King County Superior Court Judge Rejects Seattle Income Tax; The City Will Appeal the Ruling

Just before Thanksgiving, King County Superior Court Judge John R. Ruhl decisively ruled that the city’s income tax was illegal under state law. City officials were not thankful and pledge to appeal the decision to the state Supreme Court. Many local taxpayers, however, likely viewed the decision with gratitude. 

The 27-page ruling is worth reading in full. Although the judge’s decision came quickly after the November 17 hearing, Judge Ruhl’s opinion carefully dissects the arguments and uniformly comes down on the side of those challenging the tax. He decided the case on statutory grounds. 

To summarize, the Defendants’ motions will be denied and the Plaintiffs’ motions will be granted because the City’s tax is not an “excise tax” and thus is not authorized by RCW 35A.82.020 and RCW 35.22.280(32); the City’s tax is not authorized by
RCW 35A.11.020; the City’s tax is not otherwise authorized by any other statute; and RCW 35.65.030 prohibits the tax.

Bloomberg’s report on the hearing cited the plaintiffs’ argument against the city’s excise tax stance. 

Plaintiffs’ attorney Scott M. Edwards of Lane Powell’s Seattle office contended that the tax is imposed not on total income, but on net income, which is expressly prohibited by state statute, relying on RCW 36.65.030, which says that a city “shall not levy a tax on net income.”

“There are only two types of income, gross income or net income,” Edwards told the court. “Every one of the lines that is a component part of line 22 is a net number.”

“The city has no statutory authority to impose an income tax,” Edwards told the court. “Their authority is limited to excise taxes and an income tax is not an excise tax. Not only do they not have the authority they need to impose the tax, they are expressly prohibited. This is a tax on net income. There is no such creature as total income. It’s either gross or net. This is net.”

The Seattle Times reports,

The city had argued that its tax would apply to “total income” instead of net. The city also described it as an excise tax, imposed on those who live in Seattle in the same way excise taxes are imposed on companies that do business in the city.

The judge disagreed.

“ … the City’s tax, which is labeled ‘Income Tax,’ is exactly that,” he wrote. “It cannot be restyled as an ‘excise tax’ on the … ‘privileges’ of receiving revenue in Seattle or choosing to live in Seattle.”

GeekWire reports,

Following Wednesday’s ruling, Seattle Mayor Tim Burgess issued the following statement:

In order to build a more just and equitable society for all, we need a serious overhaul of our state’s tax structure. We know some argue against any income taxes at all, but we would point out that we already have a corporate income tax in this state — through the business and occupation tax. But we need more progressive tax sources, not fewer. The Seattle income tax was an attempt to move toward this goal, and we are hopeful that it will be upheld on appeal.

 As the Seattle Times writes, 

At the Supreme Court, Seattle officials hope to attack the long-standing interpretation that income taxes are property taxes, opening the door to what proponents see as a fairer tax system statewide.

Not over, but a good first decision for those challenging the income tax.