By Ryan Wynne

On June 8, Whatcom County governments received some shocking news that seemed to come out of nowhere. They were told, in the form of a press release by the Washington State Department of Revenue (DOR), that British Columbia and Ontario residents would become eligible for non-resident sales tax exemption on July 1. That’s about a month’s notice.

“Frankly, this whole thing didn’t come on our radar until mid-April,” said Mike Gowrylow, DOR spokesperson.

Gowrylow said when employees in the department became aware British Columbia and Ontario would be changing their tax laws, they realized that based on RCW 82.08.0273, residents in those provinces would soon qualify for the exemption, just like residents of other Canadian provinces and U.S. states and possessions that do not impose a retail sales tax or use tax of three percent or more.

“Where we dropped the ball is in not realizing the implications to Whatcom County,” Gowrylow said.

Gowrylow said the exemption was originally intended to help Washington retailers that compete with states and provinces that charge little-to-no sales tax. He said the DOR hadn’t intended to keep the decision from local governments, but while local governments should have been given more time to prepare for the change, he doesn’t think an earlier notification would have changed the DOR’s interpretation of the law.

British Columbia and Ontario are adopting a harmonized sales tax in tandem with the Canadian federal government beginning July 1. Gowrylow said the new tax is technically a value-added tax and not a sales tax.

Ken Oplinger, president of the Bellingham/Whatcom Chamber of Commerce, said DOR staff that reviewed the law made assumptions that are inaccurate because there will be no change to what customers in British Columbia pay at the point of sale.

The DOR is working with city attorneys to get the issue before a judge who could overturn the DOR’s opinion or put the exemption on hold, but they weren’t given much notice.

John Carter, finance director for the city of Bellingham, said the city is planning for the worst.

“We don’t have any reason to believe this will not be implemented next week,” Carter said.

He said the exemption would definitely have implications for the city’s budget, but it’s impossible to measure just what those implications will be.

For budgeting purposes, the city is planning for an annual loss of between $800,000 and $1 million. He said increased revenue from B&O taxes, which are charged based on gross sales, would slightly offset the loss of sales tax revenue. However, it would require a significant increase in sales to completely make up the loss, Carter said.

Oplinger said he doesn’t think sales will increase enough to offset losses.

In order for increased sales to offset sales tax losses, Oplinger said there would have to be the same amount of border traffic seen in the early ’90s, and that won’t happen.

After eight years of low crossing numbers, he said border traffic is starting to increase for the first time since 9/11. In May of 2009, 500,000 people crossed and this May, that number increased to 700,000, he said, which is the first year-over-year increase since 9/11.

“You are going to see an increase, but it’s not going to be the kind of increase you will need to offset the lost sales taxes,” Oplinger said.

Oplinger is afraid the city is running out of places to make cuts and that this exemption could lead to a decision to increase the B&O tax.

Carter said that while a B&O tax increase is a theoretical possibility, nobody at City Hall is talking about it.

But Oplinger is right, the exemption comes as Bellingham already faces losses in tax revenue. Budget development season is under way in Bellingham, and a June 11 press release by the city said another $1.5 million may need to be pulled out of the city’s shrinking reserve fund this year.

“Despite our citywide cost cutting and our hopes for an improved financial picture, as we approach midyear our financial challenges continue,” Bellingham Mayor Dan Pike said in the release.

Still, Carter said the exemption would be an even bigger blow to the county government’s budget and that the Whatcom Transportation Authority (WTA) would suffer an even greater loss because both, especially the WTA, rely more heavily on sales tax revenue than Bellingham does.

Gowrylow emphasized that the exemption is optional — retailers don’t have to offer it. But Oplinger said they likely will feel they need to in order to stay competitive.

The exemption applies only to tangible personal property and does not apply to lodging, meals, or other retail services that are provided in the state. Information for retailers who choose to offer the exemption can be found at dor.wa.gov/nonresidents/.