The Washington State Legislature passed a bill this April that issued a capital gains tax on individual state residents. Historically, Washington’s non-existent state income tax carried over into capital gains meaning Washington investors paid zero state tax on the sale of long-term stock. When the new 7% tax was first proposed, business owners and lobbyists across industries objected and sought exceptions to the tax, which would adversely affect profits when selling their companies. Yet one sector was conspicuously absent from public hearings on the tax proposal: Washington state’s new car dealers.
While some argued in the public square, the Washington State Auto Dealers Association (WSADA) worked quietly behind the scenes and successfully lobbied for an exemption. WSADA represented over 300 Washington dealerships that employ more than 21,000 people in the state. When Senate Bill 5096 passed, the measure included an exemption for the “goodwill” portion of an auto dealership’s value.
“Goodwill” refers to the value attributed to a company’s brand, name recognition, and community reputation. WSADA executive vice president Vicki Giles Fabre stated that “the large percentage of the sales price attributed to goodwill in dealership sales is unique” and argued that Washington auto dealers are already highly taxed compared to other states in the region, making this exemption necessary to avoid unfair levels of taxation.
Scott Hazlegrove, the lobbyist who led the charge for the exemption, estimated that based on sales figures from 2017 and 2018, annual “goodwill” values from dealership sales would total to $54 million on average. This meant that the new capital gains rate would cost auto dealers $3.8 million a year. The exemption Hazlegrove proposed in an email to state Senator June Robinson, the bill’s chief sponsor, was almost identical to the language that appeared in the final version of the bill.
In addition to introducing a capital gains tax, the new measure also provides an annual tax rebate for a large number of lower-income workers. Starting in 2023, the capital gains tax is expected to generate $445 million a year which will go toward early learning and child care programs.
In addition to new car dealers, several other categories of assets were exempted from the new tax, including business assets subject to depreciation or expensing, timber, livestock, and commercial fishing. The sale of family-owned small businesses (under $10 million in annual revenue) are also considered deductible.
Given their modest revenue, small businesses are especially in need of these types of tax exemptions to afford them the opportunity to grow and for the business owners to actually profit. Another often-overlooked small business benefit is the tax exemption available for qualified small business stock (QSBS). The IRS allows QSBS stockholders to exclude up to 100% of capital gains if the stock meets their requirements. Investing in small businesses that ultimately have successful exits can result in substantial benefits for both the company and its stockholders.
According to David Wright Tremaine, this tax does not apply to gains excluded from federal gross income such as QSBS under IRC § 1202.
The bill also includes a deduction for Qualified Family-Owned Small Businesses in section 8 which outlines, “a taxpayer may deduct from his or her Washington capital gains the amount of adjusted capital gain derived in the taxable year from the sale of substantially all of the fair market value of the assets of a qualified family-owned small business.”
For more information on QSBS and how to know if a company’s stock will qualify, review the criteria outlined on QSBS Expert’s website.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.