A Washington state sales tax exemption for B.C. residents is on hold following a recent court decision.
Skagit County Superior Court judge Susan Cook issued a temporary restraining order June 30 halting the implementation of a recent state ruling that would allow Canadian shoppers to forgo paying sales taxes on some purchases in Washington.
The injunction comes after to an action filed by the city of Bellingham and Whatcom County that challenged the ruling, calling it a “flawed interpretation” of the province’s “harmonized sales tax” and saying it would unfairly impact Whatcom County retailers and governments.
The exemption is based on the Department of Revenue’s interpretation that the new “harmonized sales tax” which took effect 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.
The change would only apply to items purchased for use in Canada.
Canadians would 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 offer 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.
“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.
Pike said while no public or private organizations have collected all the data needed to make a close estimate of how the loss will affect Bellingham, he said Bellingham’s largest retailers report that as much as 30 percent of their shoppers are Canadian residents, and about 20 percent of all retail transactions are from people who live in Canada. According to those figures, Bellingham finance director John Carter estimated the city’s sales tax collections will be reduced by at least $600,000 to as much as $1.3 million per year.
Carter added that while the exemption could attract more B.C. shoppers, the added revenue would not make up for the loss of sales tax revenue to local governments.
Ken Oplinger, president of the Bellingham/Whatcom Chamber of Commerce and Industry, added that 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, he said.
“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 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.”
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.
Blaine city manager Gary Tomsic agreed, although he said Blaine city officials’ estimates predict the relative impact to Blaine would be less than in Bellingham because of the type of goods that are tax exempt. Those include larger items, which are largely sold outside of Blaine.
Tomsic said figures presented by the Department of Revenue estimated that the percentage of retail sales in Blaine was 5 percent and that the loss of sales tax revenue to Blaine in 2011 will be only $9,000.
This would amount to .7 percent, or seventh-tenths of 1 percent, of the total sales tax received by the city of Blaine.
“We believe that the estimate is low and could be as high as 10 percent,” Tomsic said. “However, in this economy where sales taxes are down significantly, any additional loss is significant.”
City and county officials say retailers should wait for further instructions from the Department of Revenue before changing any sales tax collection practices.
A hearing on the tax has been postponed to July 16 in Skagit County Superior Court.