State predicts revenue loss for bellingham
under new rules
Retail businesses have a lot to keep track of. Bills, benefits, inventory; it’s enough to make anyone’s head spin. As of July 1, businesses owners in Washington state who ship products within state lines will have to keep track of the different sales tax rates in other communities.
As the Legislature’s 2009 fiscal year begins, businesses may be surprised to find sales tax now being calculated as a “destination-based” tax. For retail businesses that ship products in-state, sales tax will now be calculated based on the location of the receiver of the product as opposed to the location of the sender.
In the past, if a company in Bellingham shipped a product to a customer in Federal Way, the customer would pay the Bellingham sales tax rate of 8.4 percent and that tax revenue would be split between the state and the city of Bellingham.
From now on, the customer will pay Federal Way’s sales tax rate of 9 percent and the tax revenue will go to Federal Way state coffers.
The change will require many small businesses to overhaul their accounting systems and may mean a small hit to Bellingham sales tax revenues.
It only affects businesses that ship or deliver goods in Washington state; it will have no effect on in-store transactions; businesses that do not deliver within the state; deliveries outside the state; wholesale operations; sales of motor vehicles, trailers, aircrafts, or manufactured homes; towing companies; and florists.
Ken Oplinger, president of the Bellingham/Whatcom Chamber of Commerce, said the loss of revenue for small businesses is secondary to the additional work small-business owners will undertake in order to file their sales taxes.
“They will have to spend money on computers and internal accounting systems to make sure that when it’s all ready to be calculated—it is done correctly,” Oplinger said.
Justin Mitchell, vice-president of finance for Wood Stone Oven Cooking Equipment in Bellingham, said the company is trying to understand what the change means for its business.
“Anytime we make a change in a system, we have to set new jurisdictions and make sure that we understand the rules,” Mitchell said.
While Wood Stone ships a lot of ovens, Mitchell said most are going out of state or overseas and the ones that do stay in state are sold through dealers and not subject to the tax change.
“It’s a pain in the butt upfront but by and large, I don’t think it will have too much of an impact on us,” Mitchell said.
Jeremy Allen, co-owner of the Bellingham Baby Company in Barkley Village, said he and his wife/co-owner, Shelly, have been doing research to see what the implications are for their business.
“We have talked to our accountant and we have a lawyer advising us as well,” Allen said.
Bellingham Baby Company started as an exclusively online baby retailer then went brick-and-mortar earlier this year. The store still does a lot of shipping, but Allen said he doesn’t think the tax change will make waves for their business.
“It should a little, but not a huge amount,” Allen said.
Randy Hartnell, owner and founder of VitalChoice.com, a Bellingham-based online food and food supplement retailer, said most of the products he sells online are food products, which would mostly be exempt from sales tax if he had to pay it, which he doesn’t. But he said he can empathize with his brick-and-mortar counterparts.
“From my perspective, it sounds like an administrative nightmare,” Hartnell said. “I am sure big companies have the resources but small companies just do not.”
Help available from revenue department
Mark Johnson, vice president of governmental affairs for the Washington Retail Association, said he has been impressed with the responsiveness of the revenue department to respond to the needs of small businesses during this transition.
For example, Johnson said the department conducted a survey and found that 35 percent to 40 percent of small businesses use QuickBooks accounting software. So the department created a free downloadable program that goes into QuickBooks and taps into information from the Department of Revenue.
“It’s in a format they recognize,” Johnson said.
The department has also conducted more than 140 workshops statewide to educate business owners.
Johnson attended one of those workshops in Bellingham, where he said one business owner expressed concern at how the state would react if sales taxes were calculated incorrectly.
“Some people were really afraid of getting audited,” Johnson said. “But if you really give it a shot, they are not going to whack you. But if you look them in the eye and say you’re not even going to try. They will probably whack you.”
The money shuffle
According to the state Department of Revenue’s projections, the city of Bellingham stands to lose $436,400 in sales tax to other cities, but it also projects that Bellingham will receive $51,200 from online and mail-order businesses that will voluntarily comply with the law, leaving a net projected negative impact of -$385,200. That loss would represent about 2 percent of the city’s 2007 sales-tax revenue, according to Brian Henshaw, Bellingham’s city budget manager.
Henshaw said the first reimbursement check from the state should come in December.
“In theory, the city [budget] will be made whole again but it will be delayed,” Henshaw said.
Oplinger said the reason Bellingham is susceptible to this shift in sales tax is because the city has grown into a regional retail center.
“We also have some regional distribution businesses that would account for some of the loss,” Oplinger said.
At the state level
Mike Gowrylow, spokesman for the Washington State Department of Revenue, said the change is part of a national movement to streamline sales tax and convince Congress to make e-commerce taxable nationally. The movement involves 22 states and nearly 1,100 online and mail-order operations who will voluntarily comply with the new tax law.
Gowrylow said the tax change will hopefully level the playing field between Washington’s brick-and-mortar businesses and online retail businesses.
“What we have found is that Washington’s businesses were unwittingly serving as showrooms for their online competition,” Gowrylow said.
Gowrylow said the switch to a destination sales tax means tax revenue cities count on will be shuffling to and fro across the state depending on the commercial composition of a particular city. If a city has a lot of shipping businesses, it stands to lose sales tax revenue; but if a city has more consumers having products shipped to their doors, they stand to gain sales tax revenue.
“There will probably be a shift in sales tax to bedroom communities away from retail-heavy commercial centers,” Gowrylow said.
Johnson, from the Washington Retail Association, said the association has been in favor of the new tax law because its larger retail members would benefit from compatibility with other states’ sales tax laws and smaller retail members would be more competitive against their online competition.
“This is just one of many steps toward streamlining sales tax,” Johnson said. “But it is a big change that is getting a lot of attention.”
In an effort to stem the negative effects on cash flow from the ebb and flow of sales tax across the state, the state Legislature has set aside $32 million in an ongoing “mitigation fund” to reimburse cities and counties for lost sales tax revenue.
“So the winners win, but the losers don’t lose,” Gowrylow said.
Department of Revenue is hosting a free workshop for small-business owners from 1-4 p.m. on July 8, at the Labor and Industries/DSHS Building, 1720 Ellis St., First Floor Conference Room A, in Bellingham.
Topics include excise taxes, reporting classifications, deductions, tax incentives, sales tax collection, and record-keeping requirements.
To register, visit the Department of Revenue Web site at www.dor.wa.gov or call (360) 676-2114.