September 2023 > Recent Significant Cases Decided by the Washington Supreme Court

COLUMN > From the Spindle

BY VALERIE McOMIE

Capital Gains Tax Is Properly Characterized as an Excise Tax and Is Thus Not Subject to Constitutional Restrictions Governing Income Taxes

In Quinn v. State, 1 Wn.3d 453, 526 P.3d 1 (2023), the Washington Supreme Court examined the capital gains tax enacted by the Washington Legislature in 2021. Engrossed Substitute House Bill (ESSB) 5096 imposes a seven percent tax on the sale of certain long-term capital assets. See Laws of 2021, Ch. 196 (codified as Ch. 82.87 RCW). The tax applies only to nonexempt capital gains that exceed $250,000 and are earned by individuals from the sale of capital assets held for at least one year. See RCW 82.87.020(6), .040(1), .060(1). A “capital asset” is defined by reference to the United States tax code. RCW 82.87.020(2). The bill contains a number of exceptions and deductions, including for sales related to real estate, retirement accounts, family-owned businesses, and charitable donations. See RCW 82.87.050, .060(4), .070(1).

The Legislature identified two goals in enacting the new tax: (1) to serve the state’s “paramount duty” of providing “every child in the state with an education,” id. at 466 (quoting RCW 82.87.010); and (2) to mitigate the regressive nature of Washington’s tax code. Id. The tax is expected to generate nearly $2.5 billion in revenue in its first six years. Id. at 467.

Two groups of plaintiffs sued the state, seeking to invalidate the tax. Their principal argument was that the tax constitutes an income tax. As such, they argued that it violates the uniformity and levy restrictions applicable to property taxes under Wash. Const. art. VII, § 1, which prohibits “graduated” taxes, and § 2, which prohibits taxes greater than one percent. The state responded that the tax constitutes an excise tax and is thus not subject to these restrictions. The superior court agreed with the plaintiffs and granted their motion for summary judgment.

On direct review, a seven-justice majority of the Washington Supreme Court held that the tax constitutes an excise tax and is therefore not subject to the uniformity and levy restrictions of art. VII, §§ 1 & 2. Id. at 470. In a decision written by Justice Stephens, the court agreed with the superior court that the nature of a tax is determined by its “incidents,” or “the activity that triggers the tax,” but it held that the “taxable incident” here is “the sale or exchange of qualifying capital assets.” Id. at 483. The court indicated that the superior court improperly relied on federal law in characterizing the tax as a property tax: “To determine whether a tax is a property tax within the meaning of the Washington Constitution, we must look to Washington cases, which have articulated clear principles for distinguishing property and excise taxes.” Id.

The court reviewed case law and clarified that the measure of a tax is distinguishable from its subject matter. The fact that the tax is calculated based on income from a capital transaction does not by virtue of that fact transform it into an income tax. Id. at 478. It observed that Washington has characterized property taxes as taxing “the mere ownership of property,” whereas excise taxes involve “the exercise of rights in and to property or the exercise of a privilege.” Id. at 471. Acknowledging that the line between the two can be difficult to draw, the court determined that “the capital gains tax falls squarely on the excise side of the line because it taxes transactions involving capital assets—not the assets themselves or the income they generate.” Id. at 472. As an excise tax, the court held that the tax is not subject to the uniformity and levy restrictions of art. VII, §§ 1 & 2.

The court then turned to plaintiffs’ other constitutional challenges. See id. at 486-96. In response to the plaintiffs’ argument that the tax violates Wash. Const. art. I, § 12, which requires “reasonable grounds” for class legislation that implicates fundamental rights of state citizenship, see Woods v. Seattle’s Union Gospel Mission, 197 Wn.2d 231, 242, 481 P.3d 1060 (2021), cert. denied, 142 S. Ct. 1094 (2022), the majority held that the plaintiffs failed to demonstrate that the tax implicates a fundamental right of citizenship, and even if it did, there are reasonable grounds for the tax. Id. at 487. It also found unpersuasive the plaintiffs’ argument that the tax violates the dormant commerce clause of the U.S. Constitution, which prohibits state taxation that encroaches upon federal authority to “regulate commerce.” Id. at 21 (quoting U.S. Const. art. 1, § 8). Having rejected plaintiffs’ challenges to the tax, the court reversed and remanded to the superior court. Id. at 495.

Justice Gordon McCloud dissented in an opinion joined by Justice Johnson. Id. at 497. Reasoning that in Washington “capital gains are income” and “income is property,” the dissent concluded that the capital gains tax “is therefore a property tax.” Id. Acknowledging that one aim of the tax is to make Washington’s tax code more progressive, the dissent emphasized that the role of the court is to ensure that the legislation adheres to constitutional requirements: “Deciding whether to retain our regressive tax structure or to replace it with a more equitable one is up to the Legislature through legislation and the people through constitutional amendment. The duty of the judiciary when faced with a direct conflict between a statute and the constitution is to uphold the constitution.” Id. at 511.

