Someone Has to Sue by Wednesday to Prevent Canadian Sales-Tax Break – and the State Has to Bungle the Case

by Erik Smith
Staff writer/ Washington State Wire

OLYMPIA, June 28.—If local governments south of the Canadian border want to prevent hordes of British Columbians from overrunning our nation’s boundary in order to spend large amounts of money in Washington stores, they need to act fast.

            Someone needs to sue by Wednesday. And then the state needs to make sure that it loses the case.

            If nothing happens, on July 1, every resident of British Columbia will be exempted from paying sales tax when shopping in the state of Washington. That means a potential bonanza for merchants south of the border but not a dime for local governments – and there you have the problem.  

            To solve it, the state needs to employ one of the strangest legal gameplans ever attempted by state government. The strategy essentially will require the state’s attorneys to throw the case in the first round. At least they will have to convince a judge they are wrong. Then they will have to work hard to achieve a stalemate that will tie the court up in knots and ensure that no jurist will be able to make a decision for months.

And in case you’ve heard about this one already, there has been a new wrinkle in the legal thinking over the last few days.

            The Canadian Menace

Local governments, particularly in the Whatcom County area, are frightened that a wave of British Columbia shoppers will cross the border and spend their money in the United States. That’s because they will lose a major chunk of the sales taxes that are generated in local stores. No one actually meant for the British Columbians to get the tax exemption, but the state Department of Revenue decided that a change in B.C. tax laws forces the state to give it. Tax officials recognized the problem in April, too late for the Legislature to keep it from happening.

Already Canadian shoppers have a huge impact on sales south of the border. About $10 million in tax revenue is at stake. And even the chamber of commerce in the Bellingham area is on government’s side on this one. If local governments lose the money, the chamber says business will be asked to pick up the difference, and additional sales won’t make up for it.

            Actually, Gov. Christine Gregoire could solve the problem with a snap of her fingers. The legal fix would require the addition of a line or two to state law. All she would have to do is to call the Legislature back to Olympia for another special session. But the last one didn’t go all that well – legislative leaders dithered about tax hikes for 30 days while bored legislators were forced to spend long hours in local watering holes. And the experience left such a bad taste that no one is eager to come back.

           Must Delay Decision

And so the state’s legal strategy has another key element. The state’s attorneys need to make sure that the legal waters are muddied, thus ensuring that no decision is made for the next six months, and giving the Legislature enough time to reconvene next January and fix everything.

            The new legal thinking is this:

Two weeks ago, state tax authorities said they would have to issue some sort of a formal proclamation – a declaratory order – so that local governments could file a lawsuit under the state Administrative Procedures Act. Now they say they don’t have to set themselves up in such an obvious way. The state’s lawyers have decided that local governments can file a lawsuit even if the state does nothing. It's simpler that way.

            The city of Bellingham is expected to file the suit, because it has the most at stake. The Bellingham City Council voted last week to give its city attorney broad authority to file the lawsuit. So now it’s Bellingham’s move. The city government didn’t return a call Monday to inquire about its plans.

            State Must Lose to Win

            The whole strategy comes down to a single question. Can the state find a way to argue so badly that everything will go its way?

            It’s not going to be easy. The Department of Revenue says it’s on firm legal ground.

A 1965 law says that when a state or a province charges a sales tax of three percent or less, its residents don’t pay sales tax when they buy goods in this state. That’s of huge importance in border towns, which do a big business with Montana, Oregon and Alberta. None of those states and provinces charge sales tax, and merchants in border areas would lose business if the out-of-staters had to pay a penalty for doing business in Washington.

            On July 1, British Columbia will get rid of its sales tax, too, but only in a technical sense. It is combining its sales tax with the Canadian national value-added tax. They’re calling the big new tax the “harmonized sales tax,” but whatever they call it, state officials say it’s not a sales tax. It’s a value-added tax. And that means British Columbians won’t have to pay down here.

            Already the state has granted the same exemption to other Canadian provinces with similar tax structures. They’re all in the East, so those exemptions haven’t had much impact here. But the Department of Revenue says it would be hard to give them the exemption and refuse it to British Columbia.

            “We’ll be called on to defend our interpretation,” said Department of Revenue spokesman Mike Gowrylow. “We think we’re right, but it’s up to a judge to make that call. So we’re in kind of an odd position.”

            The State’s Losing Strategy

            The attorney general’s office represents the Department of Revenue, and it is the agency that will have to do everything it can to achieve a stalemate. What does it think about throwing the fight?

            That’s a question it really doesn’t want to answer. It’s a matter of attorney-client privilege, said spokesman Dan Sytman.

            But the governor, at least, endorses the strategy. And really, she says it all makes more sense than it might sound. Gregoire, a former attorney general herself, said she thinks the Department of Revenue is right. But at a news conference last week she said the other side has a strong enough argument that the court ought to hear it and then ponder it at least until next year.

            “I've had my own legal counsel in my office take a look at the interpretation that we've been given by the attorney general's office," she said. "It is a sound policy position. It is a sound legal position, but there is another legal interpretation which is being advanced by Whatcom County that has merit.

“So under those circumstances, you normally go to court and ask the court to sort it out. So I think it's a good partnership for us to go and ask the court, for example, for a declaratory judgment to decide which is the more sound legal argument.

“I think it's appropriate be it that it be sorted out in court.”