Article by Erik Smith. Published on Thursday, June 18, 2010 EST.

Department of Revenue Working on Intricate Legal Maneuver to Keep B.C. Residents Paying State Sales Tax – Will Invite Lawsuit


Cindi Holmstrom, director of the Department of Revenue.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, June 17.—Maybe there’s a way out of the Canadian sales-tax mess after all.

            It’s the kind of creative legal thinking you don’t hear every day in state government. It’s going to require the state Department of Revenue to say – please sue us.

            Revenue Director Cindi Holmstrom said Thursday the idea, hatched by alarmed Whatcom County officials, seems to have some merit. It may be the only way to keep an enormous sales-tax exemption for all residents of British Columbia from taking effect on July 1.

            But it’s going to take some quick legal maneuvering and close cooperation between state and local-government officials to make it work.

             Unless something changes, B.C. residents will be exempted from Washington state sales tax on merchandise they carry back across the border. It is the unexpected and unintended consequence of a major overhaul to tax laws in British Columbia that will take effect next month. Too late for the Legislature to take action, state tax authorities concluded that the change north of the border will force Washington to give B.C. residents a tax break when they go shopping in the United States.

            The Department of Revenue has been under the gun ever since it announced its interpretation of B.C. tax law last week. Bellingham and Whatcom County are in an uproar – the change will cost local governments in the area somewhere around $2 million this year. But the impact isn’t limited to the northwestern corner of the state – it affects every city and county near the Canadian border, as well as Spokane, which sees significant trade from British Columbia.

            Meanwhile, there haven’t been any big hurrahs from merchants. In Whatcom County, the chamber fears a big hit on business because local governments will seek higher taxes.

            Idea Advanced by Linville

            Attorneys in Whatcom County have been thumbing through the lawbooks ever since the word got out. But department officials have rejected most of the legal arguments they’ve heard. They can’t delay implementation, they say. And they can’t offer a different interpretation of the B.C. tax-law change, because they have already given the same break to provinces in Eastern Canada that reformed their tax codes in the same manner.
            Local-government officials have been hammering the department for it. Holmstrom held a stormy meeting with them in Lynden Tuesday. County Executive Pete Kremen declared, “I have to say that this decision was made recklessly, cavalierly, without any opportunity for the affected governments to have any input. Now you’re digging your heels in and circling the wagons to defend this opinion.”

            But an idea advanced at that meeting by House Ways and Means Chairwoman Kelli Linville, D-Bellingham, is getting a thumbs-up from Department of Revenue attorneys, Holmstrom said.

            It works like this: The Department of Revenue needs to issue some sort of a formal ruling regarding the British Columbia tax exemption. That will give local governments a target and allow them to sue. They can obtain a temporary restraining order preventing it from taking effect. And whether they win isn’t important, because the legal wheels turn so slowly that the Legislature will have time to reconvene in January and rewrite the law.

            Holmstrom said it just might work.

            “It’s possible that we will issue a declaratory order,” she said. “It’s never been done before, but the statute allows us to do that. And then a lawsuit can be filed under the Administrative Procedures Act.”

            Holmstrom said the department is working closely with attorneys in the Whatcom County prosecutor’s office to coordinate efforts. The lawyers are going to have to work fast – the deadline is near.

     
            Unusual Legal Tactic 
         
            There’s an interesting legal facet to the argument – courts don’t issue injunctions unless plaintiffs have a chance of winning, and the Department of Revenue has insisted up to this point that its legal interpretation is bulletproof.
            Whatcom County says the state is wrong about that. “We’ve had a number of conversations with them,” said prosecuting attorney Dave McEachran. “They have a view and we have a view.” 
            Not that he wants to comment on the strength of the county’s argument. But he says the county is eager to test it in court. 
            Meanwhile, for the strategy to work, the state has to cooperate so that Whatcom County can file a lawsuit. But it can’t put up such a strong legal defense that it throws a knockout punch in the first round.

            Not Worth a Special Session

            It appears the legal tactic may be the only way anything will get done. The department maintains it can’t do anything on its own. Holmstrom said, “We don’t get to pick and choose which laws we follow, and I don’t think anybody would want us to do that.”

            Meanwhile, another obvious solution – a special legislative session – just won’t happen, said House Finance Chairman Ross Hunter, D-Medina. The problem just isn’t big enough.

            It might seem huge in Whatcom County, he said, but as far as the state is concerned, it’s small potatoes. No one tracks actual spending by British Columbia residents in the state of Washington, but most guesses put the loss to the state at around $10 million, he said.

            “It’s Whatcom County,” he said. “If King County was right next to the Canadian border, you might have a problem.”

            Certainly the Legislature will do something to rewrite the law next legislative session, he said. But $10 million?

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