Washington tax collectors figure state and local governments are missing out on more than $100 million a year in unpaid sales taxes, so they’ve begun to overhaul the way merchants, builders, wholesalers and retail customers handle items that are purchased for resale at a later date.

Basically, it’s changing from “an honor system with audits” to a permit that must be obtained from the state Department of Revenue. It’s a huge change that will affect about 56,000 retailers and 19,000 wholesalers in Washington.

Overall, about 190,000 businesses that do some retail sales are going to be notified of the upcoming changes. And it’s all supposed to happen over the next seven months.

The new rules take effect Jan. 1, but “reseller permits” will be mailed out in September to most businesses that buy items for resale.

SKIRTING SALES TAX

The problem is this: State law requires sales tax be paid only by the final customers. Some businesses don’t have to pay sales tax on their purchases if they plan to resell the items themselves at a later date and collect sales taxes from their own customers. But some businesses are not reselling the items. They’re using the items themselves. They’re not paying the sales tax, and they’re not collecting it.

The overall loss is estimated at $100 million a year for the governments that get a portion of the sales tax. For instance, in Tacoma the sales tax is 9.3 cents on a $1 purchase. The state gets 6.5 cents and the rest is divvied up among Tacoma, Pierce County and Pierce Transit.

“It’s a major issue, particularly in the construction industry,” said Mike Gowrylow, revenue department spokesman. Some businesses are abusing the system; others just don’t understand it, he said.

Every business is issued a Uniform Business Identifier, and some business owners think that’s a license to buy everything at wholesale prices and never pay sales taxes, he said. Currently, any business can download a “resale certificate” form from the Department of Revenue’s Web site, fill out the form, then give a copy to each and every retailer from whom the business is buying merchandise.

Business owners essentially are declaring that they plan to resell the items they are buying, so the retailer won’t charge them sales tax.

“They think, ‘Gee, I can buy anything tax-free for my business,’ even if they are using it and not reselling it,” Gowrylow said. “There is widespread misunderstanding of this. It’s not all intentional, but some of it is.”

He cited the example of a dentist who bought a television set for his office. He didn’t pay sales tax on it because he said it was for resale. But it wasn’t. It was for use at his office. That was discovered in a tax audit, Gowrylow said.

However, only 3 percent or 4 percent of businesses are audited every year, so many similar abuses of the resale tax exemption go undetected, he said.

The agency persuaded the Legislature and Gov. Chris Gregoire this pass legislative session to approve a new method.

It was an easy sell to lawmakers who were looking for ways to plug a $9 billion hole in the state budget.

“I had no idea the that practice was so widespread,” said Sen. Margarita Prentice, D-Renton, chairwoman of the Senate Ways and Means Committee. “And the push-back we got back made us realize how widespread it (abuse) was.

“It’s unfortunate that is does take this kind of financial crisis to get it done,” she said.

BUSINESS OBJECTIONS

Representatives of the building industry said they were put off by the original version of Senate Bill 6173. One reason was that they got short notice. It wasn’t introduced until there were only two weeks left in the 15-week legislative session.

Moreover, that first version seemed to assume they were all cheating on their taxes, and it would make all contractors pay sales tax on all their materials and labor up front and wait until much later to get credit for those tax payments, they said.

“That would have been just an absolute nightmare,” said Rick Slunaker, director for governmental affairs for Associated General Contractors.

The final version that Gregoire signed into law last month is less extreme, but it still treats building contractors differently than other businesses and it could still become another burdensome paperwork mess for honest contractors and other businesses, he said.

Mark Johnson, vice president of government affairs for the Washington Retail Association, said most of the state’s 36,000 retailers welcome the new system, especially the roughly 10 percent of stores that fall into the “building material and retail supply” category. That includes Costco, Lowes, Home Depot, Ace Hardware and other stores that will be most affected by the change because so many of their customers are resellers.

They see the new system as an improvement, Johnson said.

“It will weed out the people who were gaming the system,” he said. “Right now, there is no verification system. They (stores) have no idea whether the (resale) certificate the customer is handing them is real, and they can’t very well question their customers.”

When the new system is fully operational in January, stores will be able to link to a Department of Revenue database to determine on the spot whether reseller permits are valid, he said. And the state agency will police it, not the stores, he said.

“It is offensive to honest contractors,” said Brian Minnick of the Building Industry Association Washington. “A lot of honest businesses feel they are being targeted. It’s a new process. It’s one more complexity that puts them at a disadvantage.

“The problem is, to try to get the cheaters, they end up coming up with these processes that add more money to the cost of doing business for honest guys,” Minnick said. “If there is maybe a silver lining in this thing, and it doesn’t turn out to be a bureaucratic nightmare, maybe it makes it more difficult for unregistered contractors to beat the system. Sometimes there is cheating that goes on in these big box stores.”

Groups that represent builders, contractors, retailers, plus the Association of Washington Business, National Federation of Independent Businesses and others are part of a stakeholder group that has been assembled by the revenue department to help develop the process for issuing the new resellers permits. They will meet June 16.

TRACK RECORDS WEIGHED

Gowrylow said businesses that have a good track record for paying their taxes and have a history of legitimate resales will be issued the new permits in September. Others, whose track record is more dubious, won’t get them. But even the businesses that are denied a permit can apply and be examined on a case-by-case basis, he said.

And any business that does end up paying sale tax on merchandise the ultimately is resold can recoup those taxes on its business taxes, Gowrylow said.

Minnick and Slunaker said that $100 million estimate seems laughably large. “That might be a bit high,” Slunaker said. The agency seems to be heading in the right direction, but it’s a very complex thing to sort out in less than seven months.

“It’s gonna be a big change for a lot of people,” Slunaker said.

“The biggest concern that we have it that they get the new permits out in time for businesses to seamlessly continue their operations in January when the new system starts.”

Joseph Turner: 253-597-8436

joe.turner@thenewstribune.com

blogs.thenewstribune.com/politics