But push on sales tax provisions will cost additional dollars
Last session, after the Legislature exempted city and county government from paying the state’s general sales tax on most purchases, the move was heralded as a long-overdue triumph of common sense. After all, what is the logic in the government taxing the government?
But when it comes to taxes, the devil is always in the details. In this case, some of those details have local advocates for Minnesota’s 87 counties and 853 cities rushing back to the Capitol less than two months after the new law went into effect, asking for more relief and clarity.
The most glaring problem involves government entities that operate under joint-powers agreements. Such collaborations, designed to achieve economies of scale and reduce taxpayer costs, have been widely encouraged by state government in recent years. But the Department of Revenue has determined that such entities remain on the hook for the 6.8 percent sales tax because last year’s reforms explicitly exempted only cities and counties.
A prime example is the South Lake Minnetonka Police Department, which serves the cities of Excelsior, Greenwood, Shorewood and Tonka Bay. Indistinguishable from other municipal police forces in all regards other than its jurisdictional peculiarities, the department does not qualify for the break from the sales tax under current law because it is not — technically — a city or county agency.
“I don’t know how many of these joint-power entities exist, but they are all over the place,” said Gary Carlson, intergovernmental relations director for the League of Minnesota Cities. That ubiquity is one reason that an extension of the exemption is a top priority for cities and counties in the coming session.
Carlson said he is relatively optimistic about the prospects, given that many lawmakers who supported last year’s reform assumed it already covered joint-power entities and “are still scratching their heads” over the issue.
Joint-powers exemptions to be examined
Sen. Ann Rest, the chair of that chamber’s Tax Reform Division and a champion of the sales tax exemption, said she expects to take up the subject of joint-powers entities at the start of the session and promised “a thorough discussion.”
“I think it is going to be a not-insignificant revenue loss. It’s not just a tweak or a minor correction,” Rest cautioned. “If we exempt these purchases, what is the revenue lost to the state?”
More generally, Rest said she is concerned about “major discrepancies” in the financial estimates about the effects of the of the sales tax exemption on the state’s bottom line. According to the Department of Revenue’s most recent calculations, released this week, the general fund stands to lose approximately $138 million in fiscal 2015.
“The local governments say the department is wrong and it won’t cost that much. We’ll have hearings at the beginning of the session to get at that discrepancy,” Rest said.
Carlson said the disparity is not entirely surprising.
“A lot of this is more art than science,” Carlson said. Lingering uncertainty over specific exemptions — what exactly qualifies — make the calculations more difficult. “I’ve had several city finance officers tell me, ‘We’ll know a lot more after we’ve gone through a year of this.’”
Local construction contracts an issue
Along with the push to provide tax relief for joint-powers entities, the League will lobby for two other significant reforms in the same arena. Carlson was tempered in his optimism. “Sen. Rest and [Senate Taxes Chair Rod] Skoe are looking very hawkishly at the costs. We’re going to have to sing for these changes,” he said. “It’s not going to be easy.”
At the top of that list: an overhaul of the rules governing sales tax exemptions on local construction contracts. Under current law, the labor and material components of a project need to be bid separately to qualify for exemption.
The rule is designed to ensure that contractors don’t game the tax system by buying extra materials for public projects — tax-free — and then stockpiling them for private purposes. But as a practical matter, Carlson said, that has the potential to drive up construction costs because it is easier to pay sales tax than to comply.
Rest acknowledged that the contract process is cumbersome. She said that it is unlikely the Legislature will deal with the issue until 2015.
More clarity sought
Finally, Carlson wants lawmakers to clarify the rule governing sales tax exemptions for public enterprises that are seen to be in competition with the private sector. That provision of the law was designed to level the playing field for businesses by requiring municipal liquor stores, publicly owned golf courses and the like to continue paying sales taxes on purchases.
However, Carlson said it is difficult in many instances to parse the fine points of the rule. For instance, when a community center is used for as a senior gathering place, it is exempted from paying sales tax on inputs such as electricity and water. But if that same community center is rented for a wedding, those inputs become taxable.
“As you can imagine, these are not the easiest things to track. Our cities say it’s not worth it and they don’t take advantage,” said Carlson.
Minnesota instituted a sales tax in 1967 but provided a general exemption for local government. In 1992, the Legislature repealed that exemption for cities, counties and townships. As a result, 853 cities and 87 counties have been paying general sales taxes since that time. At the time, school districts, hospitals, nursing homes, libraries and medical supplies for ambulances were exempted. Since then, the Legislature has added more exemptions. Opinions are divided as to whether the imposition of the sales tax on local government was intended as a temporary or permanent measure.