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Washington Supreme Court Interprets the Washington Voting Rights Act to Protect All Washington Voters From Discrimination in Elections

Portugal v. Franklin County, __ Wn.3d ___, 530 P.3d 994 (2023), provided the court with its first opportunity to interpret the Washington Voting Rights Act (WVRA), Ch. 29A.92 RCW.¹1 The court’s opinion examines the current version of the WVRA and does not address recent amendments to the WRVA, effective Jan. 1, 2024. Portugal, 530 P.3d at 998 n.1; Laws of 2024, ch. 56, § 14.

The case arose in Franklin County, where approximately 54 percent of the population is Hispanic or Latino/a, and Hispanic or Latino/a voters make up roughly one-third of the voting population.²2 This article utilizes the terminology used by the court in its opinion when referring to classes of individuals based on factors such as race or ethnicity. Portugal, 530 P.3d at 1004. In the underlying claim, plaintiffs were Latino/a voters who sued the county, contending that its procedures for electing commissioners, which combine district-based primaries with at-large general elections, dilute the votes of Latino/a voters and violate the WVRA. Id. at 1004.

While the case was pending, Franklin County voter James Gimenez was permitted to intervene. Gimenez moved to dismiss the plaintiffs’ claim. The trial court denied Gimenez’s motion and entered an order approving the original parties’ settlement. Id. at 999. Gimenez appealed directly to the Washington Supreme Court, reiterating arguments he advanced in the superior court—that the WVRA’s protections are limited to minority groups within the county based on race, color, or language, and that dismissal is thus required based on lack of standing, repeal by implication, and constitutional infirmities. The court granted review. Id.

Under the WVRA, a method of electing a governing body violates the Act if:

(a) Elections in the political subdivision exhibit polarized voting; and

(b) Members of a protected class or classes do not have an equal opportunity to elect candidates of their choice as a result of the dilution or abridgment of the rights of members of that protected class or classes.

RCW 29A.92.030(1)(a)-(b).

The central interpretive question addressed by the court concerns the meaning of “protected class.” The WVRA defines the phrase as “a class of voters who are members of a race, color, or language minority group, as this class is referenced and defined in the Federal Voting Rights Act, 52 U.S.C. 10301 et seq.” RCW 29A.92.010(5) (emphasis added). Gimenez argued that “minority group” must be read to modify all three terms that precede it—“race,” “color,” and “language”—and therefore must be understood to identify three distinct types of groups that enjoy unique protection under the statute: racial minority groups, color minority groups, and language minority groups. Portugal, 530 P.3d at 1006-09. Based on this reading, Gimenez argued (1) plaintiffs lacked standing, because as the majority of the Franklin County population, Latinos/Latinas are not protected by the WVRA; (2) the WVRA has been repealed by implication by RCW 29A.76.010(4)(d), which prohibits favoring or disfavoring racial or political groups in county redistricting; (3) the WVRA violates the privileges and immunities clause of Wash. Const. art. I, § 12, because it grants special benefits to certain classes of persons; and (4) the WVRA violates the equal protection clause of the 14th Amendment to the United States Constitution. Portugal, 530 P.3d at 1005-12.

In a unanimous decision written by Justice Yu, the court held that “minority group” in the phrase “race, color, or language minority group” modifies only the word “language,” and that protections based on “race” and “color” apply equally to minority and majority voters. The court concluded that the statute’s plain language necessitated its reading. Id. at 1007. It also looked to California and federal law, noting that California courts have adopted the same interpretation of identical language in California’s voting rights act, and federal law employs similar interpretive principles. Id. at 1008. Under this interpretation of the WVRA, a “protected class” can include any person, because “[e]veryone can be a member of a race or races [and] everyone has a color … . As a result, every Washington voter is a member of at least one protected class, so every Washington voter is protected by the WVRA.” Id., at 1007 (brackets added). Having concluded that the WVRA applies to all Washington voters, the court rejected Gimenez’s challenges to the statute, all of which required an interpretation of the WVRA that limited its protections to minority voters. Id. at 999.³3 Notably, one week before the Washington Supreme Court issued its decision in Portugal, the United States Supreme Court decided Allen v. Milligan, 143 S. Ct. 1487 (June 8, 2023), in which it upheld its framework for examining alleged violations of section 2 of the Federal Voting Rights Act that was established in Thornburg v. Gingles, 478 U.S. 30 (1986). See Allen, 143 S. Ct. at 1503-04.

