Wash. Bankers Ass'n v. State

Decision Date30 September 2021
Docket NumberNo. 98760-2,98760-2
Parties WASHINGTON BANKERS ASSOCIATION, a Washington public benefit corporation; and American Bankers Association, a District of Columbia nonprofit corporation, Respondents, v. STATE of Washington ; Department of Revenue of the State of Washington; and Vikki Smith, as Director of the Department of Revenue of the State of Washington, Appellants.
CourtWashington Supreme Court

Jeffrey Todd Even, Noah Guzzo Purcell, Washington Attorney General's Office, Po Box 40100, 1125 Washington St. Se, Olympia, WA, 98504-0100, Cameron Gordon Comfort, Charles E. Zalesky, Washington Attorney General's Office, Po Box 40123, Olympia, WA, 98504-0123, for Appellant(s).

Robert M. McKenna, Daniel J. Dunne Jr., Orrick, Herrington & Sutcliffe LLP, 701 5th Ave., Ste. 5600, Seattle, WA, 98104-7045, Eric Shumsky Orrick, Herrington & Sutcliffe LLP, 1152 15th Street Nw, Washington, DC, 20005, for Respondent(s).

Gregory J. Wong, Kymberly Kathryn Evanson, Michelle Nahyung Kim Vaughan, Pacifica Law Group LLP, 1191 2nd Ave., Ste. 2000, Seattle, WA, 98101-3404, for Amicus Curiae on behalf of Balance Our Code (SAME ATTYS ALL AMICI).


¶ 1 This case involves the constitutionality of a business and occupation (B & O) tax. In 2019, the legislature imposed an additional 1.2 percent B & O tax on financial institutions with a consolidated net income of at least $1 billion. LAWS OF 2019, ch. 420, § 2. The tax applies to any financial institution meeting this threshold regardless of whether it is physically located in Washington, and it is apportioned to income from Washington business activity. Because the tax applies equally to in- and out-of-state institutions and is limited to Washington-related income, it does not discriminate against interstate commerce. We therefore reverse the trial court and uphold the constitutionality of the tax.


¶ 2 The legislature enacted Substitute House Bill 2167 (SHB 2167) in 2019, imposing a graduated B & O tax on corporate income, specifically a 1.2 percent tax on "specified financial institutions." LAWS OF 2019, ch. 420, § 2; RCW 82.04.29004. RCW 82.04.29004(1) provides:

Beginning January 1, 2020, in addition to any other taxes imposed under this chapter, an additional tax is imposed on specified financial institutions. The additional tax is equal to the gross income of the business taxable under RCW 82.04.290(2) multiplied by the rate of 1.2 percent.

¶ 3 Prior to the enactment, financial institutions were subject to a base B & O tax rate of 1.5 percent. Former RCW 82.04.290(2) (2019). SHB 2167 increased the 1.5 percent rate to 2.7 percent. LAWS OF 2019, ch. 420, § 2. After the enactment, the increased tax rate applied to financial institutions reporting an annual net income of at least $1 billion, measured by the portion of gross income derived from Washington business activity. RCW 82.04.29004(1), (2)(e)(i).1 Any financial institution, regardless of whether it is physically located in or out of state, that meets this threshold must pay the increased tax rate. RCW 82.04.29004(2)(d).

¶ 4 Numerous states impose graduated tax rates on a corporation's income, including Alaska, Iowa, and Oregon. See ALASKA STAT. § 43.20.011(e) ; IOWA CODE § 422.33 ; OR. REV. STAT. § 317.061. In Washington, a B & O tax is an excise tax on gross income imposed for the "privilege of doing business" in this state. Ford Motor Co. v. City of Seattle , 160 Wash.2d 32, 39, 156 P.3d 185 (2007). In enacting the B & O tax act, the legislature provided for apportionment2 of income derived from intrastate and interstate activities. Crown Zellerbach Corp. v. State , 45 Wash.2d 749, 762, 278 P.2d 305 (1954). Apportionment allows states to tax the part of an interstate transaction that takes place within the state. Smith v. State , 64 Wash.2d 323, 334, 391 P.2d 718 (1964).

¶ 5 For the 1.2 percent B & O tax at issue here, lawmakers made specific findings. LAWS OF 2019, ch. 420, § 1. The legislature found that despite the economic success of Washington industry, Washington families still struggle to meet basic needs while at the same time carrying the burden of funding schools and essential services. Id . The disparity in wealth between the highest and lowest income families continues to grow, and the state's regressive tax code disproportionately affects middle and low-income earners. Id . To address these disparities, the legislature concluded that "those wealthy few who have profited the most from the recent economic expansion can contribute to the essential services and programs all Washington families need." Id .

¶ 6 RCW 82.04.29004 took effect on January 1, 2020. For the first three months of that year, the State received $34 million in revenue from 153 financial institutions, including three Washington-based taxpayers. During the 2020 legislative session, lawmakers also raised the base B & O tax rate from 1.5 percent to 1.75 percent for any businesses (with some exceptions) earning more than $1 million annually in the preceding calendar year. LAWS OF 2020, ch. 2, § 3 (codified at RCW 82.04.290(2)(a) ); see also FINAL B. REP. ON ENGROSSED SUBSTITUTE S.B. 6492, 66th Leg., Reg. Sess. (Wash. 2019), at 1-2 (legislation enacting the base B & O tax rate increase).

