Washington State sales-tax exemption on hold

A Washington State judge has temporarily blocked the sales-tax exemption for B.C. residents that was supposed to take effect today – dashing the hopes of thousands of cross-border shoppers waiting up to two hours to enter the U.S.

And even if the court fight against the exemption ultimately fails, the head of Bellingham’s Chamber of Commerce says the loophole will likely be closed by state legislators when they resume sitting in January.

Last month, Washington’s Department of Revenue announced that, once B.C.’s HST took effect July 1, British Columbians would be eligible for a non-resident sales tax exemption, saving them anywhere from 7.5 to 9.5 per cent on their cross-border purchases.

However, lawyers for the city of Bellingham and Whatcom County fought the decision in court, worried that it would lead to reduced tax revenues for local government.

On Wednesday, Skagit County Superior Court Judge Susan Cook issued a temporary restraining order that the state must inform retailers that the sales-tax exemption could be overturned.

Technically, Cook’s order doesn’t forbid retailers from offering the exemption – and some, such as Target at the Bellis Fair mall, say they’ll honour the exemption for now.

But doing that raises the risk that retailers could be on the hook for unpaid taxes if Cook ultimately strikes down the exemption when the matter goes to trial.

The case is due back in court on July 9, when Cook will decide whether to extend her restraining order.

Ken Oplinger, head of the Bellingham/Whatcom County Chamber of Commerce, said his group is hoping Cook extends her order until the new year, when it expects the state’s legislature to strike down the B.C. sales-tax exemption for good.

Oplinger said he’s had meetings with Kelli Linville, the Democratic chair of the state’s budget committee, and Republican Representative Doug Ericksen, both of whom have told him they’re confident they can kill the B.C. sales-tax exemption.

"Our understanding in talking to members of our state legislative delegation … is the votes are there and they will deal with this straight away when the legislature sits again in January," he said.

Once a new law is passed, said Oplinger, it would take effect after a 60-day waiting period.

Attempts to reach Linville and Ericksen Thursday were unsuccessful.

In 1965, Washington state passed a law, designed to lure cross-border shoppers from Oregon, that residents of any jurisdiction with a sales tax of three per cent or less don’t have to pay sales tax in Washington State.

The state’s revenue department decided in June that the HST is a "value added tax", not a sales tax, and so B.C. and Ontario residents would be eligible for an exemption once it took effect on July 1.

Lawyers for Bellingham and Whatcom County argue the state is misinterpreting the 1965 law and that the HST is as much a sales tax as the PST it replaced.

Unlike in B.C., in Washington State a portion of the sales tax goes directly to local communities to pay for things like public transit and libraries.

According to estimates from local business groups, as much as 30 per cent of Bellingham shoppers are Canadians and the sales-tax exemption could deprive local governments of up to $3 million a year in revenue.

"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 Mayor Dan Pike said in a statement.

Oplinger said Bellingham is already such a popular destination for B.C. shoppers, he’s not convinced the sales-tax exemption helps local retailers much.

"There’s really no reason to do this – we don’t think it’s going to give us any substantial boon that we weren’t already getting," he said. "You go to Bellis Fair mall today, you’ll see at least half the cars in the parking lot are B.C. plates."

He expects the court ruling will make some B.C. shoppers unhappy and said he’s already received some angry e-mails from B.C. shoppers.

"I understand people are upset about the HST," he said. "But why folks think it’s our responsibility to make up for the decision made by the provincial government there, I’m not clear."

Aside from lost tax revenue, some local businesses are concerned about the extra paperwork the sales-tax exemption requires.

Tax-exempt purchases can be audited by state officials, meaning retailers need to take down names and ID from B.C. shoppers for every sale.

Under the 1965 law, retailers have the discretion to offer the exemption or not.

However, many retailers fear that, given the media attention the exemption has received in B.C., not offering the exemption risks alienating Canadian customers.

According to an Ipsos Reid poll last week, more than half of B.C. residents said they were more likely to shop in Washington State because of the exemption, including 31 per cent who said they were a lot more likely to cross the border to shop.

Wait times at the border Thursday afternoon were about two hours heading in to the United States with no wait times coming back into Canada.

– With files from the Bellingham Herald