City takes a hit in sales tax shift

February 9, 2009

By Jim Feehan

A new tax on Internet sales could soon have the city singing the blues.The streamlined sales tax shifts sales tax receipts from the place an item was bought to the city where it was delivered.

If a person from Woodinville decides to buy a refrigerator in Issaquah and has it delivered to his house in Woodinville, the sales tax on that big-ticket item goes to Woodinville.

The law affects only shipments or deliveries within the state. There is no change for deliveries outside the state or over-the-counter sales where customers take home goods from the store. The law is part of a national effort to make it easier to collect sales taxes on sales made over the Internet.

The change shifted local sales tax revenues among local jurisdictions: Some gained revenue while others, such as Issaquah, experienced a loss.

To ease the hardship on communities negatively affected by the tax, the state Department of Revenue provided a mitigation fund to offset the losses in revenue, said James Blake, city finance director.

Issaquah’s sales tax revenues were down about $1 million in 2008 compared to the preceding year. A decline in sales tax collection from construction after the boom years at the Issaquah Highlands and Talus, a downturn in the economy and the streamlined sales tax contributed to a drop in sales tax revenues, Blake said.

In crafting the city budget, Blake factored in the slowing home construction in Talus and the highlands and anticipated a $250,000 loss that would not be mitigated by the state, he said.

The first mitigation payment was distributed Dec. 31. It covered losses for July, August and September. Next, mitigation payments will cover losses for October, November and December. In June, payments will cover net losses for the first three months of this year.

“We’re expecting a mitigation payment this year of $500,000 to $800,000,” Blake said.

With the downturn in the economy and a slowing of consumer purchases, the future of the mitigation payments is uncertain. Faced with that, the city might have to scale back future budgets for another 12 months to 18 months until the economy turns positive, Blake said.

“I just want to see the mitigation money continue through 2011,” he said.

Gov. Chris Gregoire signed the streamlined sales tax legislation into law in 2007 with collections to begin the following year. Gregoire requested the measure saying it “levels the playing field between in-state and out-of-state retailers.”

Proponents said the measure would streamline those definitions and allow so-called “brick-and-mortar” businesses to better compete with Internet and catalog suppliers, many of which do not collect sales tax.

Reach Reporter Jim Feehan at 392-6434, ext. 239, or jfeehan@isspress.com. Comment on this story at www.issaquahpress.com.

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