League Seeking to Clarify New Sales Tax Exemption Law

There are some ambiguities in the law that need to be cleared up.
(Published Aug 19, 2013)

Although the sales tax exemption extended to cities and counties during the 2013 legislative session seems like a straightforward change in tax policy, several historical artifacts have added complexity to the new exemption.

Department of Revenue (DOR) staff are trying to sort through many of these issues. The result almost certainly will be that the sales tax exemption statute, Minnesota Statutes, section 297A.70, will need clarification and cleanup in the 2014 legislative session.

DOR Sales Tax Division staff participated in an Aug. 12 League webinar on this topic.

How we got here
Prior to the 1992 law change that subjected purchases by cities, counties, and townships to the sales tax, the statutes granted an exemption to “local governments.” In 1992, that exemption was modified to only provide the exemption specifically to “school districts.” Then in the 2011 special legislative session, the Legislature added “towns” to the list of eligible exempted entities. When the law was amended in 2013, counties and cities were simply added to the list of exempt entities, rather than deleting the reference to school districts and towns and reinstating the general reference to “local governments” that had existed prior to the 1992 repeal of the city and county exemption.

In addition, the question about the application of the exemption to other entities such as joint powers boards, economic development authorities, housing and redevelopment authorities, and port authorities was not raised until after the Legislature adjourned. Although the League has met with DOR staff to urge a broader reading of the exemption, at this point, the DOR is reading the new law to only exempt purchases made directly by cities and counties.

Also in 2011, the Legislature added an exception making taxable those goods or services purchased by a town as inputs to goods and services generally provided by a private business. The rationale for that limitation on the exemption was that public enterprise operations should not have a tax advantage over private businesses.

Although this provision was added in 2011, the scope of the language has not been tested because townships generally provide a very limited range of basic services to residents, and these services have not crossed into the gray area of “goods and services generally provided by a private business.”

Cities, on the other hand, offer recreational services to residents that mirror similar recreational services provided by private businesses. Operations such as ice arenas, aquatic centers, and fitness centers are, to varying degrees, offered by private businesses. For these municipal operations, the key phrase in the law is “generally provided by a private business.” The Department of Revenue will have to make determinations about what level of private business offerings triggers the “generally provided by a private business” threshold.

Steps toward clarification
League staff have discussed these issues with Senate Tax Chair Rod Skoe, Senate Tax Reform Division Chair Ann Rest, and House Tax Chair Ann Lenczewski. At this point, they all have expressed interest in clarifying the law in 2014 should the Department of Revenue interpretation of the law severely restrict the application of the sales tax exemption.

The League will work with DOR staff on interpretation issues between now and the Jan. 1, 2014, effective date of the exemption. Please send any specific questions you have on the exemption to Gary Carlson (see info at right). Your questions will help us craft a 2014 bill to clarify ambiguities in the law.

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