Governor Supports Extending Sales Tax Exemption

Clarification and simplification of the sales tax exemption process will be a major League effort in 2014.
(Published Feb 3, 2014)

According to a recent letter from Revenue Commissioner Myron Frans, Gov. Dayton supports extending the sales tax exemption to certain special districts and joint powers entities.

Frans sent the letter on Jan. 27 to South Lake Minnetonka Police Chief Brian Litsey in response to a communication from the chief that urged the commissioner and governor to support legislation to clearly extend the new sales tax exemption to joint powers entities. Chief Litsey represents the four-city South Lake Minnetonka Police Department (SLMPD) joint powers entity.

In the letter, Frans states, “Gov. Dayton recently announced his desire to extend the sales tax exemption to certain special districts and joint powers entities that were not included in the 2013 tax bill.”

Areas of confusion
Since the sales tax exemption for cities and counties was enacted by the 2013 Legislature, many questions have been raised about which purchases are now exempt and also about the procedures that cities must use to secure the exemption.

The League will be seeking clarification on the following issues:

Joint powers entities. The law added “cities and counties” as exempt entities, but these terms have been interpreted by the Department of Revenue (DOR) to cover only those specific entities and not, for example, joint powers entities created by groups of local units of government to provide public services, like the SLMPD.

Services provided by private businesses. A limitation on the exemption put into place by the 2011 Legislature, when townships received their sales tax exemption, has generated many new questions because cities and counties generally provide a wider array of services than townships.

The law states that “goods and services generally provided by a private business” are not exempt from the sales tax. While some purchases are clearly not exempt (e.g., purchases made by a public golf course), the DOR has extended the limitation to a wider array of purchases than the League believes was intended by the Legislature, and cities find it difficult to know with certainty whether certain purchases are exempt.

Construction materials. A third issue with the exemption actually extends back decades and is related to certain purchases of construction materials under a lump sum contract for materials and labor. Unless a city follows a complex and rigorous process that requires separate bidding for labor and materials and a purchasing agent agreement with a contractor, the sales tax exemption is not available for the materials. The process changes the way that construction projects are managed, and many cities have found that it will cost more to implement than they will save on the tax exemption.

League proposal
The League has drafted a sales tax exemption clean-up bill that attempts to address three aspects of the city sales tax exemption:

  1. Extending the sales tax exemption to all instrumentalities of local units of government so that cities that enter into joint powers agreements do not lose the exemption.
  2. Repealing the sales tax exemption exclusion for “goods and services generally provided by a private business” to eliminate confusing interpretations of the law, and reduce the administrative burden on local government and the Department of Revenue.
  3. Simplifying the process by which local units of government can secure the sales tax exemption on materials used in construction projects to ensure that cities are not forced to pay taxes on exempt materials.

The League expects to have the bill introduced in the first week of the 2014 legislative session. If your city has questions about the sales tax exemption, or has received guidance from the Department of Revenue on the applicability of the exemption, please contact the League staff noted at right.

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