A Comparison of House and Senate Measures to Clarify Sales Tax Exemption

The House and Senate tax bills take different approaches to addressing the ambiguities of last year’s sales tax exemption for cities and counties.
(Published Apr 14, 2014)

The 2013 omnibus tax bill added “cities and counties” to the list of local units of government that are exempt from paying the state sales tax on their purchases. Since the passage of last year’s law, the Department of Revenue has ruled that joint powers entities and many special districts are not covered by the exemption. The Department has also struggled with determinations of which purchases are not exempt because the goods or services are generally provided by a private business.

The League has been working with legislators to expand the exemption to joint powers entities and other instrumentalities of cities, and to make the list of non-exempt purchases more definitive. The Senate and House both passed their tax bills, and have taken slightly different approaches to clarifying these questions.

Which entities are exempt?
The House bill adds housing and redevelopment authorities, economic development authorities, and port authorities as well as joint powers boards or organizations where at least 50 percent or more of the governmental units that are party to the joint powers agreement are exempt from sales tax. The effective date of the House clarifications was delayed to July 1, 2015.

The Senate bill takes a broader approach, and includes special districts (defined in Minnesota Statutes, section 6.465), any instrumentality of a city, county, or township that has independent policy-making and appropriating authority and any joint powers board or organization. The League prefers the Senate’s language because it exempts more government entity purchases. The effective date of the Senate clarifications was delayed to Jan. 1, 2015.

What purchases are not exempt?
When the 2011 Legislature exempted township purchases, a carve-out from the exemption was added that excluded “goods or services purchased by a local government as inputs to goods and services that are generally provided by a private business, and the purchases would be taxable if made by a private business engaged in the same activity.” When the sales tax exemption was extended last year, this private goods and services carve-out similarly applied to city and county purchases.

The statute defines goods or services generally provided by a private business as including, but not limited to, goods or services provided by liquor stores, gas and electric utilities, golf courses, marinas, health and fitness centers, campgrounds, cafes, and laundromats. The existing law does define a few municipal services as not being generally provided by a private business, including housing services, sewer and water services, wastewater treatment, ambulance and other public safety services, correctional services, chore or homemaking services provided to elderly or disabled individuals, or road and street maintenance or lighting. The open-ended definition has resulted in many interpretations by the Minnesota Department of Revenue about what is “generally provided by a private business,” causing confusion for city officials.

The House proposes to make the list of non-exempt purchases definitive, an approach favored by the League. The House bill states that only purchases for inputs to the following goods and services are not exempt: liquor stores; gas or electric utilities; solid waste hauling services; solid waste recycling services; landfill services; golf courses; marina, health, and fitness centers; campgrounds; cafes; and laundromats. This list is longer than current law due to the addition of solid waste hauling services and recycling services, a change requested by the waste haulers organization. This change would have a minimal impact to cities because the Department of Revenue has already ruled that these services are not exempt under the current law. The House changes to this section are effective July 1, 2014.

The Senate language retains the “including, but not limited to” language that has resulted in much of the ambiguity in the current law. The Senate approach adds several specific items to the existing list of goods and services that are not exempt, including solid waste management services, housing facility improvements and maintenance, fitness and special interest classes, recreational and athletic facilities, banquet and private party facilities, aquatic facilities, and cemeteries.

The Senate also modifies the list of purchases that are “not generally provided by a private business,” and therefore are exempt from the sales tax, to include computing services, ball fields, any goods or services provided by local government only to local governments. The Senate bill removes the general reference to “housing services” and modifies the housing, chore, or homemaking services provided to the elderly, or disabled individuals to include housing, chore, or homemaking services provided to poor individuals. The Senate changes to this section are effective Jan. 1, 2015.

Construction materials exemption not included
Neither the House nor the Senate bills include the League-sponsored bills that would have repealed the current complex sales tax exemption rules and allow cities, school districts, counties, and townships to claim the tax exemption on construction materials through the Department’s existing refund process. Under current law, cities must bid labor and materials separately and also designate a contractor to be a purchasing agent on behalf of the city.

Although the sales tax exemption is technically available for construction materials, the rules are so complex and the implementation can be so complicated that many cities have found that it will cost more money to implement than they will save on the tax exemption.

Snow plows and road construction vehicles
League-sponsored legislation to exempt from the motor vehicle sales tax city and county purchases of snow plows and road construction vehicles has been included in the House version of the omnibus tax bill, but not in the Senate version. The effective date of the exemption in the House omnibus tax bill was moved from July 1, 2014, in the original bill to July 1, 2015.

The differences between the two bills will be worked out during conference committee over the next few weeks. If you have questions or concerns about whether specific city services are considered taxable, please contact Gary Carlson or Patrick Hynes (see info at right). Identifying potential problems with the bill language is critically important as the League works with legislators to craft the final version of the bill.

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