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Community Caretaking Exception to the Washington Constitution’s Warrant Requirement Not Invalidated by U.S. Supreme Court Decision in Caniglia v. Storm

In State v. Teulilo, ___Wn.3d ___, 530 P.3d 195 (2023), the Washington Supreme Court addressed whether Washington’s version of the community caretaking exception to the warrant requirement still applies to residential searches in light of the U.S. Supreme Court decision in Caniglia v. Storm, 141 S. Ct. 1596 (2021). In Teulilo, the Douglas County Sheriff’s Office received a call reporting a missing person and requesting a welfare check at the missing person’s residence. After knocking on her door and not receiving a response, the responding officer became concerned about her safety and entered the residence without a warrant. Upon entry, the officer discovered her dead body. Her husband, Ului Lakepa Teulilo, was charged with her murder. Teulilo moved to suppress the evidence, arguing that the warrantless search was unreasonable and could not be justified under the community caretaking exception to the warrant requirement because Caniglia invalidated the exception with respect to residences.

The right of the people of Washington to be protected from unreasonable searches and seizures is grounded in the Fourth Amendment to the United States Constitution and article 1, § 7 of the Washington Constitution. The protections afforded by each are similar, but the Washington Constitution applies “a more exacting scrutiny” in the context of residential searches. Teulilo, 530 P.3d at 201.

The touchstone for determining the constitutionality of a search is reasonableness. Cady v. Dombrowski, 413 U.S. 433, 439 (1973); Teulilo, 530 P.3d at 198. Searches of private property generally require a warrant, but a number of exceptions have emerged. One of these is the community caretaking exception, which permits searches in certain situations that involve a threat to public health or safety. See Cady, 413 U.S. at 441. In Cady, a case involving a warrantless search of a vehicle, the U.S. Supreme Court explained: “Local police officers … frequently investigate vehicle accidents in which there is no claim of criminal liability and engage in what, for want of a better term, may be described as community caretaking functions, totally divorced from the detection, investigation, or acquisition of evidence relating to the violation of a criminal statute.” Id. at 441 (emphasis added). The community caretaking exception was later applied in a variety of situations, including homes. Teulilo, 530 P.3d at 199 (listing cases). In Caniglia, the U.S. Supreme Court reviewed the exception and held that it generally does not extend to the home. 141 S. Ct at 1598.

In Teulilo, the Washington Supreme Court considered the defendant’s argument that Caniglia eliminated the community caretaking exception under the Fourth Amendment, and that in doing so, it overruled the related “health and safety prong of the community caretaking exception” recognized under Washington law. 530 P.3d at 200.

In a seven-justice majority opinion written by Justice Johnson, the court held that Caniglia reached only a “narrow holding” that there is no “standalone community caretaking exception” that applies to the home, and “any entry must be objectively reasonable under the Fourth Amendment.” Id. at 199. Under this narrow holding, the fact that police are acting for a community caretaking purpose is insufficient on its own to justify a warrantless search, but that would not preclude a warrantless search where other factors are present. Id. at 200-01.

The court then went on to examine its jurisprudence interpreting Wash. Const. art. I, § 7. Identifying Caniglia’s underlying concern that there be “an objectively reasonable need for entry under the Fourth Amendment,” id. at 203, the court concluded that art. I, § 7 case law is consistent with Caniglia because it requires an “underlying reason for warrantless entry into the home” related to rendering emergency aid or conducting a health and safety check. Id. If the search is a pretext for a criminal investigation, it is unreasonable and violates art. I, § 7. Id. at 202. Having clarified the constitutional parameters for warrantless searches of homes when health and safety concerns are present, the court turned to the facts before it and determined that the search was reasonable and consistent with federal and state requirements. Id. at 204.

Justice Whitener dissented in a decision joined by Justice Gordon McCloud. The dissent agreed with the majority that Washington’s community caretaking exception is consistent with Caniglia, but concluded that on the facts in this case, the search could not be justified because there was insufficient indication of a risk to health and safety to permit a warrantless search. Id. at 210 (Whitener, J., dissenting).

NOTES

1.   The court’s opinion examines the current version of the WVRA and does not address recent amendments to the WRVA, effective Jan. 1, 2024. Portugal, 530 P.3d at 998 n.1; Laws of 2024, ch. 56, § 14.

2.   This article utilizes the terminology used by the court in its opinion when referring to classes of individuals based on factors such as race or ethnicity.

3.   Notably, one week before the Washington Supreme Court issued its decision in Portugal, the United States Supreme Court decided Allen v. Milligan, 143 S. Ct. 1487 (June 8, 2023), in which it upheld its framework for examining alleged violations of section 2 of the Federal Voting Rights Act that was established in Thornburg v. Gingles, 478 U.S. 30 (1986). See Allen, 143 S. Ct. at 1503-04.

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