Wondering If You Should Be Collecting Sales Tax From BC Residents?
This rather nondescript question pits local governments against the state in an odd legal battle. For years, the state has said that value added taxes like Canada's Goods and Services Tax (GST) are not sales taxes. If they are not sales taxes, then Washington taxpayers cannot credit the GST against any use tax that Washington might impose on goods brought from Canada and used in Washington.
On July 1, 2010, certain Canadian provinces, including British Columbia (B.C.), eliminated their sales taxes in favor of the Harmonized Sales Tax (HST), which is basically a blended tax that includes both the federal and provinces' GST. This Canadian change created new Washington State sales and use tax issues. Under Washington law, nonresidents who purchase retail goods in Washington are exempt from the sales tax if they reside in a state or province that imposes a sales tax that is less than 3%. The combined effect of the state's view that a GST is not a sales tax and B.C.'s move to the HST meant that B.C.’s residents resided in a province that imposed no sales tax. In turn, this meant that the B.C. residents could buy goods in Washington exempt from the sales tax because they resided in a province that imposed a sales tax that is less than 3%.
Although B.C. unintentionally did its part to stimulate Washington's economy, the local governments did not appreciate the Canadians' efforts. Why? The reason is that these local jurisdictions would no longer receive their share of sales tax that they had previously received from their northern neighbors. So, the local governments filed a lawsuit to prevent the state from implementing the exemption. Surprisingly (because courts typically give deference to the agency charged with administering the particular statutes in question), the local governments convinced the Skagit County Superior Court to issue a preliminary injunction. This injunction, issued July 16, 2010, required the state to issue an Excise Tax Advisory advising retailers that they "should not grant the sales tax exemption" and to update its website "to reflect that no retail sales tax exemptions should be given by the retailers [to otherwise qualified Canadian residents]." On July 19, 2010, the state complied by making the changes required.
This litigation puts retailers in a corner. Their B.C. customers want the exemption, but the court has instructed the state to advise retailers that they "should" not grant the exemption. The injunction is not directed to the retailers; it only instructs the state what it must advise the retailers. What should the retailer do? The retailers could grant the exemption if they chose to do so. Remember, there has been no legal finding that the state's interpretation is wrong (i.e. the HST is not a sales tax). There has only been a superior court judge's opinion that the state would likely lose, an opinion rendered before hearing any expert testimony on what tax elements constitutes a sales tax (other than a variety of declarations filed with respect to the action). The court’s opinion was based on briefs that were limited to 5 pages, which is required under local court rules, and the participants made their best effort to respect the 5 page limit. Such limited briefing seems much too inadequate for complex legal issues that have such significant implications.
As a practical matter, should the retailer collect the tax? The customers want the exemption; the local governments do not. So, what's the harm in collecting the tax and then giving the customer a form to claim a refund in the event the state prevails? That option may not be available. The state and local governments are taking the position that the exemption is elective. It is not a B.C. consumer election either. Instead, it is a retailer election. So, if the retailer elects not to grant the exemption, then there is no exemption. And, if there is no exemption, then the B.C. resident has no refund to claim.
That view of the exemption is a very curious construction of the statute in that there would be no uniformity in administering the exemption, except by coincidence. If you are a retailer along the Oregon-Washington border, then you likely grant the exemption for Oregon residents on a regular basis. You know that if you don't grant it, then your competitors will get the business. These businesses have done so for decades. However, that prevalent business practice along the border is not necessarily one shared throughout the state. Let’s take an illustrative example of the problem that arises. Assume that you are a Vancouver, WA retailer and you sell a blender to Customer A. Customer A gets the benefit of the exemption and does not shop next door. That’s money in your pocket now and into the future. However, if you are a retailer in Sequim, WA where you rarely get Oregon residents claiming the exemption, then you might refuse Customer B the exemption because you are unfamiliar with it. Furthermore, the chances of your competitor being more familiar with the exemption then you is not that high, so you are not likely to lose a lot of future business. What the heck? You don't have that many Oregon customers anyway, so what is so bad about losing one blender sale? In that example, under the state and local governments’ interpretation, Customer B could not get a refund. The only difference between Customer A and Customer B is that one retailer honored the exemption for the blender and the other decided not to grant it. Shouldn't a nonresident receive the benefit of the exemption without regard to the retailer's frame of mind?
For the moment, let’s assume that the state and local governments correctly understand how the exemption is granted. If the retailer chooses to honor the exemption because the statute gave it the power to do so, then one might think that the retailer would not be liable for the uncollected sales tax even if the state loses the litigation. Combining the state's official positions that (1) the retailer gets to decide who gets the exemption and (2) the GST/HST is not a sales tax, it is logical to conclude that the retailer is simply following the law. Right? Maybe, maybe not. The state has said that if the retailer has not collected the tax and the state loses the case, it will likely assess the uncollected sales tax from retailers. Even though the state openly asserts in the litigation with the local governments that the exemption should be granted, estoppel might be a difficult defense in light of the preliminary injunction that requires the state to advise the retailers that they "should not grant the sales tax exemption" to B.C. residents.
So what's a retailer to do? Getting the Canadian business would be great. But if the state loses the case, it is the retailer who might be stuck with the tax liability. The only thing certain about this litigation is that the uncertainty is rampant.
