Article by Erik Smith. Published on Monday, July 20, 2010 EST.

Residents of Eastern Canada Lose a Big Discount – But Will Any of Them Notice?

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, July 19.—A ruling Friday in a Canadian sales-tax case means bad luck for Labrador.

            So too with five other Canadian provinces, most of them thousands of miles away. They’re caught in the middle of a dispute over a sales-tax break that might have been granted to every resident of British Columbia.

            A judge in Skagit County ruled that Whatcom County and the city of Bellingham have a solid enough case against the state that the British Columbia tax exemption should be blocked while the case is being heard. That means British Columbians won’t get a bonanza if they shop south of the border this summer.

            And by extension it covers residents of other Canadian provinces that have enjoyed the same tax exemption for years. Consider it collateral damage.  

            It’s the latest development in a tangled sales-tax case that has brought a hue and a cry from the northernmost tier of local governments in this state. The city of Bellingham and Whatcom County filed suit last month to block the sales-tax exemption, which was to have been triggered automatically by a change in the British Columbia tax code on July 1.

The provincial government is eliminating its traditional sales tax and replacing it with something called a “harmonized sales tax,” or HST. The new tax combines the provincial sales tax with the Canadian national value-added tax. Whatever the Canadians call it, the state Department of Revenue regards it as a value-added tax. Because British Columbia is technically eliminating its sales tax, that means B.C. residents would qualify for a sales-tax exemption under Washington state law.

            It’s a big deal in Bellingham and Whatcom County, where local merchants estimate that 10 percent of their sales go to Canadians and local governments count on an estimated $2 million annual share of local sales tax revenue. The state Department of Revenue failed to catch the problem created by the change in the B.C. tax code until after this year’s Legislature had adjourned.

            Other Canadian Provinces Affected

            In his ruling, Skagit County Superior Court Judge Michael Rickert said Bellingham and Whatcom County stand to suffer “irreparable harm” if British Columbians get the tax exemption before the case has a chance to be heard in court. The two local governments are arguing that the Department of Revenue is wrong in its interpretation of the law. They say the new sales tax is really a sales tax.

            But what really counts is this: By issuing the injunction, Rickert makes it possible for an odd legal strategy to play out. Whichever side ultimately prevails, if the case drags on long enough, it will give the Legislature a chance to reconvene and tweak state law so that the British Columbians will keep paying. The state Legislature is next scheduled to meet in January, though budget troubles may force it to reconvene before then.

            The ruling has a broader effect, however. British Columbia isn’t the only province with a harmonized sales tax. Starting in 1997 the state Department of Revenue has granted the same exemption for five other provinces. They are Labrador, New Brunswick, Newfoundland, Nova Scotia, and Quebec.

            The judge’s order forces the Department of Revenue to advise merchants that residents of those provinces should begin paying sales tax as well. The ruling also affects the province of Ontario, which switched its tax system on July 1 and also was scheduled to receive the same tax break.

            If Bellingham and Whatcom County win their case, merchants will be on the hook for sales taxes that should have been collected from residents of those provinces as well.

            Will Anyone Notice?

            So far there hasn’t been any outcry in this state from residents of eastern Canada. Residents of Quebec do not typically cross the continent to shop at Washington-state Wal-Marts, Costcos and shopping malls. But that’s not to say that no such sales take place. Affidavits filed by several big-box retailers in the case argue that they already grant the exemption to the eastern Canadians. They filed a brief with the Washington Retail Association that argued they need clear advice.

            An earlier ruling in Skagit County prohibited the Department of Revenue from offering any advice at all. This one clarifies matters, by directing the agency to say no.

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