Facing tough competition from Xcel Energy Center, Minneapolis arena
knocks out a tax break that had boosted its St. Paul rival.
Since St. Paul's Xcel Energy Center opened, Downtown's Target Center has faced stiff competition for big-time shows, costing Minneapolis some acts -- and the Warehouse District valuable spin-off business.
Target Center remains older and less amenity-laden than its cross-river competitor -- but in the 2003 legislative special session, its high-powered management company quietly plugged a tax loophole that it said had given Xcel Energy Center an unfair advantage.
Xcel Energy Center allowed for-profit promoters to use nonprofit sponsors to avoid paying tens of thousands of dollars in state and local sales tax. Xcel Energy Center officials said that promoters could choose to use the exemption, Target Center officials, taking a stricter reading of the law, did not allow such events, putting itself at a disadvantage in wooing top acts.
In the cutthroat concert business, acts and their agents seek top dollar; venues compete to put together the most attractive financial packages possible. Avoiding sales tax was at least a pot-sweetener to encourage acts to play at the shiny new building in the capital city.
Target Center officials declined an interview request but made their feelings plain in a May 16 memo to State Sen. Larry Pogemiller (DFL-Minneapolis), chair of the Senate Tax Committee. "We are in heavy, intense competition on every concert booked in the market," Target Center Executive Director Steve Mattson wrote. "There's a tremendous impact on Target Center Arena (TC) and Downtown Minneapolis due to the unfair disadvantage caused by Xcel promoting concerts tax-exempt."
Whether the tax change will bring some big-name acts back to Minneapolis remains to be seen -- but Target Center has one less reason to cry foul.
Tax savings topped charity Target Center is already at a competitive disadvantage with Xcel Energy Center. Minneapolis has a 3 percent entertainment tax; St. Paul does not. Throw in the 7 percent sales tax exemption at Xcel Energy Center that Target Center prohibits, and the Minneapolis arena's concert bids began with a 10 percent disadvantage.
Consider the April 17 Billy Joel and Elton John concert, promoted by Jam Productions and sponsored by the Minnesota Music Academy. It grossed $2.2 million -- a record event at Xcel Energy Center, the Music Academy said.
The Target Center memo estimates the event would have generated $134,000 in sales tax.
"We are constantly put in a situation where an agent will do a side-by-side economic comparison of financial terms at each venue," the Target Center memo said. "When an artist, such as Billy Joel and Elton John, and its agent reviews competing venue deals and can walk away with an additional $130,000 by choosing Xcel and its nonprofit entity, we lose every time."
Target Center and Clear Channel Entertainment -- the concert-industry conglomerate that manages the arena for the city of Minneapolis -- used more than self-interest to torpedo the tax break.
Their memo noted that state and local governments lost $400,000 from nine Xcel concerts in 2002 and early 2003. (Skyway News confirmed six concerts; using Target Center's figures, those generated $300,000 in tax breaks.)
Also, the memo and interviews indicate that promoters' tax breaks often exceeded what charities received.
Case in point: a small nonprofit called A Festival of the Heart & Soul!, which sponsored the most nonprofit concerts listed on Target Center's memo.
Local musician Mick Sterling started the festival to raise money for Camp Heartland, a camp for kids affected by HIV/AIDS. Since September 2002, the Festival has sponsored big-time concerts with promoter Rose Presents hoping to pay off debt, said Ted Koenecke, the board's president. (Sterling deferred questions to Koenecke.)
The Festival has netted roughly $40,000 from a dozen concerts, large and small, Koenecke said. However, Target Center estimates that four of the group's larger Xcel Energy Center or nearby RiverCentre concerts -- the Who, The Moody Blues, Creed, Kenny G. -- produced a combined $115,000 tax break.
(Target Center listed a Santana concert that Koenecke said the Festival did not sponsor; however, he said the organization sponsored the 93X Nutcracker, which was not on Target Center's memo.)
Rose Presents approached the Festival about sponsoring concerts, Koenecke said. The Festival did not know how the system worked, but decided to give it a try.
The Target Center memo noted that the Festival's financial gain was 2 percent of gross sales, significantly less than the 7 percent state sales tax break its sponsorship provided.
Koenecke said the Festival got paid on profits -- not gross ticket sales -- and some concerts, such as The Who, didn't do well.
"It's not a lot -- because, honestly, sometimes [concerts] lose money," Koenecke said. "When we first looked into this, we had visions of saying, 'Gee, maybe if this really were to work out, we could retire the debt a lot quicker,' but it is not working out like that for us.'"
Still, Koenecke said he did not feel taken advantage of. The Festival got financial benefits, as well as the intangible benefits of exposure.
"A lot of these organizations survive because of exposure," he said. "You never know when you are going to meet another donor or another supporter or sponsor out there."
The new law may close the door to further concerts.
"When the law changed, it blindsided us," Koenecke said. "Right now, we are trying to figure out how the partnership can even work anymore. We are not sure it can."
The new law The Legislature's 2003 change forces the nonprofit to take more responsibility. To get the sales tax exemption, it -- not the for-profit promoter -- must handle all the money and take the risk for the event. Further, the tax exemption does not apply if "the benefit to the nonprofit organization is less than the total amount of the state and local tax revenues foregone by this exemption."
Xcel Energy Center management said it has followed the old law and did not lobby against the 2003 changes.
"We rent the building to the promoters," said Jack Larson, Xcel Energy Center's vice president. "It is the promoters who decide whether they will try to do something tax-free or not."
Any disputes would be between the state and the charitable organization, Larson said. "They would have to resolve that. Our preference is everyone pays tax like they are supposed to."
Randy Levy of Rose Presents declined to discuss its financial deals with nonprofit sponsors such as the Festival, noting that the charities get spin-off benefits in addition to the money, such as more visibility and promotional opportunities.
If promoters lack a sales-tax incentive, charities will have a much harder time getting the same
He called the new law "special interest legislation" that protects nonprofit venues such as Orchestra Hall and city-owned theaters such as Minneapolis' Orpheum, State and Pantages and St. Paul's Ordway. They remain able to avoid sales tax, Levy noted, while for-profit promoters can't -- with the exact same artists in the exact same hall.
"The agent would look at me and say, 'Why don't I sell it to the Orchestra [Hall] directly?' " he said.
Levy's solution: either all concerts and entertainment should have sales tax or none of them should, he said.
Back taxes? Pogemiller said he thought the state should have made sure that a few of the tax-exempt Xcel Energy Center concerts were taxed.
"For some reason, the Department of Revenue has not been as aggressive there as they should have been," he said. "I am hoping at some point the Department of Revenue announces that they are collecting some back taxes on some of those events."
Greg Heck, a Revenue Department attorney, said venues such as Xcel or Target Center do not have to get prior state approval to sell tickets without changing sales tax. The Department publishes guidelines. The arenas interpret them and apply them to their ticket sales.
"The only way we would find out is if we actually did an audit to see if they collected tax or not," he said. "We do a limited number of audits. We can't audit everyone."
The Department cannot say if or how often it has audited a given arena, Heck said. Privacy laws shield such information.
Asked about Pogemiller's concern that the Department of Revenue has not been aggressive enough in reviewing tax-exempt events, Becky Christianson, Revenue's communications director, said the Department was "well aware that there is some confusion" about the sales tax exemptions.
The Department would soon put out new guidelines, she said.