Sales and Use Tax

Issue

How should Minnesota change its sales tax base, rate or administration?

Policy

Minnesota's sales tax should be a retail sales tax levied on the final consumption of consumer goods or services. Taxing goods and services on a basis other than final consumption violates the principles of equity, efficiency, ease of administration and accountability.

Sales tax base. The Minnesota Chamber supports eliminating the sales tax on all intermediate goods and services. Due to the fiscal impact on the state, this change must be implemented over time. The Legislature should start with the following changes to the sales tax base:

• Converting the capital equipment refund program to an up-front exemption. The current refund program is an administrative burden to businesses and the Department of Revenue. It is also a cash-flow problem for small businesses.

• Exempting technology inputs. Technology inputs to businesses include computer and peripheral equipment, prewritten and customized software, and services such as customizing, transmitting and installing software. Adding a technology inputs exemption will expand the types of companies that can take advantage of sales- tax exemptions to nonmanufacturers. Given the importance technology inputs play in the success of businesses, this exemption could differentiate Minnesota from other states that continue to tax these goods and services.

• Exempting purchases of equipment used to comply with state or federal law (i.e. pollution control equipment, equipment required to meet safety regulations). Doing so would make it less expensive to comply with state or federal requirements.

The Chamber does not support broadening the sales tax base to generate additional revenue. If the sales tax base is broadened to additional consumer goods or services, business inputs should be eliminated from the base, the rate should be reduced, and/or other business taxes should be reduced to make the changes revenue neutral. The Chamber opposes broadening the sales tax base to business services and business-to-business transactions.

Accelerated payments. The Chamber supports eliminating the accelerated sales tax payments as soon as practical. Under current law, the accelerated payment ends when the budget reserve reaches $653 million. However, we believe it should be repealed earlier if the state's cash flow position is materially better than it is in 2010.

The Chamber supports repealing the June accelerated sales and excise tax payments. The accelerated payment requires retailers to estimate their June sales tax liability and remit a portion of it in June (current fiscal year), rather than the regular procedure of waiting until the June sales tax liability is known and remitting it in August (next fiscal year). The June accelerated payment is an administrative burden and added expense for businesses and the Department of Revenue. Until this provision is repealed, the Chamber supports requiring the state to pay interest on the June accelerated tax payments. Once repealed, the Legislature should not use accelerated sales and excise tax payments as a future budget-balancing strategy.

Taxation of remote sales. The Chamber supports conforming Minnesota's sales tax law with the national efforts of the Streamlined Sales Tax Project (SSTP), including enacting a vendor collection allowance. The Chamber also supports the attempts of the SSTP to resolve the issues regarding the collection of taxes on Internet and catalog sales. In addition, we support state efforts to promote the collection and remittance of sales tax by remote sellers and/or their customers. Whatever is done must be done in a way that does not affect nexus under chapter 290.

Vendor collection allowance. The Chamber supports enacting a vendor collection allowance. One of the components of the SSTP agreement is that participating states should have such an allowance. It compensates vendors for the administrative burden of collecting the sales tax for the state.

Gross receipts taxes. The Chamber opposes enacting gross receipts taxes to evade the SSTP's rule of one state sales tax rate per state. Enacting gross receipts taxes in place of "boutique taxes" – i.e. special sales tax rates on specific products – is contrary to the spirit of the SSTP and does not simplify administration of the tax system.

Business Impact

According to the Department of Revenue, businesses pay about 45 percent of state sales tax revenues. This makes the sales tax one of Minnesota's largest business taxes. The sales tax base, rate and administration affect business in a variety of ways.

• Sales tax base: Converting the capital equipment refund program to an up-front exemption simplifies administration of the tax and reduces compliance costs. It also helps small employers because they no longer will have to finance the tax themselves, and it provides sales tax relief to those businesses that do not know about the refund program. Exempting technology inputs from the sales tax would benefit a wide variety of companies including manufacturers and nonmanufacturers. Given the importance of technology to the success of businesses, this should be the next area on which the Legislature should concentrate. Applying the sales tax to business services or other business-to-business transactions penalizes companies that choose to contract for services rather than having them performed "in house." It penalizes service providers by giving an incentive for Minnesota's largest employers to have the services performed outside of the state or in-house.
  
  Making progress reforming the sales tax base is important because it will become increasingly difficult to do so if the trend continues of granting local governments sales tax authority. As more local projects become dependent on sales tax revenue for financing, local governments will likely become opponents of eliminating business inputs from the sales tax base and proponents of expanding the sales tax base to business services.
• Sales tax rate: Since businesses pay about 45 percent of the state's sales tax, a sales tax rate increase would be a significant business tax increase. A reduced sales tax rate, accompanied by an expanded sales tax base, will change the incidence of the sales tax. The impact on business will depend on what new goods and services are taxed. Base expansion has the potential to increase the stability of the sales tax and reduce its regressivity.
• Sales tax administration: Repealing the June accelerated sales tax payment and the temporary acceleration of sales tax payments will ease retailers' administrative burden. Enacting new gross receipts taxes rather than eliminating "boutique taxes" could increase the administrative burden of Minnesota's tax system. Adding a vendor collection allowance would compensate retailers for a portion of the cost of collecting the sales tax for the state.