8.g) Staff Report-City Administrator Report (Governor's Sales Tax Proposal c� , , �
�� �.� �.. �
SCANDIA
Staff Report
Date of Meeting: February 19, 2013
To: City Council
From: Kristina Handt, City Administrator
Re: City Administrator Report
Agenda Item#: 8.g)
Analysis of Impact of Governor's Sales Tax Proposal on the City of Scandia General Fund
Budget:
The League of Minnesota Cities has provided information on the Governor's sales tax proposal on
their website, some of which is included in this memo. The governor's proposal for sales tax will
broaden the state sales tax base and lower the sales tax rate. The governor's plan would reduce the
general state sales tax rate to 5.5 percent from the current 6.875 percent. This rate reduction would be
offset by including in the definition of taxable items such professional services as legal, accounting,
architecture, specialized design, computer, management consulting, advertising, employment, and
business support services. In addition,the governor's sales tax plan would extend the sales tax to
auto and other repair services, telecommunications equipment, court reporter documents, advertising
materials, and publications.
Purchases of taxable items by Minnesota cities and counties have been subject to the sales tax since
1992. Minnesota is one of the few states (if not the only)to fairly recently extend the state sales tax
to local government purchases. In fact, according to a research memo prepared by legislative staff
during a debate on the sales tax in the 1990s, fewer than 10 states at that time taxed the purchases of
their local units of government. Since the sales tax was extended to city purchases, the Legislature
has subsequently exempted some items. These items include certain firefighting equipment and
police equipment and supplies, certain library purchases, certain capital equipment purchases, and
other limited exemptions.
The League has asked cities to look at their 2012 financial statements and provide them with an
analysis of the impact of the governor's proposal. With the help of City Treasurer, Colleen Firkus,
staff has been able to analyze the impact of Governor Dayton's Sales Tax Proposal. On February 5,
2013, I provided League staff with the following information regarding the potential impact to the
City's general fund budget if the Governor's Sales Tax Proposal were to become law:
1) Based on estimated 2012 general fund expenditures, we estimate the expanded base
would apply to roughly$465, 638 in services which would mean$25, 610 in sales tax
expense. This is largely due to the fact that approximately one-third(36%)of the
City's spending is for contractual services.
2) While it would be very labor intensive to have staff go back through every invoice
from 2012 we've taken our budget totals for materials, supplies and equipment
($341,030) and estimated we paid about$22-24,000 in sales tax in 2012. If that
amount was reduced by 20% (that's the approximate change from the current rate to
the new proposed 5.5%rate)the City would save under$5,000. That's certainly not
enough to make up for the$25k in new taxes.
While it is important for the Council to remember these are only estimates based on 2012
spending at this time, it is clear that the Governor's Sales Tax Proposal will require more
resources from City taxpayers in order to provide the same services. Staff will begin working on
the FY2014 budget in the next couple months and will strive for a zero levy increase, which may
not be possible without impacting service levels if the City will be required to pay more to the
state in sales taxes.
A copy of the League of Minnesota Cities legislative policy on the sales tax issue is attached to
this report. Their fu112013 City Policies agenda can be found on their website. I am providing
you with this information at this time in case any Council members are planning to attend the
League's Joint Legislative Conference at the State Capitol on March 21.
opposes reinstituting Limited Market contractor installs the equipment, however,
Value,a program that reduces the taxable cities and other entities must pay the tax and
value of individual properties based on follow an elaborate process to receive a
assessor's valuation increase. Limited refund. This process includes a reyuirement
Market Value creates inequities between for an up-front written agreement appointing
similar properties based solely on the the contractor as the purchasing agent. Many
valuation increase determined by the cities and other entities fail to follow the
assessor. process properly or are unaware of the
process until after the project has been
FF-9. Sales Tax on Local initiated, resulting in a forfeiture of the tax
Government Purc6ases exemption.
Issue: When the state was experiencing a Response: The League of Minnesota
budget shortfall in 1992,the Legislature Cities supports legislation that would
repealed the sales tax exemption for city, convert the capital equipment sales tax
county and township purchases but exemption from a refund to an up-front
preserved the school district exemption. exemption at the time of the purchase of
Cities now pay state sales tax on purchases the equipment. At minimum,state law
like road maintenance supplies and should be modified to simplify the process
equipment, wastewater treatment facilities, by allowing the exempt entity to be
and some pubiic safety equipment. Although eligible for the refund,even if the
many township purchases were exempted in application is submitted after the project
2011, this tax currently costs local property has been initiated.
taxpayers and ratepayers across the state
more than $100 million annually. FF-11. Taxation of Electronic
Commerce
Response: The state should reinstate the
sales tax exemption for all local Issue: Sales over the Internet and through
government purchases. The exemption other electronic means are projected to
must not be coupled with cuts in local increase exponentially over the next several
government aid (LGA) or other state- years. Electronic transactions pose
shared revenues. significant tax-policy challenges because of
the difficulty of assigning a location to
Any future expansion of the sales tax base electronic sales and because many Internet
should exempt purchases by cities. Any goods are not tangible property.
sales tax study conducted by the
Department of Revenue or the Response: Federal tax policy should not
Legislature should review the practice of place main street businesses at a
local units of government paying sales competitive disadvantage to electronic
tax. retailers, must not jeopardize repayment
of bonds backed by state and local sales
FF-10. Sales Tax on Capital tax revenues, and should ensure stability
Equipment in state and local revenues. To address the
challenges created by the growth of
Issue:Purchases of capital equipment used electronic commerce,the League of
in the production of taxable goods are Minnesota Cities supports the multi-state
exempt from Minnesota sales tax. When a
League of Minnesota Cities
2013 City Policies Page 91