No Sales Tax for B.C. Residents Starting July 1 – State Missed Problem Until it Was Too Late, and Local Governments Will Lose Millions

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, June 16.—British Columbia residents will be exempted from the Washington state sales tax because of a fine legal point no one noticed until it was too late, and lawmakers are fuming that state tax authorities didn’t catch it sooner.

            It's causing a furor in Bellingham, the largest Washington city near the border, but the exemption means a huge hit on local governments all along the boundary line, from Point Roberts to Ione, and even in Spokane, which gets a share of the Canadian trade. Exactly how many millions of dollars, no one knows, because B.C. sales aren’t tracked.

But Department of Revenue officials say the state has no choice in the matter. A change in B.C. tax laws on July 1 will force Washington to give British Columbians the tax break, it says.

Local government officials are stunned. Lawmakers are steamed. The department didn’t alert them to the problem months ago, when the cash-strapped Legislature was in session and might have done something about it.

            “We’re trying to find money, not give it away,” said House Ways and Means Chairwoman Kelli Linville, D-Bellingham.

            And if you think merchants in the Bellingham area are whooping with joy at the hordes of Canadian shoppers who might be lured over the border, better think again.

            “We think it’s a horrible idea,” said Ken Oplinger, president of the Bellingham – Whatcom Chamber of Commerce and Industry.

The Bellingham chamber says a tax break is bad for business?

           You know there must be a problem.

            No One Saw It Coming

            Basically, British Columbia made a big change to its tax laws and no one in this state saw it coming. Since 1965, Washington state law has provided a sales-tax exemption to residents of other states and provinces that don’t have sales taxes of their own. The exemption applies to durable goods that won’t be consumed here – so clothes and computers are tax-free, bar tabs and auto-repair bills are not.

So what happens if British Columbia junks its sales tax, replaces it with something that serves pretty much the same purpose and works pretty much the same way – yet it isn’t really a sales tax?

             Yep. B.C. gets the tax break.

             British Columbia is joining the ranks of Canadian provinces that are enacting a “harmonized sales tax,” a streamlined tax structure that combines Canada’s national value-added tax with sales taxes that are levied by provincial governments. Even though they call it a sales tax, those Canadians have a different way of looking at things. The state Department of Revenue considers it a value-added tax, not a sales tax – and that means B.C. residents will be exempted from the Washington state sales tax when they go shopping south of the border.

            The funny thing is that the exemption was never meant for situations like this one. It was intended as a way for Washington merchants to make sales to residents of other states and provinces that have no sales tax at all. Without the exemption, residents of Alaska, Oregon, Montana, Alberta and other non-sales-tax jurisdictions would pay a penalty of up to 9.5 percent for the privilege of buying in Washington. It’s a big issue for communities like Vancouver, Wash., Walla Walla, the Tri-Cities and Spokane, which do a big business with out-of-state residents. Every few years there’s an effort to repeal the tax break, and lawmakers from border districts rise up to defeat it. This year was one.

            But B.C.? That came out of the blue. No one was expecting it, not even the Department of Revenue.

            Too Late for Legislative Fix

The Department of Revenue learned of the B.C. tax-law changes in April and didn’t recognize the implications until after the legislative session was over. Certainly the state will lose money, but the impact is greater on local governments near the border, because they get a share of sales tax revenue generated in their jurisdictions. They’ve built budgets that count on the money.

Had the problem been recognized while lawmakers were in Olympia, they might have fixed it by adding a few sentences to state law. Now it’s too late.

            “Nobody thought about the tax loss issue because we were swamped with working through a special session that was heavy with various tax proposals,” said agency spokesman Mike Gowrylow. “Nonetheless, Rep. Linville’s criticism is valid. We did drop the ball on this one and should have realized what this meant for local governments earlier than we did.”

            Revenue did air the issue at a public meeting of local government officials May 18, but attendance was light and the discussion didn’t seem to set off any alarm bells. That didn’t happen until last week, when the B.C. media began calling and the department issued a public announcement. Then all hell broke loose.

            Bellingham is Stunned

            You might think businessmen along the border would be thrilled at the news that residents of British Columbia will suddenly get a big discount when they do their shopping here – 8.5 percent in Whatcom County. They’re getting out the champagne, right?

            Nope. They’re groaning.

            What’s going to happen, Oplinger said, is that local governments in Whatcom County are going to lose about $2 million in sales-tax revenue through the end of the year. They’re going to want somebody to make up the loss.

            “They’re going to be looking for new revenue streams, not cutting government programs,” he said. “So they’re going to come back to business and look at tax increases. It’s going to come back to us.”

            It’s not as if the discount will do much to boost sales, he said. Merchants in Bellingham and Whatcom County have always catered to Canadian customers. Outlet malls greet motorists driving south; Wal-Mart and Costco estimate 30 percent of their sales go to Canadians. And the reason is simple, Oplinger said – American prices already are about 20 percent less, when exchange rates are factored in.

            An additional 8.5 percent discount isn’t going to generate enough traffic to pay the new taxes that local governments will surely demand, he said.

            Another telling point turns up in the Bellingham Herald. In numerous stories, the only merchant quoted with anything positive to say is a delighted car dealer who says he expects to sell an additional 100 used cars per year to Canadian customers. But Canadians don’t pay Washington sales tax when they buy cars here. They pay their taxes in Canada when they bring the car across and register up north. “Maybe it would make a difference in sales if Canadians thought it was something new,” said Mark Jaremko of Jaremko Nissan in Spokane.

            Somebody Should Have Said Something

            The whole thing is a bit frustrating for Linville, the highest-ranking Democratic lawmaker from the Bellingham area – and the House member who oversees the state budget. “It just seems like it’s a decision in Canada that’s been known for months, but nobody really looked at the implications until the C.B.C. did a news report and somebody from the Department of Revenue said it went into effect in July,” she said.

            Linville notes that Department of Revenue Director Cindi Holmstrom was apologetic about the matter during a meeting with local-government officials in Bellingham Tuesday. Linville said she appreciates that. So maybe it’s best to focus on how to fix the problem, she said.

            The only trouble is that there’s no agreement on a fix. The governor could call lawmakers back into a special session. So far Christine Gregoire has shown no willingness to do that. During a visit to Bellingham last week, she said there’s nothing she can do.

            Many in Whatcom County argue that the department’s interpretation is wrong. County Executive Pete Kremen is circulating an opinion from a staff attorney that holds the B.C. tax can be seen as a sales tax. But the Department of Revenue has already granted the tax break to residents of Eastern Canada provinces with similar taxes, and it would have trouble saying no to B.C. So the decision is final.

            Here’s another idea. Linville notes that the department hasn’t made a formal decision. All it has done is to interpret the law. Perhaps the department could do something in a formal way and give local governments something to sue about, she said. They could obtain a temporary restraining order. Whether they win wouldn’t matter – the courts move slowly enough that the Legislature could meet again and change the law.