Governor’s Tax Bill Introduced: Sales Tax System Revamped

The governor's tax recommendations were recently introduced in the House and Senate. The sales tax changes and exemptions included in the proposed bill language could impact cities.
(Published Feb 19, 2013)

On Monday, the governor’s tax recommendations were introduced in the House and the Senate. The bills, SF 552 and HF 677 were introduced by Senate Tax Committee chair Rod Skoe (DFL-Clearbrook) and House Tax Chair Ann Lenczewski (DFL-Bloomington), respectively.

The legislation includes a new fourth tier income tax bracket, changes in the corporate franchise tax, a sales tax rate reduction and base expansion to services, higher-value clothing, digital goods and Internet commerce, a new LGA formula and a host of miscellaneous tax changes including an increase in cigarette and tobacco taxes. This article will focus on the sales tax provisions in the bill.

Proposed Sales Tax System Changes
Article three of the governor’s tax proposal includes an expansion of the state sales tax base to include a wide array of services, digital goods and Internet commerce. The bill also reduces the overall state sales tax rate from the current 6.875 percent to 5.5 percent. The digital goods changes are intended to treat all forms of electronic content—music, magazines, books and applications—similarly for tax purposes. Currently, applications and magazines are subject to the sales tax but music and books are not. In addition, the bill includes the “affiliate nexus” provisions that have been discussed for several years that would require Internet retailers that do not have a physical presence in Minnesota to collect the Minnesota state and local taxes if they have an affiliate business that has a presence in Minnesota.

Much of the media attention on the governor’s tax plan has focused on the expansion of the sales tax to services. The bill broadly adds nearly all services to the definition of retail sale and includes not only service purchases by individuals but also business-to-business service transactions.

Impact on Cities
Cities would be impacted by the sales tax changes in the bill. For example, the tax liability on purchases of traditional taxable goods such as computers would decrease due to the proposed sales tax rate reduction to 5.5 percent. However, the bill would also subject a wide array of professional services, such as legal, accounting, engineering, computer services, management consulting services, executive search and employment services, advertising and related services, many of which are widely consumed by cities through contracts, to the 5.5 percent sales tax.

Exemptions to Proposed Sales Tax
Although the bill broadly defines services as taxable, the bill also adds a lengthy section of service exemptions to the sales tax. The exemptions, which are enumerated in Article 3 Section 32 of the bill, are detailed and should be carefully reviewed.

The exemptions are categorized within the bill into broad areas related to:

  • agriculture and forestry support services,
  • bank services,
  • brokerage and investment counseling services,
  • cemetery grounds maintenance services,
  • construction labor for real property services,
  • education services,
  • funeral and cremation services,
  • health care and medical services,
  • installation services,
  • insurance company commissions for policy sales,
  • mining support services,
  • real estate services,
  • social assistance services,
  • storage of farm products and refrigerated food storage,
  • veterinary services,
  • public transit and student transportation services,
  • waste management services, and
  • a category of miscellaneous services.

Exemption Impacts on Cities
One example of an exemption that will impact cities is the exemption of labor services for “construction or improvement of real property include[ing] construction work on buildings and engineering projects such as highways, bridges, and utility systems.”

The bill also exempts a category of public services that are provided by government for a fee including such services as “issuing, renewing, and reinstating licenses and permits; inspection and certification of property, goods, and services, operations, and standards; and various other services provided by local, regional, state, and federal government agencies or officials; except services which are specifically enumerated in this chapter as being taxable services, even though provided by a government.”

Several cities have raised concerns about whether government-to-government service arrangements would become taxable under the governor’s plan. Although the League has been verbally told that government-to-government service arrangements would not be taxed, the bill is not entirely clear on this exemption.

More Information To Come
We expect the House and Senate Tax Committees will take up these bills later this week or early next week. The hearings will provide an opportunity to explore the intent and effects of the governor’s plan. League IGR staff will keep you updated through Third Reading and the Cities Bulletin as more information is known.

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

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