Judge issues restraining order against B.C. tax exemption

Retailers offering exemption may end up paying lost taxes

The Bellingham Business Journal

A Skagit County Superior Court judge issued a temporary restraining order June 30 barring the Department of Revenue (DOR) from advising Washington retailers that British Columbia residents will be able to buy goods in Washington without paying sales tax beginning July 1.

Judge Susan Cook directed the Washington State DOR to notify retailers that a legal challenge has been made to the department’s opinion and that “the outcome of the pending litigation is unknown and that tax liability of retailers may be affected,” according to a DOR press release.

The order is directed only at the DOR, but it warns retailers that they may be liable for any unpaid tax if at some future date the court determines that B.C. residents should not have been afforded the nonresident sales tax exemption available to states and provinces with a sales tax of less than 3 percent, the release stated.

The order was in response to an action filed by the city of Bellingham and Whatcom County in Skagit County Superior Court, challenging a recent state ruling that allows Canadian shoppers to forgo paying sales taxes on some purchases in Washington.

The city partnered with Whatcom County Prosecuting Attorney Dave McEachran and Executive Pete Kremen in this effort, who are all united in their stance that the statute in question provides no exemption for Canadian shoppers, according to a press release issued by the city.

“While our community welcomes Canadian shoppers, the loss of sales tax revenue, if the ruling prevails, presents significant challenges to already-financially-strapped local governments,” said Bellingham Mayor Dan Pike in the release.

While the opportunity for savings may attract more B.C. shoppers to our communities, Whatcom County officials said the increase in total sales, and subsequent increase in B&O taxes collected, would not make up for the loss of sales tax revenues to local governments if the DOR ruling prevails.

Ken Oplinger, president/CEO of  Bellingham/Whatcom Chamber of Commerce & Industry, agreed the impact would be widely felt.

“While some businesses will see increased traffic from this change, there is no doubt that the community as a whole will suffer from the revenue loss to the cities, Whatcom County and the Whatcom Transportation Authority,” Oplinger said in the city’s release. “The increased paperwork and additional likelihood of municipal tax increases due to this revenue loss will mean that every business in our community will pay more for this state-mandated giveaway of local money.”

City and county officials said retailers should wait for further instructions from the DOR before changing any sales tax collection practices. They said the safest route for local businesses may be to provide no exemptions until the legal process runs its course.

State DOR and Attorney General’s Office officials said earlier this month that British Columbia’s new “Harmonized Sales Tax” or “HST,” is a value-added tax, not a sales tax. They contend it meets the “value-added tax” definition because some participants along the supply chain get a partial rebate on tax payments, even though the end consumer also pays the tax on the final product’s sale.

If the state’s ruling stands,  B.C. residents would be entitled to claim the tax exemption under a 1965 state law meant to help Clark County merchants entice Oregon shoppers. The law provides the exemption for residents of any state or province with a sales tax of less than 3 percent.

Pike said no public or private organizations collect all the data needed to make an exact estimate of how the loss of some sales tax revenue from Canadian shoppers will affect Bellingham.

He said Bellingham’s largest retailers report that as much as 30 percent of their shoppers are Canadian residents, and the Bellingham Finance Department’s best estimates are that citywide, 15 percent to 18 percent of affected retail transactions are from people who live in Canada.

Using those figures and the data the city collects, Bellingham Finance Director John Carter estimated that city sales tax collections will be reduced by at least $600,000 to as much as $1.3 million per year, beginning July 1, 2010.

The DOR will be updating its website and other communications to notify the public that its interpretation is under legal challenge.

For more information on this topic, please see our previous coverage.

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