A seemingly simple new law that exempts local governments across Minnesota (including the Park Board) from paying sales tax on most purchases has been deemed largely ineffective due to the unforeseen administrative challenges it has created.
The law was designed to help keep local taxes down by eliminating a strange circular funding mechanism in which governmental entities are required to pay taxes on projects that are funded by taxes. Prior to 1992 local governments didn’t have to pay sales tax on most purchases, but that year the Legislature chose to extend taxes to help shore up a state budget crisis.
Thought to be a temporary fix, the policy was finally repealed last year and it went into effect Jan. 1. To prevent government programs and facilities from having an unfair advantage over private sector competitors, a provision was included that requires local governments to still have to pay taxes on “goods or services generally provided by a private business.”
This provision has become an administrative nightmare for the Park Board, because every space it owns provides a mix services, some of which are provided by local businesses and some that are not.
Take Powderhorn Park, for example. Goods or services purchased for the picnic area, walking path, drinking fountain or bathrooms would be exempt from sales taxes, but anything bought for its playing fields, bandstand, wading pool or basketball court is still taxable.
“If we purchase grass seed and we use it all around Powderhorn Park, a part of that invoice is going to be taxable and a part is going to be non-taxable, and the provision says we have to develop some sort of prorated process to qualify for the sales tax exemption,” said Juli Wiseman, finance director for the Park Board.
Another burdensome requirement of the sales tax exemption is that when a city hires a contractor to perform construction work, the labor and the construction materials must be split into two separate bids. Then, instead of buying materials itself, the contractor acts as a purchasing agent on behalf of the city, leaving the city liable for any defective or damaged material.
“As we all know with construction contracts, there is a lot of responsibility that remains with the contractor when you bid that project together. The benefit of the sales tax exemption is not great enough to justify taking on that much extra liability,” said Wiseman, who said until that provision is repealed the Park Board will continue to pay sales tax on materials purchased for construction projects.
The Park Board anticipated $300,000 in savings this year from the sales tax exemption, but due to those provisions that figure has been lowered to $125,000. According to the League of Minnesota Cities (LMC), the state projected it would lose $429 million annually in sales tax revenue due to the exemption, but early estimates place that number between $50 million and $55 million.
The Park Board is supporting an initiative sponsored by the LMC to get the burdensome provisions repealed this legislative session. Repealing them would ultimately let the law achieve what it was intended to achieve — lower expenses for local governments resulting in lower municipal and county tax rates. But what about the private businesses the provisions were created to protect?
“It does create a slight advantage for a governmental entity,” said Park Board Commissioner Jon Olson, who owns and operates a small business and chairs the Park Board’s Legislative and Intergovernmental Relations Committee. “Personally does it bother me? No, not really.”
Gary Carlson, LMC’s Intergovernmental Relations Director, says a repeal could be justified because local governments often provides services and facilities for free or at a much lower rate than a private business. He used a municipal swimming pool as an example.
“There’s a gray area. Yeah you’re competing with the private sector by offering a swimming pool, but if you’re doing it in such a way as to allow people who otherwise wouldn’t be able to use a pool, does it make sense that we’re applying sales tax toward the purchase of chlorine for that pool?”
This summer the Park Board plans to open a brand-new pool at Webber Park in north Minneapolis. The pool, featuring a 4,500-square-foot wading area, five lap swim lanes, and a 13-foot deep diving area, will be free to the public.
Carlson says he’s been contacted by a number of state legislators interested in tweaking provisions in the sales tax exemption, but has not found someone to author those changes at this point. The LMC is lobbying for an outright repeal, but Carlson said he would be willing to entertain a more nuanced compromise.
“We’re certainly willing to discuss alternatives to an outright appeal, but members of the LMC have established a policy to ultimately simplify this, so that when cities make purchases they are exempt because they’re doing it for a public purpose,” he said.
Ben Johnson // 612-436-5088