¶ 7 Prior to RCW 82.04.29004 ’s effective date, the Washington Bankers Association and American Bankers Association (collectively the Association) challenged the increased tax rate in a declaratory action on behalf of their members. The Association argued, among other things, that the tax violated the commerce clause of the United States Constitution. On cross motions for summary judgment, the trial court agreed with the Association that the 1.2 percent tax discriminates against out-of-state businesses both in effect and purpose in violation of the commerce clause. The court also agreed that the Association had standing to challenge the tax under the Uniform Declaratory Judgments Act (UDJA), ch. 7.24 RCW. Upon the court's denial of reconsideration, the State appealed both issues to this court. We agreed to retain and decide the case.

¶ 8 Amici curiae Service Employees International Union, Local 775, et al. submitted briefing (SEIU Am. Br.) in support of the tax.


¶ 9 The State seeks review of the trial court's decision on summary judgment that RCW 82.04.29004 violated the dormant commerce clause and that the Association has standing to sue. This court reviews a grant of summary judgment de novo and views all facts in the light most favorable to the party challenging the summary dismissal. State v. Heckel , 143 Wash.2d 824, 831-32, 24 P.3d 404 (2001) (citing Lybbert v. Grant County , 141 Wash.2d 29, 34, 1 P.3d 1124 (2000) ). A legislative act is presumed constitutional and the statute's challenger has the heavy burden to overcome that presumption. Id . at 832, 24 P.3d 404 ; see also Wash. Fed'n of State Emps. v. State , 127 Wash.2d 544, 558, 901 P.2d 1028 (1995).

I. The Dormant Commerce Clause

¶ 10 The commerce clause grants Congress the authority "[t]o regulate commerce with foreign nations, and among the several states, and with the Indian tribes." U.S. CONST. art. I, § 8, cl. 3. Implicit in this affirmative grant of power is the negative or "dormant" aspect of the clause: states intrude on this federal power when they enact laws that unduly burden interstate commerce. Heckel , 143 Wash.2d at 832, 24 P.3d 404 (citing Franks & Son, Inc. v. State , 136 Wash.2d 737, 747, 966 P.2d 1232 (1998) ).

¶ 11 The United States Supreme Court has interpreted the dormant commerce clause to protect the fluidity of interstate commerce and to prevent states from retreating into economic isolation. Okla. Tax Comm'n v. Jefferson Lines, Inc. , 514 U.S. 175, 179-80, 115 S. Ct. 1331, 131 L. Ed. 2d 261 (1995). To those ends, the Court has invalidated laws awarding benefits to intrastate interests and giving local consumers advantages over out-of-state consumers. E.g. , Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth. , 476 U.S. 573, 580, 106 S. Ct. 2080, 90 L. Ed. 2d 552 (1986). Such obvious local economic protectionism is antithetical to the dormant commerce clause—the principle that the people of the several states must sink or swim together. Camps Newfound/Owatonna, Inc. v. Town of Harrison , 520 U.S. 564, 578, 117 S. Ct. 1590, 137 L. Ed. 2d 852 (1997) ; Baldwin v. G.A.F. Seelig, Inc. , 294 U.S. 511, 523, 55 S. Ct. 497, 79 L. Ed. 1032 (1935).

¶ 12 Regulating interstate commerce is the purview of the federal government, but states retain the authority to regulate matters of local concern, including the power to impose and collect taxes on commerce related to that state. See, e.g. , Maine v. Taylor , 477 U.S. 131, 138, 106 S. Ct. 2440, 91 L. Ed. 2d 110 (1986) (the states " ‘retain authority under their general police powers to regulate matters of legitimate local concern’ " (internal quotation marks omitted) (quoting Lewis v. BT Inv. Managers, Inc. , 447 U.S. 27, 36, 100 S. Ct. 2009, 64 L. Ed. 2d 702 (1980) )); Love v. King County , 181 Wash. 462, 467-68, 44 P.2d 175 (1935) ("State government has the inherent power to tax ... subject only to constitutional and inherent limitations."); Chi. Bridge & Iron Co. v. Dep't of Revenue , 98 Wash.2d 814, 828, 659 P.2d 463 (1983) (states have " ‘a significant interest in exacting from interstate commerce its fair share of the cost of state government’ " (quoting Dep't of Revenue v. Ass'n of Wash. Stevedoring Cos. , 435 U.S. 734, 748, 98 S. Ct. 1388, 55 L. Ed. 2d 682 (1978) )).

¶ 13 The command to preserve interstate commerce, however, "has been stated more easily than its object has been attained." Jefferson Lines , 514 U.S. at 180, 115 S.Ct. 1331. State taxation has proved particularly challenging as the Court's views on the subject have evolved. See, e.g. , id . at 180-83, 115 S. Ct. 1331. In the 19th century, interstate commerce was held to be completely immune from state taxation. Leloup v....

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