Gov. Mark Dayton’s office on Friday waded into the red-hot center of the debate over his broad tax proposal, attempting to clarify the rules on when Minnesota businesses would pay the state sales tax.
Service businesses — from law firms to accountants to advertising agencies — have strongly protested Dayton’s plan to have them pay state taxes for their dealings with other companies, especially the prospect of sales involving clients outside Minnesota. Some law firms have even threatened to leave the state.

But on Friday, Dayton spokesman Bob Hume and Department of Revenue Commissioner Myron Frans challenged that criticism directly, telling reporters that a “business-to-business” sales tax would not apply to goods or services sold beyond Minnesota.

“The rewriting of the code around such a very, very large comprehensive tax reform was always going to be complicated,” Hume said. “There’s been no change between what we’re saying today and what we said almost four weeks ago, but putting that into bill form takes this time. It’s the way the process is set up.”

Dayton’s budget — meant to wipe out a $1.1 billion projected budget deficit, give $1.1 billion to schools and transfer $1.4 billion in property tax rebates to homeowners — would raise $2.2 billion in new revenue by taxing sales between companies, plus another $1.1 billion by raising income taxes for the wealthiest Minnesotans.

If approved, Minnesota would join only three other states — Hawaii, South Dakota and New Mexico — that have broad sales taxes on professional services. The proposal has drawn the criticism of a broad cross-section of service firms, even though it also lowers the corporate tax rate from 9.8 percent to 8.4 percent.

Other businesses who already pay the tax — from restaurants to tree trimmers — have expressed support for the plan because it would lower the sales tax rate and eliminate exemptions that appear arbitrary.

To try to make peace with business executives who oppose the plan, the governor’s office issued a 16-page clarification on the proposal, before the likely introduction of the bill at the statehouse next week. The governor’s team provided a detailed list of exemptions, which includes the sale of farm machinery and some construction labor.

Under the proposal, Minnesota’s sales tax rate would fall from seventh-highest in the nation to 27th, according to the governor’s plan.

Still, the sales tax would apply to all goods and services purchased by Minnesota companies, including those for goods and services bought from companies in other states.

The Minnesota Chamber of Commerce, representing more than 2,400 business across the state, remains opposed to the business-to-business sales tax and the budget as a whole. Despite Friday’s announcement, more details need to be known, and the rules are far from settled, said Beth Kadoun, tax and fiscal policy director for the chamber.

Analysis doesn’t change

“Obviously they’re putting together more information, but it still doesn’t change our initial analysis of the proposal,” Kadoun said.

Applying a sales tax on services is always more complicated than one on goods, because where a service is delivered is up for interpretation, Kadoun said.

“We’re still waiting for language, and we still don’t know how broadly it will apply for some of these services,” she said. “It is going to harm Minnesota businesses.”

Despite the new details, the governor’s plan leaves a series of unanswered questions, said John Spry, an economist at the University of St. Thomas.

Enforcement gets complicated for various types of services, he said. For example, when a Minnesota company buys advertising from an agency in New York that runs on national television, must the firm pay the sales tax to the state on the entire cost of the ad, or a prorated tax based on viewership by Minnesotans?

“If Best Buy buys an ad for the Super Bowl or any national ad, what’s the basis of that?” Spry said. “I can’t tell how that works.

If Best Buy could avoid the tax by moving its ad-buying operations to another state, then the company would be tempted to do so. If it cannot, then what’s to stop the state from collecting the sales tax on Super Bowl advertising by national companies like Apple, which also have a physical presence in Minnesota?

“It’s kind of neat intellectually to think these things through,” Spry said. “I don’t know how much the policymakers went through all these things in advance.”

Adam Belz • 612-673-4405