Orrick Litigation and Public Policy Team Wins Constitutional Challenge to Washington State Tax on Major Financial Institutions

May.11.2020

Backing the arguments of an Orrick litigation and public policy team, a Washington state court judge has struck down a state tax on large out-of-state financial institutions because it violates interstate commerce protections by targeting them with a higher business and occupation tax rate.

In a ruling issued from the bench on May 8 during a virtual hearing, King County Superior Court Judge Marshall Ferguson declared unconstitutional Washington state's new surtax on financial institutions that report at least $1 billion in global consolidated net income, concluding it violated the Commerce Clause in both purpose and effect. The tax statute, which increased by 80 percent the business and occupation tax rates on these banks doing business in Washington compared to the rate paid by local institutions, effectively targeted approximately 29 major financial institutions heavily engaged in interstate and global commerce that are not chartered or headquartered in Washington state. The tax was expected to raise more than $100 million annually.

Led by partners Dan Dunne and Rob McKenna, Orrick challenged the statute on behalf of the American Bankers Association (ABA) and the Washington Bankers Association (WBA). After two and a half hours of oral argument, the judge rejected the state's argument that the net income "trigger" for the surtax on banks was a facially neutral "net income" formula, regardless of geographic location, and therefore not discriminatory under Commerce Clause precedent.

Rob, a member of Orrick's Public Policy group, successfully argued that the ABA and WBA had standing to challenge the tax's constitutionality, while Dan, a member of our global litigation practice, persuaded the judge to invalidate the statute because it interferes with the ability of these financial institutions to conduct interstate commerce.

The case has major implications for large financial institutions that do business in the state, a number of which filed declarations in support of the plaintiffs. The judge's decision is being closely watched by the industry as other state governments weigh tax legislation to plug anticipated budget deficits. Law360 covered the outcome.

In addition to Dan and Rob, the Orrick team included associates Christine Hanley and Emily Luken.