Sales Tax Base Expansion Bills Considered

Senate Tax Reform Division begins looking at bills that would broad the sales tax base and possibly allow the sales tax rate to be reduced.
(Published Jan 17, 2013)

On Wednesday and Thursday, the Senate Tax Reform Division of the Tax Committee considered several bills 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 SF11 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 Senator Ann Rest (DFL-New Hope).

Under SF9, 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 their sales tax to articles of clothing in excess of $175 while New York applies their sales tax to article of clothing in excess of $110. At this time, the department was 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 due to the fact that the revenue impact of the bill has not yet been estimated, the bill as introduced does not specify the new sales tax rate.

Under SF11, the existing exemption for clothing would be fully repealed, essentially subjecting almost all clothing sales to the state sales tax.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, is covered.

The third bill, SF 35 that would subject many digital goods including music, movies, television shows, electronic games, greeting cards and books initially included a general sales tax rate reduction. However, in an amendment offered in committee, Senator 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.

We expect that the Governor’s budget recommendations next week will also include some modernization and expansion of the state’s sales tax base. We will report on the budget recommendations next Tuesday.

Questions? Contact Gary N. Carlson at gcarlson@lmc.org or (651) 281-1260.

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