Visitors from British Columbia will soon be exempt from paying state and local sales tax after a ruling by the Washington state department of revenue (DOR) last week.

The exemption is based on the DOR’s interpretation that the new “harmonized sales tax” which will take effect on July 1 in B.C. is not a sales tax but is a value added tax. As such, it qualifies for the Washington sales tax exemption allowed under RCW 82.08.0273.

The change will only apply to items purchased for use in British Columbia. Canadians will still have to pay taxes on non-tangible purchases such as lodging, meals, haircuts and other retail services provided in the state. The exemption is optional for businesses to provide and is limited to sales of goods for use outside Washington and does not apply to sales of services or retail activities such as golf.

Quite a few people are not happy with the change. On Tuesday, June 15, Whatcom County mayors, county executive Pete Kremen, state representative Kelli Linville and others met with state revenue director Cindi Homstrom in Lynden to discuss the state’s plan to grant a sales tax exemption to residents of B.C. for certain goods.

According to Blaine city manager Gary Tomsic, Hostrom began the meeting by apologizing for the abrupt manner by which her department announced the exemption. She followed her apology with written information that showed estimates of how much sales tax might be lost to Whatcom County. Tomsic said the general consensus of Bellingham mayor Dan Pike, Kremen and Bellingham/Whatcom County Chamber of Commerce president Ken Oplinger  and others was that the estimates were extremely low.  Kremen argued that WTA alone would lose more money than the total estimated by the state.

 For example, the department of revenue estimated that the percentage of retail sales in Blaine was 5 percent and the loss of sales tax revenue to Blaine in 2011 will be only $9000. This would amount to .7 percent (7/10s of one percent) of the total sales tax received by the city of Blaine. Tomsic said, “We believe that the estimate is low and could be as high as 10 percent. However, we think that the impact on Blaine will be less than the impact on Bellingham because of the goods upon which the sales is exempt. They are typically larger items which are not sold in Blaine. But in this economy where sales taxes are down significantly, any additional loss is significant.”

Blaine finance director Jeffrey Lazenby said, “Where it could have an immediate impact is tax from hardware sales and sales of tangible or durable goods at Blaine retailers that sell such items. The future impact would be from retailers who set up shop in Blaine intending to sell durable goods.  The exemption in that respect could have a fairly significant impact on the city’s budget. Those impacts would negate any tax increases from sale of consumables, such as gas, food, and lodging that would potentially result in increased border traffic.”

Oplinger said he estimated the exemption could have as much as a $3 million loss in sales tax revenue for the county, $1.2 million just for Bellingham. And while he did not have figures for Blaine he said the new rule would have a significantly large impact there.

“We’re down to cutting bone now, there's no fat to cut,” he said. “Given the fact we’ve gone through several rounds of cuts and this will impact the current budget cycle, I think it’s a horrible idea.”

Oplinger said because DOR officials looked only at sales tax revenue from big ticket items, they failed to take into consideration that much of the $12.5 million Whatcom County brought in last year came from everyday items such as clothing and groceries. Groceries, not including prepared foods, are tax-exempt to all purchasers.

Oplinger said while it may encourage some Canadians to shop here more, the difference would be marginal because they already enjoy a cost advantage. In May alone, more than 700,000 Canadians visited Whatcom County, up from 500,000 in May of last year. “There's already a cost advantage for Canadians to come down here, so to make that argument work you'd have to show there is a huge number of people who would be coming but won't come and I just don’t think those people are there. It will increase traffic but not in a significant way and in no way will it offset the loss in sales tax revenue to the cities and the state.”

Residents of other Canadian provinces that impose the harmonized VAT have been eligible for the exemption for years.

Five states, including Alaska, Oregon, Montana, Delaware and New Hampshire, seven other Canadian provinces, and four U.S. territories already qualify for this exemption.