Cities, counties cite confusion over tax-exemption law

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. The law exempted cities and counties from paying sales taxes on purchases. But the details of the break aren't clear cut — and that's prompted some to say the new law isn't as good as advertised.

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 get paid through the property taxes they collect. The Legislature passed a law this year that exempts that sales tax starting on January 1. 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," said Isanti, Minn., Mayor George Wimmer.

Wimmer says he's frustrated by the answers he's been getting from the Minnesota Department of Revenue. He said Isanti city officials asked the Department of Revenue to clarify whether they would have to pay sales tax on a new street sweeper when the tax exemption kicks in on Jan. 1. He said city officials were initially told they wouldn't have to pay the tax but were later told they had to pay it. Wimmer said the changing answers are 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."

The Minnesota Department of Revenue's Susan Von Mosch says there is always confusion when there are changes to tax law. She told MPR News that Isanti should not have to pay the sales tax on that street sweeper.

But other things will continue be taxed. For example, anything that competes with a private business will have to pay sales tax. That means publicly owned golf courses, marinas and liquor stores have to pay sales taxes. Von Mosch says her department is trying to be responsive to cities and counties that have questions.

"We're trying to provide advice as quickly as possible," she said, "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."

But some cities and counties are also going to 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 these so-called "joint powers agreements" to save money on everything from corrections to health care. Keith Carlson, a lobbyist with the Inter-County Association, says it makes no sense that individual cities and counties get 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, 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," he said.

Senate Tax Chair Rod Skoe says his intention was for the tax to apply to joint powers agreements, as well. 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," Skoe said. "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."

Not all mayors are frustrated by the new law. Circle Pines Mayor Dave Bartholomay says he understands the Department of Revenue is still working to interpret an often complex tax law.

"It would be nice, from a city's perspective, that everything counted as we moved forward — but life is typically not that easy," he said.

Bartholomay said it's also important to remember that some cities and counties are seeing a savings because of the law change — even if the pathway to get there is a bit uneven.