Today, you could drive from Mountlake Terrace to buy a $5,000 fridge at Albert Lee Appliances in Lynnwood, have it shipped from Lynnwood to your home, and your tax bill would be about $445.
Lynnwood thanks you. A piece of that sales tax, about $50, goes directly into the city’s coffers.
Go next Wednesday, though, after July 1, and the rules change.
Starting then, that $50 slice of your tax money should follow you home. Instead of paying for Lynnwood’s police and parks, that tax slice will go where you live.
The change is part of a multi-million dollar tax shuffle called the “streamlined sales tax,” or SST, an effort to tax Internet sales that in Washington should immediately make big winners of rich suburbs, shifting new burdens to state taxpayers and companies that deliver products — fridges, couches, even pizzas — to you.
State enforcement of SST starts July 1, even though the law began last year, when Washington became the 22nd state to join the Streamlined Sales and Use Tax Agreement (SSUTA).
“This is a major policy change,” said Jim Justin, assistant director for legislative services with the Association of Washington Cities (AWC), and one of the central figures who helped make SST a reality in Washington. “It (created) the most internal, within the cities, controversy of any issue in the last 20 years.”
It could also have massive impact. Although local governments express skepticism with official figures, the state’s Department of Revenue says SST could bring $246.3 million into Washington, much of it to be distributed to cities like Mountlake Terrace or Brier.
The goal
The change is an attempt to simplify tax collection for Internet, mail order or phone order companies.
Many of those businesses do not collect sales taxes, which puts traditional Main Street businesses at a disadvantage, SST advocates believe.
“We want to level the playing field between brick-and-mortar local stores and their out-of-state competitors,” said Mike Gowrylow, communications director for the DOR. “We want businesses to compete on price, product and service. Not on whether or not taxes can be avoided.”
As Internet sales accelerate, that is becoming more important.
Even in the midst of what is widely seen as a recession, Internet retail sales shot up 15 percent year-to-year in April 2008, according to comScore, an Internet research firm.
The winners
The state’s richest areas — not just cities, but also counties and even transit districts — stand to win the most.
For instance, Clyde Hill is a wealthy city of about 2,800 people outside Bellevue. It has only one gas station, and one coffee store. In the next five years, though, the city could collect $2.3 million in new sales taxes, or $818 per resident, according to DOR estimates.
Other winners are bigger. King County and Snohomish County governments, for example, should expect to gain $28.1 million and $25.9 million in new sales taxes before 2013, according to the DOR.
Mountlake Terrace and Brier will come out ahead with SST.
Two years ago, the DOR told city officials in Mountlake Terrace to expect a $350,000 annual windfall.
“We thought that was a little overly optimistic,” said finance director Sonja Springer. Instead, the city’s budgeted for sales tax receipts to increase $100,000 in 2008 and $150,000 annually beginning in 2009. The money will go into the city’s general fund, which pays for essential services. The additional revenues will also help to make up for the 2007 closure of a major big-box electronics retailer.
“So, basically, it will make us whole again,” she said.
Brier, a city with six businesses, also is conservative in its revenue projections. It was told to expect $900,000 annually in additional sales tax revenues.
Instead, the city’s planned on “somewhere between $100,000 and $200,000,” said city clerk Paula Swisher.
Her city of 6,000 has been hit hard the past 10 years by anti-tax initiatives, particularly I-695, which repealed the motor vehicle excise tax.
“That took between $500,000 and $600,000 out of our pocket,” “Swisher said. “It made us lose staffing.”
Not ‘losers’ — others
For businesses that ship products, figuring out sales taxes will now be much more difficult, business owners said.
For the cities that house those businesses, what had been virtual gold mines will disappear almost overnight. What might have seemed like a growth industry suddenly is a dead one.
The state has promised full SST relief for actual losses, but otherwise about $11.2 million would drain out of Lynnwood before 2013, according to DOR estimates.
Lynnwood’s finance director John Moir said he anticipates receiving the state reimbursements Dec. 31 to cover net losses from July, August and September.
Though the reimbursements will make the city “whole,” they won’t make up for expected losses from future retail growth, he said.
Those losses “mean we’re going to have to deal with reality,” Moir said. “What we’re going to have to do is adjust the budget to offset whatever growth there would have been.”
Every penny will be replaced, the state promises. By 2013, Washington will spend $193 million on SST mitigation, according to the DOR. The money will come directly from the general fund.
There is hope that more money will flow in. Out-of-state retailers who voluntarily participate in the SSUTA should send $246.3 million to the state before 2013, the DOR estimates.
In the program’s first year, though, more “mitigation” money will flow out than will flow in. The state believes it will lose about $5.9 million, according to the DOR.
Still, the state is offering relief to businesses. It has already distributed software programs to help retailers charge, and track, different sales taxes. This year, it will also give $12 million in tax credits to eligible small businesses.
The help is appreciated, but with such a major shift, the state needs to be sensitive, said Amber Carter, the tax and fiscal policy director with the Association of Washington Business.
“This is a big change for Washington retailers,” said Carter, who has lobbied for new laws to assist retailers with the SST transition. “We really have to try and get as many solutions as possible for them.
“We don’t want (the state) to nit-pick on people for not knowing the law immediately,” she said.
At Underhill’s Furniture, a four-store family-owned business with a location in Lynnwood, preparations started long ago.
Company accountant Sue Bowden used to have four sales tax codes to wrestle with. Now she has 210.
“This is the biggest change we’ve ever dealt with,” said Bowden, who has had to rework her accounting software. She has worked with DOR officials, and attended seminars, Bowden said. “This is huge.”
A needed change
Those difficulties are troubling, but the SST switch was necessary, said AWC’s Jim Justin. As consumers shift to the Internet, so must the state’s tax system, he said.
Cities need healthy businesses, and they need to collect taxes, Justin said.
That’s true, the AWB’s Carter said.
The tax shuffle will be hard, but not all bad, she said.
The state’s biggest companies won’t have much trouble complying, she said. And the state’s Main Street businesses are engaged in an unfair fight.
“It is a lose, lose right now,” Carter said. “This will be a win for Main Street and a win for larger corporations. We just have to find a solution for the employers in between.”
Enterprise editor Oscar Halpert contributed to this story.
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