLARATORY

AND INJUNCTIVE

RELIEF

Plaintiffs,

STATE OF WASHINGTON;

DEPARTMENT OF

REVENUE, an agency of the

State of Washington; VIKKI

SMITH, in her official

capacity as Director of the

Department of Revenue.

Defendants.

Plaintiffs, by and through their attorneys,

allege the following First Amended Complaint for

Declaratory and Injunctive Relief against Defendants

State of Washington, Department of Revenue of the

State of Washington, and Vikki Smith, as Director of

56a

the Department

Washington:

Revenue

the

State

I. NATURE OF THE CASE

The Washington State Legislature

enacted ESSB 5096 to impose a seven percent (7%) tax

on long-term capital gains. While described as an

excise tax on the sale or exchange of long-term capital

assets, the tax on capital gains is a tax on income.

Beginning January 1, 2022, individuals

arc subject to capital gains tax on their adjusted

capital gains during the federal taxable year.

Adjusted capital gains are defined by the individual’s

federal net long-term capital gain, which is based on

the amount of long-term capital gain reported on the

individual’s federal income tax return.

A standard deduction of $250,000 from

the measure of the tax is allowed, along with an

additional deduction for qualifying charitable

donations over $250,000.

Individuals owing the tax must report

and pay the capital gains tax to Washington on or

before the date that their federal annual income tax

return must be filed. Failure to pay the capital gains

tax or otherwise comply with ESSB 5096 will result in

penalties for the individual and possible criminal

punishment as either a felony or gross misdemeanor.

Plaintiffs seek a declaratory judgment

that ESSB 5096 is void because imposition of the

capital gains tax as set forth in ESSB 5096 violates

the Washington State Constitution and the United

States Constitution.

57a

ESSB 5096 is unlawful and invalid

under the Washington State Constitution because (1)

imposition of a non-uniform capital gains tax violates

Article VII, Section 1 of the Washington Constitution;

(2) imposition of a seven percent (7%) tax rate violates

Article VII, Section 2 of the Washington Constitution;

(3) imposing a capital gains tax on certain individuals

while not taxing other individuals and not taxing

entities violates the privileges and immunities clause

of Article I, Section 12 of the Washington

Constitution; (4) requiring Washington residents and

nonresidents to disclose their federal income tax

returns and all schedules and supporting

documentation violates their privacy rights under

Article I, Section 7 of the Washington Constitution.

ESSB 5096 is unlawful and invalid

under the United States Constitution because (1) it

allocates taxable gain to Washington based on the

taxpayer’s residency instead of where the sale

generating the gain occurs in violation of Article I,

Section 8, clause 3 (the “Commerce Clause”) of the

United States Constitution and (2) the method for

allocating Washington capital gain in the statute

violates the Commerce Clause requirements that

state taxes be non-discriminatory and fairly

apportioned.

Plaintiffs seek to enjoin the Defendants

from assessing and collecting the capital gains tax

from Washington residents and otherwise enforcing

ESSB 5096.

58a

II. PARTIES

Plaintiffs

Plaintiffs are Chris Quinn, Craig

Leuthold, Suzie Burke, Lewis and Martha Randall,

Rick Glenn, Neil Muller, Larry and Margaret King,

and Kerry Cox.

10.

Each of the named Plaintiffs own capital

assets and would be subject to the capital gains tax in

ESSB 5096 if they realized capital gains and would

incur a tax liability on capital gains in excess of

$250,000.

11.

Plaintiffs have standing under the

Uniform Declaratory Judgment Act because their

interests in avoiding unlawful taxation are arguably

within the zone of interests to be protected by the

constitutional provisions in question and each would

be injured if the unlawful capital gains tax set forth in

ESSB 5096 were imposed on them.

12.

Plaintiffs’ Complaint also raises issues of

significant public interest, which affect nearly 60,000

estimated taxpayers in the State of Washington.

Defendants

13.

Defendant is the State of Washington.

14.

Defendant Department of Revenue is an

agency of the State of Washington.

15.

Defendant Vikki Smith is the Director of

the Department of Revenue and legislatively charged

with assessing, collecting, and administering all

programs related to taxes through the Department of

Revenue. Director Smith is sued in her official

capacity only.

59a

III. JURISDICTION AND VENUE

16.

This Court has subject matter

jurisdiction under Wash. Const. Article IV, Section 6,

RCW 2.08.010, RCW 7.24.010, and RCW 7.40.010.

17.

Venue is proper in this Court under

RCW 4.92.010 because Douglas County is the county

of residence or principal place of business of one or

more of the plaintiffs.

IV. FACTUAL ALLEGATIONS

18.

The Washington State Legislature

adopted ESSB 5096 to impose a tax on the federal

income taxable long-term capital gains of individuals.

19.

The tax is imposed on individuals who

have long term capital gains or losses for federal

income tax purposes.

20.

Individuals subject to the capital gains

tax must pay a seven percent (7%) tax on the amount

of adjusted capital gains less $250,000 and possibly

other deductions. The threshold amount of taxable

adjusted capital gains may increase—but never

decrease—based on the consumer price index for all

urban consumers for the Seattle area for each

subsequent 12-month period.

21.

Adjusted capital gains mean the “federal

net long-term capital gain” reportable by individuals

for their federal income tax purposes, excluding

exempt gains or losses and excluding gains or losses

that are not allocated to Washington. Losses carried

back for federal income tax purposes are not included

in the calculation of the individual’s adjusted capital

gain.

60a

22.

Long-term capital gains or losses derived

from tangible personal property is allocated to

Washington if either (1) the property was located in

this state at the time of sale or exchange or (2) the

property was located in Washington at some time

during the taxable year, the taxpayer was a resident

of Washington at the time of the sale or exchange, and

the taxpayer is not otherwise subject to the payment

of an income or excise tax on the long-term capital

gains or losses by another state.

23.

Long-term capital gams or losses derived

from intangible personal property is allocated to

Washington if the taxpayer was domiciled in

Washington at the time the sale or exchange occurred.

24.

A tax credit is allowed against the

capital gains tax owed to Washington that is equal to

the amount of any legal imposed income or excise tax

paid by the individual to another taxing jurisdiction

on capital gains derived from capital assets within the

other taxable jurisdiction but included in the

taxpayer’s Washington capital gains.

25.

A deduction of $250,000 is allowed per

individual from the measure of adjusted capital gains,

but in the case of spouses or domestic partner the total

deduction is limited to $250,000.

26.

A deduction is allowed for amounts of

adjusted capital gains for the sale or transfer of an

individual’s interest in a “qualified family-owned

small business,” as defined in ESSB 5096.

27.

A deduction of up to $100,000 is also

allowed for amounts donated by the taxpayer to one

61a

or more qualified charitable organizations in excess of

$250,000 during the same taxable year.

28.

Capital gains exempt from taxation

include capital gains derived from certain real es

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