Since 1965 Washington State has granted a retail sales tax exemption for purchases of goods for use outside the state by residents of states and provinces with a retail sales tax of less than 3%. Since 2003, the Department of Revenue ("the Department") has interpreted the statute to exempt purchases by residents of Canadian provinces imposing the Harmonized Sales Tax ("HST"), concluding that the HST was a value-added tax and not a retail sales or use tax.
In 2009, British Columbia ("B.C."), the province adjacent to Washington state, abandoned its sales tax and adopted the HST, effective July 1, 2010. In June 2010, the Department issued press releases notifying retailers and the public that British Columbia residents would qualify for the nonresident exemption beginning July 1. The release simply reflected the Department's long-standing position that the HST is not a retail sales or use tax. As July 1 approached, retailers modified their point of sale systems to allow the exemption.
One day before the effective date, the City of Bellingham and the County of Whatcom filed a lawsuit against the Department, challenging its interpretation of the statute, and seeking an injunction prohibiting the Department from giving tax advice to retailers. On that same day, without participation by the Department or Department's counsel, a Superior Court judge issued a temporary restraining order ("TRO") prohibiting the Department from giving any tax advice to retailers. The next day, the B.C. tax system switched to the HST.
Most retailers were prepared to grant the exemption to B.C. residents the following day. After hearing about the lawsuit and TRO, some retailers chose not to grant the exemption. Others chose to follow the Department's long-standing advice and granted the exemption.
The TRO placed retailers in an untenable position. The City of Bellingham and the County of Whatcom made it clear that they expected retailers to be assessed for any uncollected taxes if they prevailed on the merits. However, at that point it would be too late for retailers to recover the taxes from their B.C. customers. On the other hand, retailers that did collect the tax faced the risk of customer complaints and potentially faced class action consumer protection lawsuits if the court later decided that the exemption applied to B.C. residents. Additionally, retailers that were collecting sales tax were at a competitive disadvantage with those that were not.
To compound the injury to retailers, the TRO prevented the Department from providing rulings or other binding advice to retailers. This deprived retailers of their right under Washington law to obtain clear and timely guidance regarding their tax responsibilities and to be protected against assessment in the event that the Department's advice is later determined to be in error.
Nordstrom, Eddie Bauer, Costco, Best Buy, Macy's, J.C. Penney, REI, Ross Dress for Less, Big Lots and the Washington Retail Association hired Perkins Coie to intervene in the lawsuit for the purpose of clearing up the confusion the TRO created, and to vindicate their rights to clear and timely tax instructions. In a span of two weeks, Perkins Coie filed nine declarations, a motion to intervene, and a brief in opposition to the City of Bellingham and the County of Whatcom's motion for preliminary injunction.
On July 16, a little more than two weeks after the issuance of the TRO, the Superior Court granted retailers' motion to intervene and issued a preliminary injunction directing the Department of Revenue to advise retailers to collect the tax. This injunction put all retailers on the same footing and resulted in clear advice from the Department (whether that advice is correct will ultimately be determined in litigation on the merits). In an unusual move, the Superior Court also expressed its desire to have the merits of the case first decided by the court of appeals instead of the trial court, which is the more common next step. The case is currently pending in the Superior Court. Gregg Barton and Bob Mahon represented the retailers.
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