Bill Would Provide Construction Sales Tax Exemption for Cities

Under the bill, cities would be able to receive a refund on construction materials purchased by a contractor for public projects.
(Published Feb 11, 2019)

League-supported legislation was introduced last week that would streamline the sales tax exemption process on construction materials purchased by cities and other local governments.

SF 901 (Sen. Ann Rest, DFL-New Hope) and its companion, HF 670 (Rep. Mike Freiberg, DFL-Golden Valley) were each referred to the respective Taxes committees in the House and Senate. Another House bill with the same proposal, HF 779 (Rep. Chris Swedzinski, R-Ghent), was also referred to the Taxes Committee.

The House Tax Committee will consider HF 670 and HF 779 on Feb. 12.

Cumbersome process currently required

Under current law, cities, counties, townships, and school districts must follow a cumbersome set of rules to receive the sales tax exemption for building, construction, or reconstruction materials, supplies, and equipment used in public buildings and public infrastructure projects. They are required to do all of the following:

  • 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.

Because the current required process adds considerable risk and potential cost to construction projects, many cities, counties, townships, and even school districts—which have been subject to these rules for decades—choose not to pursue the sales tax exemption at all.

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 (DOR) estimated that paying the sales tax will increase the cost of local government projects by an estimated $18.9 million in fiscal year 2020.

Bill would allow a sales tax refund

Under these bills, contractor purchases on behalf of cities will initially be subject to the sales tax, but a city would now be able to apply to the state for a refund of the sales tax paid after completion of the project.

The refund process is not as simple as an up-front sales tax exemption, but because of concerns raised by the DOR, the bill is drafted as a streamlined refund process. This will allow local units of government to receive the benefit of the exemption while allowing the DOR to ensure that the sales tax savings are realized by the exempt entity and not the contractor.

Under two separate bills, specific projects in Minnetonka and Inver Grove Heights would receive an exemption through a similar refund process. (Read related story.)

Overall, the DOR estimated that a similar bill considered last biennium would save local units of government nearly $19 million per year on construction material purchases.

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