When is an revenue tax an excise tax? And for that matter, what precisely is an excise tax? The destiny of Washington’s capital features tax, at the moment in litigation, rests at the very least partly on the reply to those questions.
By the use of background, Washington’s supreme courtroom has repeatedly held that the state’s structure functionally prohibits graduated revenue taxation. (It’s just a little extra difficult than that, however suffice it to say, if the brand new capital features tax is set to be an revenue tax, then the courts can’t uphold it with out overturning nearly a century of precedent relating to a transparent constitutional constraint.) To get round this restriction, lawmakers handed a tax on excessive earners’ capital features revenue that is named an excise tax on the privilege of incomes capital features, hoping that the verbiage makes a distinction.
In a movement for abstract judgment, plaintiffs difficult the brand new regulation argue that (1) it’s clearly an revenue tax and (2) even when it had been an excise tax, it might be an unconstitutionally imposed one—which, if something, additional factors us within the path of calling it an revenue tax. The arguments are sound, however typically a authorized transient could be quick on explanations that assist get lay readers from Level A to Level B. So let’s flesh these out a bit, as a result of it’s an fascinating query with implications past simply Washington and its standalone capital features tax.
What’s an excise tax? We might simply look to the dictionary, with Webster’s defining an excise tax as “a tax on sure issues which might be made, bought, or used inside a rustic.” This appears roughly appropriate, particularly after we contemplate essentially the most distinguished excise taxes, on issues like gas, alcohol, tobacco, and airline tickets. The definition has to stretch just a little, with “used” taking an expansive sufficient that means to cowl actual property switch, inspection charges, the supply of medical health insurance, and even mineral extraction, if you wish to classify severance taxes as a category of excise tax.
And in frequent parlance it might additionally slender in one other approach, placing particular emphasis on “sure issues” by specializing in taxes on very specific issues, relatively than broader-based consumption taxes just like the gross sales tax. From a authorized standpoint, nevertheless, it might be simple sufficient to characterize the gross sales tax as a “basic excise tax” even when this terminology just isn’t very helpful in most circumstances, the place excise taxes usually tend to be known as “particular gross sales taxes” than gross sales taxes are to be thought of “basic excise taxes.” (See right here for extra on what constitutes an excise tax, and their conventional rationales.)
So the dictionary is principally proper however maybe not ample to tell our understanding of the authorized distinction between an excise tax and an revenue tax. What prevents us from referring to an excise tax on revenue?
Basically, excise taxes are oblique taxes whereas revenue taxes are direct taxes. That distinction is why the U.S. Supreme Courtroom struck down early makes an attempt to impose a federal revenue tax earlier than ratification of the sixteenth Modification, since, previous to that constitutional change, all direct taxes needed to be apportioned among the many states, which was an insuperable barrier to revenue taxation.
The revenue tax is a direct tax as a result of it falls instantly on folks. The authorized incidence is on specific folks, and tax legal responsibility is assessed per individual, not per sale or exercise. Whereas the financial incidence of excise taxes can also be borne by folks (what various is there?), the authorized incidence relies on the particulars of a transaction or exercise, and it’s in the end not calculated on a private foundation. In follow, which means that excise taxes will probably be imposed as particular taxes (primarily based on quantity, e.g., gallons of gasoline or packs of cigarettes) or as advert valorem taxes (primarily based on value, e.g., a tax on the retail value of marijuana).
Take into account the fuel tax, as an illustration. There isn’t a query that you just “pay” the fuel tax while you gas up, despite the fact that the service station remits the tax in your behalf. However the authorities just isn’t imposing a tax on you particularly, and the tax is owed primarily based on the place the gas is bought or used, not primarily based on the gas’s final “proprietor.” You don’t file a tax return on the finish of the yr detailing how a lot gas you bought and paying accordingly—and even if you happen to did (a automobile miles traveled tax, VMT, can be considerably extra aggregated, as a result of it’s on an exercise relatively than a transaction), the taxable occasion can be the exercise, not the individual. If a Washingtonian flew to California, picked up a rental automobile, and drove round San Diego, there’s no approach that Washington might say that the driving force owes the state VMT taxes just because they’re a Washington resident, because the taxable exercise has no nexus with Washington despite the fact that the individual does.
That is key to one of many plaintiffs’ arguments, one I may need distinguished a bit greater than they do. For states to tax somebody or one thing, they will need to have nexus: ample connections to be allowed to impose a tax. With direct taxes, the nexus is with the individual. At the very least so far as nexus is anxious, a state can impose an revenue tax on a resident’s out-of-state revenue, as a result of with a direct tax, the nexus query begins with the individual. (There are extra constraints associated to truthful apportionment and relatedness to state companies; nexus is simply the brink query.) With an oblique tax, nevertheless, nexus attaches to the transaction or exercise. When you purchase fuel in Oregon, Washington has no declare on that transaction even if you happen to’re a Washington resident.
Washington’s capital features tax is designed as a direct tax, not an oblique one. It taxes out-of-state earnings and out-of-state exercise. If we settle for the state’s argument that it’s an excise tax, then it’s in all probability an unconstitutional one, as a result of it fails to satisfy the nexus necessities established in circumstances like Complete Auto Transit v. Brady. If, however, it’s a direct tax, then we have now nexus—however we’ve additionally acknowledged that it’s an revenue tax, which is what Washington can’t afford to acknowledge.
In fact, it is an revenue tax. Let’s return to that distinction between an oblique tax on issues made, bought, or used—or, put one other approach, on actions and transactions—and a direct tax, which might be on a person’s earnings or possessions. It’s attainable to impose an excise tax on the actions surrounding capital features—unhealthy coverage, however attainable. If Washington had chosen to levy a tax on gross sales of shares or bonds, such a inventory switch tax can be an excise tax, as a result of it’s primarily based on the transaction or exercise. Washington’s tax, nevertheless, just isn’t primarily based on the variety of transactions, or on any exercise, however on the web capital features revenue earned over the course of the yr. The article of the tax is clearly the individual, with a give attention to their mixture revenue. It’s a direct tax. It’s actually denominated in revenue. It’s, in brief, an revenue tax.
And in Washington, that must be an finish to it.