Background:

Retail sales and use taxes are imposed by the state, most cities, and all counties. Retail sales taxes are imposed on retail sales of most articles of tangible personal property and digital products and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes were not collected when the property, digital products, or services were acquired by the user, then use taxes apply to the value of most tangible personal property and digital products and some services when used in this state. The state sales and use tax rate is 6.5 percent. Local tax rates vary from 0.5 percent to 3.0 percent, depending on the location. The average local tax rate is 2 percent, for an average combined state and local tax rate of 8.5 percent.

State law provides a retail sales tax exemption to certain nonresidents purchasing goods in Washington. The exemption is unavailable if the purchaser resides in a United States or Canadian jurisdiction that imposes a retail sales or use tax of 3 percent or more, unless the jurisdiction grants Washington residents an exemption from the tax by reason of their residence.

A number of Canadian provinces have replaced their provincial sales taxes with the Harmonized Sales Tax (HST). Most recently, the provinces of British Columbia and Ontario converted to the HST, effective July 1, 2010. The Department of Revenue (Department) has taken the position that the HST is not a sales tax but instead a valued-added tax (VAT), which is a consumption tax that taxes the value added by businesses at each point in the production chain. It can apply to both manufactured goods and services. Therefore, since the Department does not construe a VAT to be a sales tax, the Department has determined that residents of British Columbia and the other provinces that have converted to the HST are eligible for the nonresident sales tax exemption.

The City of Bellingham and Whatcom County brought suit against the Department, arguing that residents of British Columbia and other provinces that have implemented a HST are not entitled to the nonresident exemption. The Skagit County Superior Court entered a preliminary injunction ordering the Department to advise retailers that residents of Canadian provinces with a HST did not qualify for the exemption. The litigation is not expected to be concluded until after the 2011 legislative session.