OLYMPIA — Thousands of Washington businesses will be affected by a change in the way sales taxes are collected, in an attempt by the Department of Revenue to recapture some of the estimated $100 million a year that state and local governments fail to collect.
Businesses that operated under an honor system tempered by audits will now be required to get a reseller permit to avoid taxes until items are sold.
The new rules take effect next January, but notices about the change will be mailed out during the next few months to about 190,000 retail businesses and the permits will be issued this fall.
State law requires only the final customer to pay sales tax. Businesses that buy things they plan to resell do not have to pay sales tax until they sell the items and collect the tax from their customers.
The Department of Revenue thinks, however, that some businesses are not reselling items on which they deferred paying sales taxes. Instead, the state believes, they’re using the items themselves and no one is paying the sales tax.
“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.
Businesses use their Uniform Business Identifier to buy things at wholesale prices without paying sales taxes. By doing so, they are declaring they plan to resell the items they are buying.
“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.”
As an example, he told the story 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 was for use at his office. His mistake was discovered in a tax audit, Gowrylow said.
Only 3 percent or 4 percent of businesses are audited every year, so many similar abuses of the resale tax exemption probably go undetected, he said.
The new rules requiring a reseller permit were approved by the 2009 Legislature.
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.
“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.”
But Brian Minnick of the Building Industry Association Washington said it was offensive to honest contractors.
“It’s one more complexity that puts them at a disadvantage,” Minnick said.