Omnibus Tax Bill Expands and Clarifies Local Government Sales Tax Exemption

For cities, one of the most significant portions of the omnibus tax bill will be the changes to the local government sales tax exemption passed into law in 2013.
(Published May 12, 2014)

The League of Minnesota Cities spent a considerable amount of time during the 2014 legislative session working with the Department of Revenue and the Legislature to expand and clarify the scope of the local government sales tax exemption enacted in 2013. Legislation reflecting the positions of the League were introduced by Sen. Ann Rest (DFL-New Hope) and Rep. Mike Freiberg (DFL-New Hope), and the final tax committee report now includes modifications and clarifications that will simplify the exemption and expand it to other city instrumentalities.

Below is an initial summary of the sales tax exemption provisions contained in the conference committee report. The report will be finalized by the conference committee on May 12 and sent to the House and Senate floors for final approval. Gov. Dayton is expected to sign the package of tax law changes.

Exempt entities expanded
The 2013 legislation granted a sales tax exemption to “cities and counties,” and the Department of Revenue interpreted this language to exclude joint powers entities and other instrumentalities of local government.

The adopted omnibus tax bill language expands the sales tax exemption to instrumentalities of cities and counties, including joint powers entities, all economic development authorities, housing and redevelopment authorities, and port authorities as well as special districts defined under Minnesota Statutes, section 6.465 and special taxing districts defined under Minnesota Statutes, section 275.066.

However, the expanded exemption is not effective until Jan. 1, 2016. This delayed effective date was included in order to fit the omnibus tax bill tax reductions into the overall budget target that includes the yet-to be-finalized supplemental budget and bonding bills.

Goods and services generally provided by a private business
One of the most confusing aspects of the local government sales tax exemption is a provision that makes purchases of inputs to goods and services generally provided by a private business subject to the sales tax.

Existing law contains two lists of goods and services. The first list contains items that are not tax-exempt, and the second list includes items that are tax-exempt. All other goods and services may be taxable, depending on whether the Department of Revenue determined it was a good or service generally provided by a private business.

Goods and services that are NOT exempt under current law:

  • Liquor stores
  • Gas and electric utilities
  • Golf courses
  • Marinas
  • Health and fitness centers
  • Campgrounds
  • Cafes
  • Laundromats

Goods and services that are exempt under current law:

  • Housing services
  • Sewer and water services
  • Wastewater treatment
  • Ambulance and other public safety services
  • Correctional services
  • Chore or homemaking services provided to elderly or disabled individuals
  • Road and street maintenance or lighting

The “include, but are not limited to” qualification created an enormous gray area in statute that forced the Department of Revenue to have to make determinations on whether a good or service was in fact generally provided by a private business without any direction on how to make that determination.

The conference committee significantly streamlined the statute by subjecting a finite list of goods and services to the sales tax by eliminating the “include, but are not limited to” language. Under the agreement, only the inputs to the following specific goods and services will be taxable when purchased by a local government:

  • Liquor stores
  • Gas and electric utilities
  • Golf courses
  • Marinas
  • Campgrounds
  • Cafes
  • Laundromats
  • Solid waste hauling
  • Solid waste recycling
  • Landfills

The new language adds solid waste hauling services, solid waste recycling services, and landfill services, but the agreement also eliminates purchases related to “health and fitness centers.” This latter reference was the focus of many difficult interpretations by the Department of Revenue, and removing it should significantly reduce the administrative confusion with the exemption, especially for cities with multi-use community centers.

In addition, eliminating the “include, but are not limited to” language in current law will simplify the administration of the sales tax exemption for cities as well as for the Department of Revenue. For example, under existing law, purchases related to pools were determined to be taxable even though pools were not specifically enumerated in the statute. Under the conference report, swimming pool purchases, park equipment, community centers, and other purchases that were subject to taxation will now be exempt. The changes to the definition of non-exempt “goods and services” are effective for purchases made on or after July 1, 2014. We expect the Department of Revenue to issue guidance shortly after the bill is signed into law.

While this is a significant improvement for cities, the new law will not eliminate all administrative hassles. For example, a municipal utility that provides both water and electricity will still have to pay sales tax on purchases used to support the provision of electricity, which is not exempt from the sales tax. Cities will need to develop a method for allocating between purchases used to provide exempt services and those used to provide non-exempt services. The Department of Revenue has given cities flexibility in allocating sales tax, stating that a city must “use a reasonable method of allocation and keep business records that clearly identify how [it] determined the tax.”

Sales tax exemption for construction materials
The League had also pursued legislation to simplify the process by which cities can secure the sales tax exemption for construction materials. Under current law, construction materials for public buildings and other construction projects are exempt from the sales tax, but many cities choose not to secure the exemption because they must follow a complicated bid and administrative process that often costs cities more money than they would save with the exemption. Unfortunately, the simplifications sought by the League were not included in the final bill, however, several legislators have indicated an interest in pursuing changes in 2015.

Snow plows and road maintenance vehicles remain taxable
Although the House bill originally contained a League-supported exemption from the motor vehicle sales tax for city and county purchases of snow plows and road construction/maintenance vehicles, the conference committee chose not to include that provision in the final bill. The League sought the exemption for these vehicles because these vehicles are used for road and highway purposes and similar township purchases are already exempt. Because these vehicles pay the motor vehicle sales tax, the 2013 general sales tax exemption does not extend to these purchases.

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