Seattle payroll tax upheld in Superior Court ruling

This afternoon, King County Superior Court Judge Mary Roberts ruled in favor of the City of Seattle, upholding as “constitutionally permissible” the city’s payroll tax enacted last summer and dismissing a lawsuit challenging it.

The legal challenge to the tax ordinance, brought by the Seattle Metropolitan Chamber of Commerce, argued that it was an impermissible tax on employees’ right to earn a living, which the state Supreme Court found unconstitutional in Cary vs. Bellingham. The judge agreed with the City of Seattle that Cary didn’t apply here, since the tax was levied on employers, not employees, and barred employers from passing it through to their employees.

This was an important but expected win for the City — the Chamber’s case was not strong. They are likely to appeal, though in a statement this evening simply said, “we are working with our legal team to explore next steps.” The appeal will stretch the case out for several months, but at the appeals court level the result is unlikely to be different. However, while this was the first legal challenge to the payroll tax, it is unlikely to be the last. It was a “facial” challenge, alleging that the tax ordinance was illegal in any circumstances. Once it begins to be collected, there will be “as applied” challenges by employers that argue it is illegal in their specific cases. One of those will probably be an employer with no offices in Seattle but that has employees who live in Seattle and work remotely from home at least part of the time, and are required to pay the payroll tax on those employees; the Council amended the tax ordinance earlier this year to try to avoid such a challenge, but the courts will have the final say as to whether that was sufficient. Another challenge is likely to come from Amazon, who will be the sole company paying the top-tier payroll tax rate and thus has a good case that they are being subject to punitive taxation. But since collection won’t start until next year, we will have to wait for those cases to be filed.

In the meantime, this provides a bit of security for city officials who have built this year’s budget assuming robust payroll tax revenues. The rug was not pulled out from under them today.

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