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The bill contains the League-supported sales tax exemption simplification for construction material purchases.
A bill containing a provision to simplify the process for cities to get a sales tax exemption on construction materials will be considered by the House Taxes Committee on Feb. 23 and 24.
HF 3669 (Rep. Paul Marquart, DFL-Dilworth) would, among other tax initiatives, allow local governments to apply for a refund of the sales taxes paid by contractors for materials used in local government constructions projects, including roads, water and wastewater facilities, public safety facilities, and other public projects. These provisions were included in Gov. Walz’s supplemental tax proposal.
The provision included in the bill is identical to legislation the League has been pursuing since the general local government sales tax exemption was reenacted in 2013. Last session, Rep. Chris Swedzinski (R-Ghent) and Sen. Jason Rarick (R-Pine City) introduced HF 768/SF 216 with this language.
However, a more limited bill, authored by Rep. Greg Davids (R-Preston), was enacted as part of the omnibus tax bill, 2021 First Special Session, Chapter 14. It exempted construction materials from the sales tax only for police and fire facilities.
Current tax exemption process cumbersome
Technically, cities can currently secure the sales tax exemption on construction materials purchased by a contractor for city facilities, but the process is cumbersome and could be risky. To currently receive the exemption, a city would have to separately bid the labor and materials for the project, appoint the contractor to be the purchasing agent on behalf of the city, and assume responsibility for defects in the construction materials.
Due to the challenges of the current process, most cities, counties, and school districts simply forego the exemption, adding 6.875% to the cost of construction materials. According to a revised estimate from the Minnesota Department of Revenue, the cost of this foregone exemption is estimated to be more than $70 million per year.
Under the provision included in the governor’s bill, a contractor would still initially pay the sales tax on the materials, but after the project completion, a city could submit documentation of the materials used in the project and receive a refund from the state.
This year, several local units of government have introduced bills for specific local projects. With the recent passage of the federal Infrastructure Investment and Jobs Act that will bring $6.8 billion to Minnesota in the coming years, and with the potential for a state bonding package this session, the impact of the cumbersome current exemption process will almost certainly grow.
City action needed
City officials are encouraged to contact their legislators and ask them to support HF 3669 (Rep. Marquart), as well as HF 768/SF 216 (Rep. Swedzinski and Sen. Rarick).