A Nov. 30 order from the Washington State Supreme Court is injecting confusion into the controversy surrounding a capital gains tax approved by the 2021 Legislature.

The state’s high court said the Department of Revenue may begin collecting the tax in 2023 pending its own future ruling in a case that challenges the constitutionality of levying an excise tax on certain capital gains exceeding $250,000 or more.

And that is where the confusion comes in.

The tax takes effect Jan. 1, 2023, with the first payment due on or before April 18. The court hears the case on Jan. 26.

It is not clear if the court will rule on the constitutionality question before the April payment deadline, meaning the state could be compelled to refund payments if the tax is eventually overturned.

The Nov. 30 ruling in Chris Quinn v. State of Washington concerned whether the state could collect the tax after a Douglas County Superior Court judge said it was an unconstitutional graduated income tax and not an excise tax.

In a unanimous decision, the court said it could start collections pending an appeal by the state.

At the time, state Attorney General Bob Ferguson said there is a “great deal at stake” in the case and pledged to defend the law, enacted by elected representatives in Olympia and signed by the governor.

“All the parties recognize this case will ultimately be decided by the state Supreme Court,” he said.

The 2021 Legislature passed ESSB 5096 creating a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests and other investments and tangible assets. It applies only to individuals after a deduction of $250,000. There are exceptions for real estate and certain other investments.

Jason Mercier, the Kennewick-based director of government reform for the Washington Policy Center, has been a dogged opponent of the tax whose research forms the basis for the legal challenge in Douglas County.

Essentially, it argues that despite characterizing the tax as an excise tax on activities, capital gains tax is an income tax.

WPC and opponents maintain graduated income taxes run afoul of a century of Washington case law and more than 10 statewide ballot requests seeing to establish a statewide income tax, typically to tame fluctuations in state sales tax and property tax revenue.

Washington voters have rejected income taxes in any form and by wide margins every time it has gone to a ballot.

Mercier amassed testimony from other states and the Internal Revenue Service that they treat capital gains as income for tax purposes.

“Every other state with a capital gains tax clearly acknowledges that it is an income tax,” WPC argues.

Creating an excise tax on capital gains could affect Washington taxpayers’ federal income taxes.

Excise taxes are not deductible on federal returns, but income taxes are. The policy center cautions that the IRS may not allow Washington residents to deduct capital gains taxes, putting the state at a competitive disadvantage.

That is a theme taken up by U.S. Rep. Dan Newhouse, R-Sunnyside, who testified in opposition to the bill in Olympia in 2021. He slammed it again after the Nov. 30 ruling allowed collections to begin.

“I am deeply disappointed in the governor’s continued destructive attempts to raise taxes on Washingtonians and take away one of our state’s best competitive advantages to attract new business,” he said in a statement.

Newhouse predicted “chaos” if the Supreme Court decides the capital gains tax is unconstitutional and the money must be refunded.

Go to bit.ly/DORCapitalGainsExplainer.