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A sales tax exemption would reduce city and county costs by an estimated $150 million.
(Published Feb 11, 2013)
The House Taxes Committee on Feb. 13 will consider HF 295, a bill introduced by former Elk River councilmember and freshman Rep. Nick Zerwas (R-Elk River), that would exempt city and county purchases from the state sales tax.
The bill is co-authored by three other former local officials—Rep. Jerry Hertaus (R-Greenfield), former Greenfield mayor; Rep. Tim O’Driscoll (R-Sartell), former Sartell mayor; and Rep. Mark Uglem (R-Champlin), former Champlin mayor. The companion bill, SF 329, was introduced by former Rochester councilmember, Sen. David Senjem (R-Rochester), and former Carver County commissioner, Sen. Julianne Ortman (R-Chanhassen).
Sales tax for local governments
The sales tax has been applied to city and county purchases since the state budget crisis of 1992. That year, the Legislature was confronted with a $569 million state budget deficit and during the session, the Legislature debated a recommendation by then-Gov. Arne Carlson that would have cut city local government aid by $66 million.
During the debate, the House and Senate developed an alternative proposal to address the state deficit by extending the sales tax to local government purchases. In the end, the sales tax was extended to city, county, and township purchases, which at that time was estimated to yield roughly $67 million in state revenues. School districts remained exempt under the 1992 law change.
Today, the state sales tax still applies to city and county purchases, although townships were exempted in 2011. The tax generates an estimated $150 million per year from the taxable purchases of cities and counties.
Over the years, the Legislature has exempted a limited number of purchases made by local governments including, certain purchases by hospitals owned and operated by local units of government, bullet-resistant body armor, and more.
Effect of sales tax on services
With Gov. Mark Dayton’s proposal to extend the sales tax to a wide array of services, the sales tax issue has generated more discussion in the city and county communities. Although there is not yet a bill reflecting the governor’s sales tax rate reduction/base broadening plan, many cities have indicated that they contract for a wide variety of professional services that would likely be taxable under the base broadening plan.
The League is collecting information from cities on the impact of the sales tax rate reduction—from 6.875 percent to 5.5 percent—as well as information on the potential impact of applying the 5.5 percent sales tax to professional services. If you have information and estimates of the possible sales tax impact on your city, please send that information to LMC staff member Gary Carlson (see right).
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Contact Gary Carlson
(651) 281-1255 or (800) 925-1122