Chamber of Commerce files legal challenge to Seattle payroll tax

This morning the Seattle Metropolitan Chamber of Commerce announced that it has filed a lawsuit in King County Superior Court arguing that the “Jump Start” payroll tax passed by the Seattle City Council last summer violates the Washington State Constitution.

 

The lawsuit invokes state Supreme Court case law, Cary vs. City of Bellingham, which held that earning a living is a right, not a privilege. This is a critical distinction because excise taxes may only be imposed on privileges, not on fundamental rights. The Jump Start payroll tax legislation does not specifically label itself as an excise tax, but it is assumed to be so. The lawsuit argues that a payroll tax on compensation is in effect a tax on the right to earn a living, which would violate the precedent set in Cary.

This is a fairly weak argument, for one simple reason: the tax is paid by employers, not employees. In fact, the payroll tax legislation explicitly prohibits employers from making deductions from employees’ compensation for the purposes of paying the tax. Cary vs. Bellingham is fundamentally about an employee’s right to earn a living, not about employers’ rights or privileges, and it ruled that the government couldn’t tax employees — it didn’t say anything about taxing employers. So for the purposes of this case, the legal question is really: is having paid employees a right or a privilege for a business?

A much stronger legal argument for challenging the payroll tax is that it creates a separate tier with a higher tax rate for just one company: Amazon. This could be seen as legislatively singling it out for punitive action. However, there is only one company that has standing to sue the city for that issue: again, Amazon. And to do so it would need to publicly reveal details of its Seattle payroll, which so far it has been unwilling to do, in order to prove that it is subject to the higher tax rate.

That brings up a larger issue with this case: if it proceeds to the discovery phase, the Chamber of Commerce will be forced to disclose to the city detailed information on the payrolls of its member companies who are subject to the payroll tax. Currently the city only has high-level, anonymized information on Seattle companies’ payroll through the state Department of Revenue, which collects B&O taxes. However, there’s a good chance that it will not get that far: the factual issues are not really in dispute here, so the case will likely be decided by the judge through motions for summary judgment on the legal issues alone.

 

 


In the meantime, the city has already issued draft Director’s Rules for implementation of the payroll tax. Among other issues, those rules delve into the details of whether a specific employee’s wages are subject to the tax. In a recent hearing, companies raised issues with the interpretation of where a given employee is “primarily assigned,” in particular during the COVID pandemic when an employee may be officially assigned to an office outside of the city (say one of Microsoft’s or Amazon’s offices in Bellevue or Redmond) but has been working from home in Seattle and will continue to do so for several months. The payroll tax legislation anticipates employees without a physical office who primarily work from home, as well as ones who live in Seattle but primarily work at an office outside of the city, but is less clear on what the tax liability is for employees who are assigned to an office outside the city but are stuck working from home for the time being.

 


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2 comments

  1. The City of Seattle is waging a financial war against City businesses. I wonder at what point will Jeff Bezos admit he made a mistake betting on Seattle? He could always move to Texas like Elon Musk has started to do. Here is a prediction, which is really more of a guarantee: As soon as the draft Director’s rules are finalized, the smart people will figure out how to get around the senseless web of regulations. Then the Progressives will do what they always do, which is to pass rules upon rules upon rules until more commerce grinds to a halt. Say hello to the next Argentina-Venezuela-Cuba. Steve Willie.

    1. Bezos lives across the lake in Medina, not in Seattle. And he has already decided to stop betting on Seattle — he is quietly shifting Amazon’s Puget Sound hiring to Bellevue. He probably won’t do a lot of large moves of employees out of the city, but will likely shrink it through attrition over time.

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