City/County Sales Tax Exemption Bills Heard on Wednesday

Bills that would exempt local governments from the state sales tax were laid over for possible inclusion in a omnibus tax bill.
(Published Feb 14, 2013)

On Wednesday, the House Tax Committee considered three bills that would exempt a large portion of the purchases of local units of government from the state sales tax.The bills include HF 295, a bill introduced by freshman Rep. and former Elk River councilmember Nick Zerwas, (R-Elk River), HF 469, introduced by Rep. Peter Fischer (DFL-Maplewood) and HF 466 introduced by Rep. Paul Anderson (R-Starbuck). All three bills were laid over for possible inclusion in an omnibus tax bill.

The Department of Revenue estimates that the savings to cities and counties would be $115.9 million in state Fiscal Year 2014. The first year figure only reflects 11 months of exemption. In Fiscal Year 2015, the first full year of the exemption, the savings to cities and counties is estimated to be $129.2 million.

The committee also considered two bills that would exempt public safety radio communication system equipment from the sales tax, HF 118, authored by Rep Jay McNamar (DFL-Elbow Lake) and HF 428, authored by Tom Anzelc (DFL-Balsam Township).

Testifying in support of the broad sales tax exemption bills were South St. Paul Mayor Beth Baumann, Plymouth Mayor Kelli Slavik, Elk River Administrator Cal Portner and Beltrami County Commissioner Joe Vene. In accordance with FF-9 (pg. 91 in 2013 City Policies), the League testified in support of all three broad exemption bills as well as the public safety radio communications exemption bills.

Background
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-governor Arne Carlson that would have cut city LGA by $66 million. During the debate, the House and Senate developed an alternative proposal 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.

Exclusions to exemptions
The bill does not exempt purchases by local governments of goods and services used as inputs to goods and services generally provided by a private business. Examples are liquor stores, gas and electric utilities, golf courses, marinas, health and fitness centers, campgrounds, cafes, and laundromats. These exclusions from the exemption mirror the provisions included in the 2011 township sales tax exemption and are intended to maintain a level tax structure for private businesses that compete with government-owned enterprises.

Purchases by special taxing districts are not exempted under the bill. Special districts include entities that are not cities or counties that have their own taxing powers and could include some HRAs, EDAs and Port Authorities. The exemption would also not apply to building materials purchased by construction contractors (except in the case of local government correctional facilities) or purchases and leases of registered motor vehicles that are not otherwise exempt including ambulances, fire trucks and marked squad cars.

We need your help
With the Governor’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 we do not yet have 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 on the possible sales tax impact, please forward to Gary Carlson at gcarlson@lmc.org.

Questions? Contact Gary N. Carlson at (651) 281-1255 or gcarlson@lmc.org.

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