Most Minnesota businesses dodged a sweeping expansion of the sales tax, but not logistics firms.
The final version of the tax bill, approved moments before the end of the legislative session last week, included an expansion of the sales tax on a handful of unlucky industries. One of them is warehousing and storage. Firms that repair electronic equipment and industrial machinery and those that sell telecommunications equipment also will be subject to the tax.
Logistics companies are baffled, and talking about moving their operations across the St. Croix River.
“Why wouldn’t I go to Hudson, and just ship across the border?” said Richard Murphy, CEO of Murphy Warehouse in Minneapolis. “The surrounding states are going to get business, and you’re going to see people pull back into Chicago, Des Moines and Kansas City.”
A nearly across-the-board expansion on business-to-business sales tax proposed by Gov. Mark Dayton in February struck fear into businesses across the state. The backlash forced Dayton to back off the proposal. But when senators and representatives went into conference committee during the last days of the session to broker details of the tax bill, a few industries were still slated for a sales tax expansion.
One business-to-business service — custom computer software — escaped. The others did not.
The state hopes that applying sales tax to these businesses will raise about $200 million, which will help pay for the cost of exempting capital equipment and local government purchases. The new taxes will go into effect July 1, except for the warehousing and storage tax, which won’t be in force until April 2014.
If it goes into effect, it will make Minnesota the only state to apply sales tax to warehousing, according to the Minnesota Trucking Association.
Companies like Murphy Warehouse charge handling fees, but also offer what they call “value-added” services, such as putting together assembly kits for clients or being able to ship products just in time for manufacturers. For now, it’s not clear how the sales tax will be applied. Murphy has 200 employees at 12 warehouses in the Twin Cities and one in Kansas City.
Sen. Ann Rest, DFL-New Hope, said hashing out those details, and figuring out what impact the tax might have on Minnesota’s competitiveness, are the reasons the tax won’t go into effect for nearly a year.
“That’s why we delayed implementation. If it’s serious enough, then we can reconsider it,” she said. “If I was one of them, I’d be feeding [Revenue] Commissioner [Myron] Frans all kinds of information.”
Murphy’s headquarters are just northeast of Dinkytown, and the warehouse there is full of everything from wine and almonds to ATVs and components for nuclear power plants. The company is a crucial part of the supply chain for many different types of businesses.
Minneapolis is not one of the major logistics hubs in the country, like Chicago or Atlanta. But there’s no reason companies wouldn’t consider a move to Wisconsin to avoid the tax, said Jerry Conklin, a vice president at Triangle Warehouse. In general, profit margins in the business are between 3 percent and 5 percent, so a 6.875 percent sales tax would have to be passed on to customers.
“It’s a definite disadvantage to those doing business as warehouses in Minnesota,” Conklin said. “I don’t know if we’re trying to drive business out of the state, or what. But it sure looks that way.”
There also are concerns about the impact of the tax on taconite storage in Duluth. Until the Department of Revenue comes up with the specifics, the impact will not be clear, said Craig Pagel, president of the Duluth-based Iron Mining Association.
Assessing the consequences of the tax for business competitiveness is a key reason its implementation has been delayed, said Rest, the senator who was chair of the Senate Tax Reform Division. Other businesses that would have been subject to the sales tax, like law and accounting firms, successfully lobbied against the governor’s budget proposal.
Over time, the list of businesses subject to sales tax was whittled down, Rest said, but warehousing, equipment and machinery repair and telecommunications equipment companies should have taken the initial proposal more seriously, she said.
“Those proposals were on the table for months,” she said.