The City of Seattle’s recently enacted payroll tax was upheld by a King County Superior Court judge on June 4. The Greater Seattle Chamber of Commerce had challenged the payroll tax as an unconstitutional tax on employees’ right to earn wages. Judge Roberts rejected the Chamber’s arguments and held that the payroll tax was a valid excise tax on the employer’s privilege of doing business in Seattle. The Chamber is currently working with its legal team to explore next steps and has not stated whether it will appeal the ruling.
The payroll tax, referred to as JumpStart Seattle, was passed in July 2020. The tax was imposed on companies doing business in Seattle with payrolls over $7 million a year. The tax is progressive and imposes tiered rates based on the company’s total payroll and the amount of compensation paid to employees earning above $150,000 per year. Companies cannot pass the tax along to employees through payroll deductions. The tax went into effect January 1, 2021, but companies do not have to pay the tax until January 2022. We discussed this topic in our previous legal updates here and here.
The Chamber argued that the tax was unconstitutional because it was a tax on the payment of wages in Seattle, not the privilege of doing business. The Chamber relied heavily on the Washington Supreme Court’s decision in Cary v. City of Bellingham, 41 Wn.2d 468 (1952). In that case, the Washington Supreme Court struck down a tax imposed on all employees’ wages. The ordinance in Cary required “that all employees within the City of Bellingham secure a yearly license.” The court held that “[t]he right to earn a living by working for wages is not a ‘substantive privilege granted or permitted by the state.’”
In rejecting the Chamber’s arguments, Judge Roberts noted that the JumpStart Seattle tax was different from the tax in Cary because it was imposed on businesses, not employees, and the businesses were prohibited from passing the expense of the tax on to employees. For these reasons, Judge Roberts held that the tax was a valid excise tax on businesses and that there was no unconstitutional burden on employees’ “right to earn a living by working for wages.”
If you would like to know more about the Seattle payroll tax, how it might affect your business, or options to plan for it, please contact one of our Washington tax partners: Scott Edwards, firstname.lastname@example.org 206.223.7010, or Brett Durbin, email@example.com, 206.223.7041.
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