Addressing cross-motions for summary judgment from the Seattle Metropolitan Chamber of Commerce and the City of Seattle, the Superior Court of Washington for King County held that the City’s new payroll expense tax, which applies to businesses that spend $7 million or more on payroll in Seattle, is constitutionally permissible.
On July 6, 2020, the City passed Ordinance No. 126108, imposing a payroll expense tax applicable to certain entities engaging in business within Seattle. The tax is based on compensation paid to employees in Seattle. Businesses with payroll expense in the prior calendar year of less than $7 million – as well as a variety of specifically-named types of businesses – are exempt. In response to the ordinance, the Seattle Chamber brought an action in court alleging the tax violated the state constitution.
Before the Superior Court, the City asserted that the payroll expense tax is a constitutionally permissible excise tax on the privilege of doing business, while the Seattle Chamber argued that the tax is a tax on employers’ payment of compensation to employees and was therefore an impermissible tax on an employee’s act of earning a living. Highlighting the facts that the tax is levied on businesses based on their aggregate payroll expense and businesses are expressly prohibited from passing the expense of the tax on to employees in the form of wage deductions, the Court concluded that there is no burden on employees. Accordingly, the Court granted the City’s motion for summary judgment, ruling as a matter of law that the City’s payroll expense tax is a valid excise tax on business under the taxing authority granted to cities by the Washington State Constitution and statutes.