Swapping sales tax exemption for a refund: Will it work?

Swapping sales tax exemption for a refund: Will it work?
The impact of a new state law swapping the sales tax exemption for nonresidents with a refund program may depend on what type of businesses are included and the proximity of out-of-state competitors. Photo: freepik.com

An upcoming change to the state sales tax exemption for nonresidents and the reaction by different business entities reflect the diversity of Washington’s economic climate and how the effects of statewide policies varies by region.

This session the legislature approved ESSB 5997 which swaps the state sales tax exemption for a refund for nonresidents who do shopping in Washington state. Despite enormous pushback from several industries as well as requests by legislators representing districts located along the state border for a veto, Governor Jay Inslee signed the bill into law on May 21, and it is set to take effect on July 1.

Under the current sales tax exemption program, non-Washington residents from states such as Oregon without a similar tax are exempt from paying it. To qualify, they must provide personal identification showing they live in that state.

ESSB 5997 modifies that by turning it into a remittance program in which non-state residents will now pay the sales tax at the time of purchase, but they can later request refunds that total more than $25. So while nonresidents can still avoid paying the sales tax, the bill’s fiscal note estimates the change will net the state more than $90 million in additional sales tax revenue through 2025.

Yet some businesses say forcing nonresidents located near large metro areas such as Portland to go through an extra hurdle will deter them from shopping in Washington cities like Vancouver if similar goods or services are available in their own states.

Prior to the May 21 bill signing, Inslee received numerous requests for a veto from business associations that included the Greater Vancouver Chamber of Commerce, Identity Clark County, Washington State Auto Dealers Association (WSADA), the Washington Retail Association, as well as family-owned businesses located along the state border. In 2011, the state auditor recommended keeping the exemption “because it is meeting its inferred public policy objective.”

WSADA Senior General Counsel Bryan Imai wrote in an email to Lens that the exemptions “help Washington dealers offer competitive pricing on parts and vehicles with minimal inconvenience for eligible customers.” He added it’s especially true for car dealers near Oregon that heavily rely on nonresidents for sales. According to Imai, nonresidents make up 40 percent of sales for one Vancouver auto dealer, while a Walla Walla dealer reported nonresidents are 35-40 percent of its sales.

“Depending on the manufacturer, dealerships farther from the border can also have significant nonresident sales numbers,” he added. “Washington dealerships spend millions of dollars each year to encourage out-of-state buyers to purchase cars here.”

Under the new law, nonresidents will still get a sales tax exemption with vehicle purchases. However, Imai writes that the change will “create customer confusion that could hurt sales.”

Or they will simply avoid the hassle altogether and buy in-state. Washington Policy Center Government Reform Director Jason Mercier said the new law will “put those teens on their first job behind the register in an awkward position” by having to explain to nonresident customers about the new policy.

“This is a new tax now that out-of-state shoppers will pay,” Mercier added. “Will they still come to our communities to purchase? They (the business community) think the answer is no, they won’t come anymore.”

Washington Retail Association Senior Vice President of Government affairs Mark Johnson also anticipates pushback from nonresidents. In a blog post he wrote “can you imagine the angst and frustration when a formerly qualified customer questions why they are being forced to pay the sales tax?”

That’s what a businessman located in Rainier, across the Columbia River near Longview, wrote in an email to Inslee. “This business family (logging and farming) will easily find other outlets for supplies, fertilizers, livestock feed, chainsaws, etc.  If you care about jobs or people, you can easily understand the impact of this hurriedly passed piece of legislation.”

Yet, certain industries in regions such as southeastern Washington may avoid similar problems due to the lack of nearby, out-of-state competition.

“I haven’t heard of any uprising from local retailers,” Tri-City Development Council President and CEO Carl Adrian told Lens. “We’re in a little bit different situation here. There’s isn’t a Costco down there (northeast Oregon), so people come up here and shop. They are coming up here for goods and services they can’t get nearby. If I’m in Portland or in Vancouver, there might be a difference than the other border counties, where there’s more balance in terms of services on both sides of the state lines.”

Aside from impacts to the state’s business climate, Association of Washington Business Tax Policy Director Clay Hill says the refund program creates new opportunities for fraud, something the state Department of Revenue (DOR) anticipates. However, the agency did not receive dedicated funding from the legislature to handle the program.

“As a result, doing the type of enforcement to eliminate or really reduce fraud is going to be difficult,” Hill said.

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