Sales Tax Base Expansion Bills Considered

The Senate Tax Reform Division has begun looking at bills that would broaden the sales tax base and possibly allow the sales tax rate to be reduced.
(Published Jan 22, 2013)

The Senate Tax Reform Division of the Taxes Committee considered several bills last week that would broaden the state’s sales tax base. Included in the discussions were SF 9, a bill that would limit the clothing sales tax exemption to the first $200 of any article of clothing, and SF 11 a bill that would eliminate the clothing sales tax exemption entirely and replace it with an income tax refund system.

A third bill, SF 35, would extend the sales tax to products that are digitally delivered, including music, movies, television shows, electronic games, greeting cards, and books.

All of the bills are authored by the chair of the Tax Reform Division, Sen. Ann Rest (DFL-New Hope).

Under SF 9, the first $200 of the sales price of any article of clothing is exempt. The bill defines clothing as “all human wearing apparel suitable for general use.” According to the Minnesota Department of Revenue, Massachusetts currently applies its sales tax to articles of clothing in excess of $175 while New York applies its sales tax to articles of clothing in excess of $110. At this time, the department is unable to estimate the impact of the $200 limit on the state’s general fund revenues.

SF 9 includes language that will reduce the state sales tax rate, but because the revenue impact of the bill has not yet been estimated, the bill as introduced does not specify the new sales tax rate.

Under SF 11, the existing exemption for clothing would be fully repealed, essentially subjecting almost all clothing sales to the state sales tax. Individuals would be able to claim a refundable credit when they file their income tax refund in the following year. Under the bill, the current state sales tax rate would be reduced from 6.875 percent to 6.51 percent. That rate reduction is essentially revenue neutral after the clothing income tax refund, which is estimated to cost $41.6 million in the first year.

The third bill, SF 35, which would subject many digital goods—including music, movies, television shows, electronic games, greeting cards, and books—to a tax, initially included a general sales tax rate reduction. However, in an amendment offered in committee, Sen. Rest removed the rate reduction language from the bill. The revenue analysis for that bill indicated that the state would collect roughly $6.4 million in the first year of implementation.

Under these bills, cities could see several impacts. Given that cities must pay the state sales tax on many purchased items, any associated sales tax rate reduction might reduce the overall cost of the sales tax on city purchases. Of course, if a city purchases clothing items that are currently exempt, the provisions in these two bills would, to a degree, increase the city’s sales tax liability.

The governor’s budget recommendations are also expected to include some modernization and expansion of the state’s sales tax base.

Read the current issue of the Cities Bulletin

* By posting you are agreeing to the LMC Comment Policy.