Open season on Dayton tax proposal
The Minnesota State Bar Association has hired a public relations firm and is asking the state’s law firms to donate money to help beat back the proposed sales tax on business-to-business services.
The MSBA held a series of meetings last week to discuss strategies for defeating the proposed tax and has retained the Minneapolis firm of Himle Rapp to aid lobbying efforts.
The state’s 100 largest law firms were invited. About 40 firms sent representatives to one of the meetings Wednesday morning at the MSBA offices in Minneapolis; many more participated via teleconference. The MSBA is asking for $35 per lawyer per firm to help pay for the public relations battle it plans to wage against the tax.
Since Gov. Mark Dayton announced his budget proposal in January, the business-to-business tax has been by far the most unpopular component. Many law firms say they will lose business to competitors in states like Wisconsin, Iowa and the Dakotas that do not have the tax. (Minnesota would become just the fourth state to tax legal and other professional services.) Some firms are even exploring the possibility of opening offices in neighboring states to get around the tax.
“I haven’t met a lawyer yet who wants this,” said Scott Dongoske, the president of Winthrop & Weinstine in Minneapolis.
Law firms may not like the idea, but many aren’t saying so publicly.
Faegre Baker Daniels; Leonard, Street and Deinard; Dorsey & Whitney; Briggs and Morgan; Greene Espel; and Fredrikson & Byron all declined to comment for this story.
“We don’t want to make things difficult for the governor; he’s got a lot of things to work out. We aren’t taking a public position on this as a firm,” said Martin Lueck, the Chairman of the Executive Board at Robins, Kaplan, Miller & Ciresi in Minneapolis.
The state is facing a $1.1 billion budget deficit and Dayton said his budget would raise about $2.1 billion in additional revenue in the 2014-15 biennium — about $1.5 billion annually would come from the business to business tax. The rest would come from a new tax on cigarettes, Internet purchases, expensive clothing and a higher tax rate for the richest Minnesotans. The corporate income tax rate would be reduced from 9.8 percent to 8.4 percent.
Myron Frans, the Commissioner of the Department of Revenue, said the business to business tax is a necessary step the state must take to broaden its tax base. He realizes that the tax is unpopular, but said there is some misinformation. The tax is about destination. Businesses in Wisconsin and Iowa who do business with Minnesota companies will still be subject to the tax. But Minnesota businesses with North Dakota clients will not.
“We feel confident the proposal we put together is the best one out there—the most honest and the most transparent,” he said. “To make investments in our state, to solve the deficit and pay back the schools, we structured this so it is held together by different and sometimes competing interests. Everyone has some skin in the game. Until someone comes up with a better plan, our view right now is, we will submit the bill language as is.”
The state’s overall sales tax rate will be cut from 6.5 percent to 5.5 percent. Frans said that for many consumers the reduction in the tax rate will offset any increase applied to goods and services that would now be taxed.
Frans said the real change will come for the true “service businesses.” The tax would start next year and the state will do outreach to help businesses learn how to collect the tax appropriately from their clients. There is time for those businesses to adjust, he said.
At last week’s meeting, MSBA officials also asked rank-and-file members to get to know their representatives and senators and work on convincing them the tax is a bad idea. The task is not easy. Unlike when the tax has been introduced before, Democrats control the Governor’s office and both branches of the legislature.
“We’re taking this extremely seriously. If we’re going to be successful we’ve got to start right now. We have to explain why tax on legal services is bad policy,” said Bob Enger, the MSBA President.
And that will cost money. The MSBA employs two lobbyists to represent its members at the legislature. The association did not say how much it is paying Himle Rapp. The firm is no stranger to high profile legislative battles.
Last year the firm was part of the team hired by the Minnesota Vikings to garner legislative support for public financing for a new $1 billion football stadium. It also worked with the Northstar Corridor Development Authority to gain public and legislative support for commuter rail service.
The MSBA’s lobbyists are working to set up meetings with several lawyer-legislators in the coming days to “get a sense of where they stand on the issue.”
Attorney Kathleen Marron runs two small businesses based in Minnesota. She is an executive coach and attorney whose clients include law firms and financial service companies. She also practices law with GCL, a company that provides outsourced, in house legal services to businesses ranging from startups to Fortune 100.
She said she believes in paying taxes and said doing so is a necessary part of living in a community that values education and building roads and bridges. But she said that she and many other business owners and attorneys will face a Hobbesian Dilemma if the state of Minnesota institutes the business to business tax.
“You would either have to swallow the tax and keep your prices flat, or you pass it on to your clients and risk losing your business to companies in other states that don’t have the tax,” she said. “Quite frankly I don’t know what I would do, but I don’t think either choice is a good one. There is a lack of wisdom in this proposed tax. It could potentially put a lot of small businesses out of business.”
It is not just attorneys and law firms who would be affected. Many professional service firms, like accountants and public relations advisers, count lawyers as some of their bigger clients. Terrie Wheeler, a marketing and sales coach in Rush City, works with attorneys to help them attract new clients. She said the new tax could entice her clients hire in-house people because it would be cheaper than hiring her. She said it would also put undue stress on small business owners to administer, especially those with clients out of state or the country.
“If this passed, I would have to fight to sell my value to convince clients that we are worth it even if you have to pay sales tax on the service I offer,” she said. “The reality is my clients would be feeling the pain the same as I would.”
Tax or No Tax?
Gov. Mark Dayton has proposed a 5.5 percent sales tax on legal and other professional services. Here’s how it would apply:
• Client and lawyer both in Minnesota
The seller must collect sales tax on the purchase and pay it to the state.
• Client in Minnesota, lawyer in another state
The seller must collect sales tax if they have “nexus” in Minnesota – that is, if they have a physical presence such as an office, warehouse or employees here. If the seller doesn’t collect sales tax, the buyer is required to pay use tax to the state.
• Lawyer in Minnesota, client in another state
The good or service is not subject to Minnesota’s sales tax when delivered in another state. The good or service may be taxable in the buyer’s state, depending on that state’s laws.
Source: Minnesota Department of Revenue