Merchants Don’t Want to Say No to Canadians – Victims of Odd Legal Strategy, They Say

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, July 12.—Nine big retail chains, together with the Washington Retail Association, say they want a quick decision in a Canadian sales-tax case that government officials hope will drag on for months.

            Their motion to intervene in the case Friday could throw a monkey wrench into one of the state's strangest-ever legal battles. A government legal strategy depends on the judicial system to flow as slow as molasses. But the nine chains and the trade association say they want someone to make a decision, and fast. Are B.C. residents going to get a tax holiday in Washington or not?

They filed a motion Friday to intervene in a lawsuit filed by local governments in the Whatcom County area. The suit, filed in Skagit County Superior Court, aims to block a sales tax exemption for residents of British Columbia. Just as important, it aims to delay a final decision until the Legislature can settle the matter once and for all next year.
            The big retail chains say they’ll lose big if they have to start saying no to Canadians. The filing demonstrates the chain stores aren’t on board with the local chamber of commerce, which is supporting the local governments in their legal battle.

Meanwhile, there’s one group that still hasn’t been heard from yet – the Canadians themselves.

            A hearing in the case is set for July 16.

            A Tax Break No One Expected

            The state Department of Revenue shocked retailers and local governments last month when it announced that starting July 1, residents of British Columbia would be exempted from paying sales tax when buying goods in Washington stores. For some 45 years, Washington has granted a sales tax break to residents of states and provinces that pay less than 3 percent sales tax. Because British Columbia was going away with its sales tax starting July 1, state officials said they had no choice.

            It wasn’t a tax break anyone planned to give. It will cost somewhere in the neighborhood of $10 million a year, and local governments in border areas will be particularly hard-hit – all of them had been counting on collecting their share of sales-tax revenue from local merchants.

            And it wasn’t exactly a clean-cut decision. British Columbia is replacing its sales tax with another tax that does pretty much the same thing, just in a slightly different way. The Canadian government is encouraging provinces to combine their local sales taxes with the national value-added tax, creating something the Canadians call the “harmonized sales tax.”

            Whatever the Canadians want to call it, the state considers it a value-added tax, and that means Canadians get the exemption. The state maintained it had little room to maneuver, because it had already granted the same tax exemption to residents of eastern Canadian provinces that had already modified their tax laws in the same way.

            There’s a big difference, as far as Washington is concerned, between British Columbia and the far-off provinces of Labrador, New Brunswick, Newfoundland, Nova Scotia, and Quebec, whose residents already enjoy the tax exemption. It's not as though they do much shopping in this state. But Bellingham and Whatcom County lie just south of the Vancouver metropolitan area, and merchants there estimate that more than 10 percent of their sales go to British Columbians.

Also modifying its tax laws July 1 was the province of Ontario, which also gets the exemption under the Department of Revenue interpretation.

            Odd Legal Strategy Aims for Delay

It’s a problem that could be resolved with a few quick changes to state law, but no one in state government seems eager to hold a special legislative session for that purpose alone. Not only did the last special session drag on for weeks, giving lawmakers a bad taste, but it’s also an election year – and lawmakers can’t raise money when they’re in session. So in many respects the legal strategy adopted by Bellingham and Whatcom County is a delaying action. They filed suit in Skagit County June 30 challenging the Department of Revenue interpretation of the law. But the most important element is that they won a temporary restraining order that aims to block the exemption from taking effect.

 Even though the Department of Revenue promises to fight “vigorously” for its position, if it takes six months or more for the judge to issue a ruling, that would accomplish much the same thing. It would provide enough time for the Legislature to reconvene next year and dispose of the Canadian problem. The hearing July 16 will determine whether the restraining order will remain in place until a decision can be issued.

The big chain retailers say the strategy is a terrible idea. They say the state’s Taxpayer Rights and Responsibilities Act gives them the right to expect “clear and current tax instructions” from the Department of Revenue. They say they’re the ones who will suffer.

            Don’t Want to Wait Months

It should be noted that Washington law doesn’t require retailers to give out-of-state residents the tax break. They can keep charging it if they wish, as long as they send the money to the Department of Revenue. That was part of the idea behind the temporary restraining order. State tax officials aren’t telling retailers to collect the tax. But the restraining order requires them to tell retailers that the matter is being challenged in court, and if the state loses the case, they’ll be on the hook for the money.

In their motion, the retailers say that’s just not good enough. The Department of Revenue already said they don’t have to charge the tax. If they charge it, they say they are vulnerable to complaints and even lawsuits from out-of-state residents. And it creates a situation where one business might charge the tax and a competitor might decide to gamble and provide the exemption.

What’s worse, many already have been providing the exemption to residents of the eastern provinces.

That leaves retailers with an unpleasant choice. Either they can give Canadians a break and risk being socked with a huge bill by the state. Or they can accept “a competitive disadvantage, and the risk and burden of dealing with customer ill-will, complaints and lawsuits.”