• Washington State Supreme Court Rules in Favor of Taxpayers Contesting Washington's Estate Taxes
  • February 24, 2005
  • Law Firm: Perkins Coie LLP - Seattle Office
  • On February 3, 2005, in Estate of Hemphill, the Supreme Court of Washington issued a unanimous and momentous ruling in favor of the taxpayer in the class action lawsuit against the State of Washington Department of Revenue relating to the payment of Washington estate tax. By way of background, in 1981 Washington residents passed Initiative 402, which ended Washington's former inheritance tax and created a new estate tax "restricted to the federal estate tax credit." That meant the state could collect up to the amount the federal law allowed as a credit against the state estate tax. This was known as the "pickup" tax. In 2001 the federal estate tax law changed and phased out the federal credit for state estate taxes paid on the estates of individuals dying after December 31, 2001. The Washington Department of Revenue, however, continued to collect the credit amount as if the federal law had not changed.

    As a result, a class action lawsuit was brought on behalf of Washington State taxpayers requesting a refund of amounts paid over and above the amount that would have been due if the Washington State estate tax was equivalent to the credit for state death taxes under current federal law. The plaintiffs argued that the amount of state tax should equal the amount of the federal credit allowed for state estate tax, or the "pickup" amount. In its ruling in Hemphill, the Washington Supreme Court held that any amount of a state estate tax not fully offset by a current federal credit is an invalid tax under current Washington law. Without legislative intervention, the outcome of the court's decision will require the State of Washington to make refunds to the estates of certain taxpayers who died after December 31, 2001 and paid state estate tax and appears to prohibit the imposition of state estate taxes for taxpayers who die after January 1, 2005, when the federal state estate tax credit is fully phased out.

    The court stated:

    In this case, the original initiative creating this tax statute, our prior interpretation of the statute, and the current wording of the statute show that Washington still has a "pickup" tax based on current federal law. Any amount of a state estate tax not fully absorbed by a current federal credit is an invalid independent tax.

    We expect significant discussion of this matter in the legislature and news media. Information on the process and timing of collecting refunds will be forthcoming, and we will keep our clients whose estates are impacted by this ruling advised and will monitor the situation on an ongoing basis. Undoubtedly the ruling will result in further discussion of new tax legislation to replace the significant loss of state revenue, estimated at in excess of $100 million a year going forward.