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Tom Scheck, Published July 28 2013

Officials: Minnesota sales tax exemption has flaws

ST. PAUL – As cities and counties across Minnesota prepare budgets for next year, they’re encountering some confusion and frustration over a new law intended to provide them some relief.

For two decades, cities and counties have lobbied the Legislature to stop forcing local governments to pay sales tax on purchases. They argued that it’s silly to require local governments to pay sales taxes that ultimately are paid through the property taxes they collect.

During its last session, the Legislature passed a law that, beginning in January, exempts cities from paying sales taxes. But there now appears to be some confusion over what is taxed and what isn’t.

“We can’t have one answer in the morning and another answer in the afternoon,” Isanti Mayor George Wimmer said.

Wimmer said the changing answers are a problem as he tries to craft a budget for next year.

“I think there’s confusion by everybody, and you get that when a new law is passed, but it was definitely in the zeitgeist that all of the localities were going to get this,” he said. “But they’re not.”

Answering questions

Susan Von Mosch, an assistant commissioner for tax policy at the Minnesota Department of Revenue. Mosch said there is always confusion when there are changes to tax law.

For example, a public entity that competes with a private business will have to pay sales taxes – among them publicly owned golf courses, marinas and liquor stores. Von Mosch said her department is trying to be responsive to cities and counties that have questions.

“We’re trying to provide advice as quickly as possible, and working with them to make sure that we understand how their government is organized and how they provide services and so we’re trying to do it as quickly as possible,” she said.

Not all exempt

Some city and county officials who have sought to cut expenses will be disappointed. That’s because cities, counties and other entities will still have to pay the tax when they collaborate on services. Cities and counties enter into such so-called joint powers agreements to save money on everything from corrections to health care.

Keith Carlson, a lobbyist for the Minnesota Inter-County Association, said it makes no sense that individual cities and counties receive the exemption but those that choose to cooperate do not.

“When you get into Greater Minnesota, in many instances the counties have combined to operate these community corrections agencies,” he said. “And even though it’s an identical service, they’ll be subject to tax on the goods and services that they purchase and that’s just ridiculous.”

Senate Tax Chair Rod Skoe, DFL-Clearbrook, said he intended the sales tax exemption to also apply to joint powers entities. He said the Legislature may have to provide further clarification when lawmakers return for the 2014 session.

“If you try to make a literal list of everything that you intend to be exempt, you’re going to forget something or miss something,” said Skoe. “And if you don’t provide guidance then they don’t interpret it like you want. So, there’s this balancing act that we run into all of the time.”