Bills Would Provide Construction Sales Tax Exemption for Two City Projects

The League is also working with legislators to introduce a bill that would provide a general construction sales tax exemption for all local governments.
(Published Feb 4, 2019)

The House Taxes Committee last week considered two bills that would provide a sales tax exemption through a refund process for construction materials used for two specific public facilities when the materials are purchased by a contractor.

The first bill, HF 279 (Rep. Ruth Richardson, DFL-Mendota Heights), would provide a refund of sales taxes paid on construction materials for a new Inver Grove Heights fire station that includes a public safety training facility. According to the Department of Revenue analysis, the exemption will reduce the cost of the $8.7 million facility—$4.3 million of which is assumed to be taxable materials—by an estimated $300,000.

The second bill, HF 333 (Rep. Patty Acomb, DFL-Minnetonka), would provide a refund of the sales taxes paid on construction materials for a Minnetonka public safety facility. The Department of Revenue analysis estimates the exemption will reduce the cost of the $25 million facility—$12.5 million of which is assumed to be taxable materials—by an estimated $850,000.

Both bills were laid over for possible inclusion in the omnibus tax bill.

General exemption bill coming soon

Rep. Mike Freiberg (DFL-Golden Valley) and Sen. Ann Rest (DFL-New Hope) will be introducing companion bills that would create a process to generally allow cities, counties, school districts, and townships to receive the sales tax exemption through a refund when construction materials are purchased by a contractor for a public project.

Background on the issue

Under current law, for cities, counties, townships and school districts to receive the benefit of the sales tax exemption for building, construction, or reconstruction materials, supplies, and equipment used in public buildings and public infrastructure projects, they must follow a very cumbersome set of rules that require local units of government to:

  • Separately bid labor and materials.
  • Designate the contractor as a legal purchasing agent on behalf of the local unit of government.
  • Assume the liability for damages caused by defective materials or delivery delays.

Since the current required process adds considerable risk and potential cost to the contracting process, many cities, counties, and townships choose not to pursue the sales tax exemption at all. Similarly, some school districts—which have never been subject to sales tax on their purchases, but have been subject to these rules for decades—have opted to pay the sales tax on construction materials.

According to an analysis prepared last session on a bill that would provide a refund to all local units of government, the Department of Revenue estimated that paying the sales tax will increase the cost of local government projects by an estimated $18.3 million in FY 2019 and $18.9 million in FY 2020.

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