The new law will reduce the cost for construction, reconstruction, and remodeling of public safety facilities owned by local units of government.
As part of the 2021 omnibus tax bill (First special session Chapter 14, Article 4, Sections 7, 8, 9 and 10), cities will now have access to a refund process that will allow any city to realize the sales tax exemption on materials, supplies, and equipment incorporated into a fire station or police station through a refund process. The refund also covers “related facilities” which include roads, lighting, sidewalks, and utility components that are necessary for safe access to the building.
Under the new process, contractor purchases on behalf of a city will be initially subject to the sales tax. Upon completion of the project, the contractor, subcontractor, or builder will be required to provide the city with a statement including the cost of the exempt items and the taxes paid on the items used in the facility construction, remodel, expansion, or improvement. The city will then file an application with the Department of Revenue with documentation of the purchases in order to receive a refund. The law is effective for purchases made after June 30, 2021.
According to the Department of Revenue analysis of the exemption (pdf), it is expected to save local units of government $4.38 million in the first full year of implementation.
The omnibus tax bill also includes retroactive sales tax exemptions for public safety facilities in the cities of Buffalo, Maplewood, and Plymouth and an extension of a previously granted exemption for the city of Minnetonka. All four of those city-specific exemptions follow the same new refund process.
Other city construction projects will only be eligible for the sales tax exemption process under MN Rules 8130.1200 described above. Further information on the requirements for all other construction projects can be found in the Department of Revenue Notice 17-10. The League will continue to pursue extending the refund process to all city construction projects.
New law simplifies cumbersome process used since 2013
Although most city purchases were exempted from the sales tax during the 2013 legislative session, many cities continued to pay the sales tax on construction material purchases for public facilities. In order to secure the exemption when the purchases are made on behalf of a city by a contractor as a part of a lump sum contract, the city is required to follow a rigorous, cumbersome process and as a result, many cities and other local units of government simply forego the exemption and pay the sales tax. Under the process defined in Minnesota rules (MN Rules 8130.1200), a city must follow a process that includes:
- Separately bidding labor and materials;
- Designating the contractor as a legal purchasing agent on behalf of the local unit of government, and;
- Assuming the liability for damages caused by defective materials or delivery delays
The fact that the required process added considerable risk and potential cost to the contracting process, many cities, counties, townships chose not to pursue the sales tax exemption at all.
Since 2013, the League has been seeking legislation to create a process for cities to receive a refund on the sales taxes paid on construction materials and equipment used in all public facilities. The most recent estimate of the cost to local governments for the forgone sales tax exemption is $70 million per year.