One might have thought that the shelling DFL Gov. Mark Dayton took in January and February for proposing to apply the state sales tax to business services would have deterred legislators from making that mistake again — at least this year.
But just weeks after Dayton withdrew his proposal, DFL senators proposed a sales tax on two business services — warehousing, and repairs of commercial, electronic and telecommunications equipment. A month later, those provisions appeared in the session’s final tax bill. They were chosen to raise $300 million in 2014-15 to finance two desirable tax code changes — the elimination of a cumbersome sales tax refund requirement for business equipment purchases, and an exemption for local governments from the sales tax. Despite saying he’d sworn off sales tax expansion for this year, Dayton signed the entire measure into law.
But legislators exhibited enough uncertainty to delay the implementation date for one of the two targeted business services — warehousing — until April 1, 2014. That means there’s time for Minnesota to follow the pattern of four other states — Maryland, Massachusetts, Florida and Michigan — that tried in recent years to apply their sales taxes to what is called “third-party logistics” in modern business parlance. Those states discovered that the tax is a job-killer and repealed it soon thereafter.
That’s what should happen in Minnesota in 2014, to both the warehousing tax and the commercial equipment repairs tax, which also applies to telecommunications and farming equipment. They are every bit as flawed as the other proposed business services taxes that Dayton was right to take off the lawmaking table in March.
It’s bad enough that these are hidden, regressive taxes built into the cost of goods and services. But they are also an anticompetitive blow to Minnesota-based providers of those services. That’s particularly true for the warehouse industry. It employs some 14,250 Minnesotans in firms that operate on tight profit margins and compete within a multistate region. They provide other businesses with a host of inventory-related services that go well beyond storage.
The state’s largest such business is Murphy Warehouse Co., a 109-year-old family-owned concern with 12 facilities in the Twin Cities area and one in Kansas City. Owner Richard Murphy Jr. pleaded with legislators not to proceed with the tax. He explained that intense competition gives him little or no capacity to pass the tax along to his customers, and that absorbing the tax would more than consume his slim profit margin.
The result is that “Hudson, Wisconsin, will become a hotbed of activity,” he predicted last week. His firm is “strategically considering a move across the St. Croix River.” In addition, his competitors in Kansas City, Chicago and Des Moines will be among the tax’s prime beneficiaries, he said.
Warehousers are also right to complain about the inherent unfairness in the Legislature’s decision to apply the sales tax to third-party warehouses like Murphy’s but not to warehouses owned by retailers themselves. It also appears that while the storage of farm products is exempt, storage of mining products is not. That makes the new tax a great marketing tool for the port of Superior, Wis.
Similar pleas from providers of more place-bound equipment repair services went unheeded — even though the same senators who pushed for that new tax sought in the session’s final hours to spare farm machinery repairs from its reach. Time had run out, replied House Taxes chair Ann Lenczewski, DFL-Bloomington. She said, in effect, “see you next year.”
Dayton and Senate leaders should take that message to heart. Dayton’s chief tax adviser, Revenue Commissioner Myron Frans, said last week that he intends to conduct a series of meetings in August and September to gain more information about the implications of the two business sales taxes, with an eye toward possible changes in 2014.
Senate Taxes chair Rod Skoe offered similar assurances: “We’ll take a look at all of these things again. It’s not unusual for us to tweak these things as we go along.”
Canceling a proposed $300 million tax increase would be more than a tweak. But a better way should be found to pay for the local government sales tax exemption and capital equipment tax change that legislators were right to seek. Applying the sales tax to more consumer purchases, including clothing and personal services, ought to be reexamined.
The sales tax is a consumption tax that does the least economic damage when it’s imposed at the end point of commercial transactions — that is, on retail sales. Trying to spare consumers by applying the sales tax to business services only hits consumers indirectly with regressive, hidden taxes, while arbitrarily and unfairly putting Minnesota business-services providers and their employees at risk.