It is without question that when the Washington Legislature enacted the Business & Occupation surtax on financial institutions with consolidated net income of at least one billion dollars, the Legislature had a discriminatory intent—namely, they sought to impose the additional tax on out-of-state financial institutions. However, the question remains whether there is an impermissible discriminatory effect of the surtax.

The Washington Supreme Court concluded that the surtax did not discriminate against interstate commerce because the statutory language applied equally to financial institutions located in-state and out-of-state. Wash. Bankers Ass’n v. Dep’t of Revenue, 495 P.3d 808 (Wash. 2021). Two banking associations have petitioned the U.S. Supreme Court for review. Petition for Writ of Certiorari, Wash. Bankers Ass’n v. Dep’t of Revenue, No. 21-1066 (2022).

In their Petition, the associations assert that the surtax has a discriminatory effect, which is best demonstrated by an example. Assume there is a Washington-based financial institution that has net income of $750 million—all of which is earned in Washington. Also assume that there is a Missouri-based financial institution that has net income of $1.6 billion—of which only $100 million is earned in Washington. The Washington-based financial institution would escape the surtax as its net income is less than one billion dollars, while the Missouri-based financial institution would be subject to the surtax on its Washington earnings.

Essentially, by basing whether the surtax applies on a set amount of a financial institution’s global income—not just on the financial institution’s income earned in Washington—the surtax places an impermissible burden on interstate commerce. The Petition quickly points out that this discrimination is not just theoretical. Pet. at 2. Of the 153 financial institutions that paid the surtax, only three were based in Washington—less than 2 percent. Id. Of the total surtax paid, less than 0.5 percent was paid by the Washington-based financial institutions. Id.

As the above example makes clear, the incremental tax burden is not based on a financial institution’s Washington activity. Instead, it is based on the financial institution’s activity globally. The surtax is then applied to the Washington activity. This discrimination should not be excused merely because the Legislature artfully drafted the statute in a non-facially discriminatory manner.

The Washington Legislature was clear—it wanted out-of-state financial institutions to pay more tax. Now it will be up to the U.S. Supreme Court to determine if such discrimination is permissible.