City and County Sales Tax Exemption Bill Introduced

The application of the state sales tax to city and county purchases has frustrated local officials since 1992.
(Published Jan 28, 2013)

Sens. Chuck Wiger (DFL-Maplewood) and Susan Kent (DFL-Woodbury) on Jan. 24 introduced SF 104, a bill that would exempt cities and counties from the state sales tax on purchases. The budgetary benefits of this sales tax exemption bill to individual cities could be even more important with the governor’s proposal to broaden the state sales tax base to include services.

History
Purchases of taxable items by Minnesota cities and counties have been subject to the sales tax since 1992. During the state budget crisis in the early 1990s, the state balanced its budget in part by extending the sales tax to local government purchases rather than make cuts to local aid programs.

Minnesota is one of the few states (if not the only) to fairly recently extend the state sales tax to local government purchases. In fact, according to a research memo prepared by legislative staff during a debate on the sales tax in the 1990s, fewer than 10 states at that time taxed the purchases of their local units of government.

In Minnesota, school districts are exempt from paying the sales tax, and in the 2011 special session tax bill, townships were also exempted. But the state actually imposes a sales tax on its own taxable purchases.

Since the sales tax was extended to city purchases, the Legislature has subsequently exempted some items. These items include certain firefighting equipment and police equipment and supplies, certain library purchases, certain capital equipment purchases, and other limited exemptions.

According to a fiscal note prepared by the Minnesota Department of Revenue based on a bill introduced in 2007, cities, counties and townships (townships were subject to the tax in 2007) were projected to pay roughly $150 million in sales taxes to the state on taxable purchases during state fiscal year 2011.

The League's legislative policy on "Sales Tax on Local Government Purchases" (FF-9, page 91 of the 2013 City Policies [pdf]) supports a sales tax exemption for cities and calls for any future expansion of the sales tax base to exempt cities.

The governor’s sales tax plan
The bill introduced by Sen. Wiger could interact with the governor’s proposal to broaden the state sales tax base and lower the sales tax rate. The governor’s plan would reduce the general state sales tax rate to 5.5 percent from the current 6.875 percent. This rate reduction would be offset by including in the definition of taxable items such professional services as legal, accounting, architecture, specialized design, computer, management consulting, advertising, employment, and business support services.

In addition, the governor’s sales tax plan would extend the sales tax to auto and other repair services, telecommunications equipment, court reporter documents, advertising materials, and publications.

Cities are subject to the sales tax, and cities purchase many of the services that would become taxable under the governor’s proposal. This makes the net impact of the governor’s sales tax plan, including the rate reduction, difficult to estimate.

We need your help!
The League is collecting information from cities to find out if the governor's sales tax plan will increase or decrease city sales tax liability. For more information on the League’s effort to quantify the impact of the governor’s sales tax proposal, read the related 15-Minute Advocate article.

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