Win Temporary Restraining Order to Block Sales Tax Break – Big Relief for State?

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, July 1.—The game is afoot! Bellingham and Whatcom County fired the first round Wednesday in a curious legal battle that aims to prevent the state from granting a sales-tax exemption to residents of British Columbia.

            They won a temporary restraining order that bars the Department of Revenue from advising retailers to give the Canadians a break. Instead, the state tax department is ordered to tell retailers that the issue is being challenged in court, and that if the state loses the case, they will be on the hook for sales taxes.

            Since it’s up to retailers to decide whether to give Canadians the break, the temporary restraining order effectively blocks a sweeping sales-tax exemption that otherwise would have gone into effect July 1.

            It’s one of the strangest legal battles in state history because, it’s safe to say, this is an argument the state wouldn’t mind losing. State officials from the governor on down were caught unaware by a change in the British Columbia tax code that – at least in a sense – eliminates the sales tax in that province. The Department of Revenue maintains that under state law, Washington is forced to exempt British Columbians from paying sales tax when they buy goods in Washington stores.

            It’s an unexpected hit on state government revenues – most estimates indicate about $10 million is at stake. But it’s an especially big hit on Bellingham and Whatcom County, where Canadian shopping is a big factor and local governments have built budgets that count on local sales tax revenue.

            And an even bigger problem is that state tax officials recognized the problem only after the state Legislature had gone home for the year. So something that might have been fixed with a tweak to state law suddenly became an impossible obstacle. Before state and local officials came up with their unusual legal strategy, Gov. Christine Gregoire said publicly she wished she could do something, but her hands were tied.

            Nothing Against Canadians

            Bellingham and Whatcom County say they have nothing against their neighbors from the north. They just want them to keep paying sales tax.

            In a prepared statement, Bellingham Mayor Dan Pike said, “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.”

            Bellingham and Whatcom County obtained the restraining order in Skagit County Superior Court. Judge Susan Cook ruled that the Department of Revenue must inform retailers that “the outcome of the pending litigation is unknown and that tax liability of retailers may be affected.”

            The challenge technically hinges on the Department of Revenue’s interpretation of the tax law. British Columbia is eliminating its separate sales tax and combining it with the Canadian national value-added tax. The resulting “harmonized sales tax” isn’t really a sales tax, according to state tax officials. It’s a value-added tax. That means a 1965 state law kicks in that exempts residents of states and provinces from paying Washington sales tax when they don’t pay sales taxes at home.  

The curious element of the case is that state officials continue to insist that their interpretation of state law is bulletproof. But for the strategy to work, they can’t win the argument quickly. If the case drags on for six months, that will give the Legislature time to reconvene and rewrite the law.

            News Release Offers Details

A joint press release issued by the city of Bellingham and Whatcom County offers details about the impact of the sales tax break. It notes that no one keeps track of the exact amount spent by Canadians in Washington stores. But it says stores in the area report as much as 30 percent of their sales go to residents of British Columbia. The city of Bellingham estimates that 15 to 18 percent of the sales in the city limits are to Canadians.

Using those figures, the city estimates that city tax collections would be reduced anywhere from $600,000 to $1.3 million.