July 8, 2020

Volume X, Number 190

July 07, 2020

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July 06, 2020

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Washington Surtax on “Big Banks” Struck Down as Unconstitutional

On May 8, Washington’s 1.2% surtax on “specified financial institutions” (banks with at least $1 billion a year in net revenue) was struck down by a King County Superior Court judge. Judge Marshall Ferguson ruled that the tax, which is imposed on top of all other taxes, violates the Commerce Clause of the US Constitution by discriminating against out-of-state banks in both purpose and effect.

In their briefs, attorneys for the Washington Bankers Association and American Bankers Association explained that an out-of-state bank would pay a much higher tax rate (and be at a competitive disadvantage) compared to an in-state bank because its global revenue is sufficient to trigger owing the surtax. The associations presented evidence that every bank meeting the definition of “specified financial institution” was an out-of-state bank, and that no in-state bank met the definition. Further, they pointed to statements by legislators appearing to show an intent to promote “local banks” and address a national wealth disparity and regressive taxation.

The state responded that the surtax is neutral on its face, applying to all businesses with $1 billion regardless of their headquarters location, and that none of the funds were used to subsidize or reduce tax burdens on in-state banks. They also argued that the tax should be presumed constitutional and rejected the plaintiffs’ standing to sue as associations. The actual effect of discrimination seemed especially persuasive to Judge Ferguson, who asked counsel for the state, “If the tax so clearly falls on non-Washington businesses, is that not a discriminatory effect?”

The state may appeal the case, Washington Bankers Association et al. v. State of Washington et al., No. 19-2-29262-8, to the Washington Supreme Court.

Practice Note: The structure of the tax struck down in this case, a surtax imposed only if the company’s global income exceeds a high threshold, has been on the rise. San Francisco’s gross receipts tax on businesses with over $50 million in receipts, Portland’s clean energy surcharge on businesses with over $1 billion in national gross revenue, and Maryland’s proposed digital advertising tax based on a sliding scale of global revenue all come to mind. This ruling may be the first sign that judges will not be afraid to subject such taxes to scrutiny under Commerce Clause analysis.

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 139

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About this Author

Kathleen Quinn, McDermott Will, State Tax Matters Lawyer, Corporate Development Attorney
Associate

Kathleen Quinn focuses her practice on state and local tax matters. She has represented corporations and individuals in New York State and New York City income tax controversies. She also has advised clients on the state and local consequences of corporate restructurings and other business transactions.

Previously, Kathleen worked at a Big Four accounting firm, where her practice focused exclusively on state and local tax.

(212) 547-5718
Alysse McLoughlin attorney state and local tax matters, financial services companies MCDermott Will New York
Partner

Alysse McLoughlin is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office.  She focuses her practice on state and local tax matters, with particular skill working with financial services companies.

Alysse was most recently the head of state tax at Barclays Capital, where she was responsible for all including income, franchise, sales and use, and excise tax issues.  Her responsibilities included establishment of state tax return filing positions and reserves, participation in the financial statement process, and the handling of all state tax audits.  She has also held positions as state tax counsel at Lehman Brothers and attorney in the chief counsel division of the Internal Revenue Services.

Alysse received her LL.M. from New York University School of Law and her J.D. from Fordham University School of Law.  She earned her B.A. from the State University of New York at Binghamton.

Alysse is admitted to practice in New York

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Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

202-756-8180