TAX NEWS - 2010

Washington Tax: Washington state should remedy sales tax drain from exempt Canadian shoppers

A Washington state legal interpretation will let British Columbia shoppers off the hook for paying sales tax because of a new B.C. law that goes into effect July 1.

Whatcom County officials plan to challenge state government officials' interpretation of existing state law that qualifies British Columbia residents for an exemption from Washington state's sales tax.

At least $3 million and perhaps as much as $5 million in county and city revenues are at stake. Predictions of significant sales increases to B.C. residents, which could partly blunt the impact of the change, are highly overstated. Quick and simple action by the Washington Legislature can pre-empt the impending damage to local governments, which are already reeling from recession-induced revenue declines.

Why is the change occurring now? State attorneys have determined that British Columbia's new harmonized sales tax (HST), taking effect July 1, is not a retail sales tax. Under a 1965 Washington state law, residents of states and provinces with sales taxes below 3 percent are exempt from retail sales taxes in Washington. Since the HST is deemed not to be a retail sales tax, B.C. shoppers in Washington are exempt from the sales tax.

As a value-added tax, the HST is certainly collected in a different way than a sales tax imposed at the retail level. It imposes a tax at each stage of the production and distribution process on the economic value that is added to a product. However, this is entirely equivalent to imposing a tax (at the same rate) at the cash register when sale of the final product is made to the buyer, as long as businesses are exempted from paying the tax on goods to be resold, as they are in Washington. Legal distinctions aside, there is no meaningful economic difference between the HST and a retail sales tax.

Could the direct loss in sales-tax revenue be indirectly recaptured through increased purchases by B.C. residents drawn to do more cross-border shopping by the sales-tax exemption? Increased sales to B.C. residents should lead to hiring of local workers and/or higher wages for existing workers which, in turn, would promote greater spending by local residents and increased sales-tax revenues. Business-and-occupation (B&O) tax revenue should also rise, since the tax depends on the revenues earned by local businesses.

Is it reasonable to expect an invasion of B.C. shoppers motivated by the sales-tax exemption? We think not. Our research suggests that the relative prices of goods in Whatcom County stores compared with stores in the Greater Vancouver region are less important influences on cross-border shopping than they were before 9/11.

In addition, the exemption from the existing provincial sales tax (PST) that exists for groceries will continue under the HST, while the HST will not apply to other goods such as books and children's clothing. In short, numerous products that B.C. shoppers might buy in Washington can be purchased tax free and more conveniently at home.

Besides the loss to governments in needed tax revenues, the arbitrary legal distinction between the HST and the PST will also impose record-keeping burdens on Washington retailers who choose to offer the exemption.

Finally, the exemption invites avoidance of sales tax if Washington residents indirectly exploit the exemption by enlisting friends and relatives living in B.C. to buy goods on their behalf.

We encourage state legislators to modify the current legislation to better align the relevant legislation with economic logic. One approach is to change the wording in law — in section (1) of RCW 82.08.0273 — to broaden the definition of a retail sales tax to include any tax paid by consumers on the purchase of goods and services regardless of how the tax is applied.