SeeSALT Blog
The fate of Washington’s Business & Occupation (“B&O”) surtax on large financial institutions remains uncertain as the state’s highest court has not yet decided whether to grant direct review or transfer the state’s appeal to the Washington Court of Appeals. On July 13, 2020, the State of Washington filed a direct appeal in the Washington Supreme Court seeking to overturn a trial court decision that struck down the state’s recently enacted surtax on large out-of-state financial institutions. Wash. Bankers Ass’n v. State, No. 19-2-29262-8 SEA (Wash. Super. Ct. May 15, 2020), appeal docketed, No. 98760-2 (Wash. July 13, 2020). On July 27, 2020, the state filed its statement of grounds for direct review with the Washington Supreme Court and on August 24, 2020, the respondents, the Washington Bankers Association and American Bankers Association (collectively, the “Associations”) filed their answer.
The state’s direct appeal is the latest development in a dispute over the legality of a B&O tax statute that, effective January 1, 2020, imposed a 1.2% surtax on “specified financial institutions” with consolidated annual net income of $1 billion or more. In November 2019, the Associations challenged the statute on the grounds that it discriminates against interstate commerce in violation of the Commerce Clause by imposing a higher tax rate on out-of-state financial institutions than on in-state financial institutions. The trial court held that the statute, while facially neutral, violates the dormant Commerce Clause because it discriminates against interstate commerce in purpose and effect.
The state appealed directly to the Washington Supreme Court and, on July 27, 2020, filed a statement of grounds explaining why, in the state’s view, direct review is warranted. The state urged the court to reverse the trial court for two reasons: (1) the trial court erroneously determined that the surtax is per se invalid because it discriminates against interstate commerce in purpose and effect; and (2) the Associations lack standing under Washington’s Uniform Declaratory Judgments Act to seek declaratory relief on behalf of their members. See Wash. Bankers Ass’n v. State, No. 98760-2, App. Stmt. of Grounds for Direct Rev. (filed July 27, 2020).
The state’s appeal is primarily focused on the Commerce Clause, which grants Congress the power to regulate interstate commerce, according to the July 27, 2020 filing. The U.S. Supreme Court has long-interpreted this grant of authority as an implicit (or “dormant”) restraint on states’ ability to discriminate against or burden interstate commerce. E.g., Oregon Waste Sys., Inc. v. Dep’t of Env’t Quality, 511 U.S. 93, 98 (1994). When confronted with a Commerce Clause discrimination claim, a court must first determine whether the law at issue “regulates evenhandedly with only ‘incidental’ effects on interstate commerce, or discriminates against interstate commerce.” Id. at 99. For this purpose, “discrimination” means differential treatment that benefits in-state economic interests at the expense of out-of-state economic interests. Id. If a restriction on commerce is discriminatory it is virtually per se invalid, meaning it will be invalidated, unless the state can show that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278 (1988). However, if a law is not discriminatory and merely has incidental effects on interstate commerce, the court must uphold the law unless it can be shown that the law imposes a burden on interstate commerce that is “clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
The state claims that the B&O surtax does not discriminate against interstate commerce because the surtax does not apply based on where a financial institution is physically headquartered. Instead, the state contends, the application of the surtax depends on two facially-neutral factors: (1) whether the financial institution meets the definition of a “specified financial institution”; and (2) whether the financial institution conducts in-state business activities subject to the B&O tax. According to the state, that the surtax largely falls on out-of-state taxpayers is of no consequence under the Commerce Clause.
The state also asserts that the lower court erred by permitting the Associations’ challenge to proceed as they lacked associational standing to seek declaratory relief on behalf of their members. The state argues that any challenge to the state’s excise tax laws must be brought by an aggrieved taxpayer pursuant to the state’s existing procedures for challenging tax assessments, and that body of law does not provide for an exception for “associations of potentially aggrieved taxpayers.” See App. Stmt. of Grounds for Direct Rev. at 14.
In their August 24, 2020 answer, the Associations assert that the state failed to establish that: (1) the trial court’s decision presents a fundamental issue of broad public import to warrant review by the Washington Supreme Court; and (2) the appeal contains any novel issues of state or federal law or evidentiary issues of fact regarding discrimination in purpose or effect against interstate commerce. See Wash. Bankers Ass’n v. State, No. 98760-2, Resp. Answer to App. Stmt. of Grounds for Direct Rev. (filed August 24, 2020 ).
According to the court’s briefing schedule, the state’s opening brief is due November 12, 2020, the Association’s response brief is due December 14, 2020 and the state’s reply brief is due January 13, 2021. We will continue to monitor the appeal and report on any significant developments.