For some Minnesota businesses, sales tax debate is all about fairness

Don't tell Wendy Brown that a business can't charge a sales tax and survive.

She's been collecting the tax every time she gives a Schnauzer or a golden doodle a shampoo and a clip at her shop in south Minneapolis. So to her, Gov. Mark Dayton's proposal to lower the tax rate and spread it to a wider variety of businesses -- such as hair salons for humans -- is about fairness.

"I'm just surprised that hair salons have not been taxed," said Brown, owner since 1976 of Wendy's Doghouse, a pet grooming shop a few blocks west of the Minnehaha Dog Park. "I've been paying sales tax forever."

Dayton's budget overhaul has taken blistering criticism from lawyers, public relations firms, accountants and IT firms that would have to charge sales tax on their fees if the budget is approved. But the governor's plan would lower Brown's state sales tax from 6.875 percent to 5.5 percent and help remedy a patchwork system that favors some businesses over others, often for no apparent reason.

Minnesota sales tax applies to pet grooming but not barber shops, dry cleaners but not coin-operated laundromats, and calls to 1-900 numbers but not dating services. Super Bowl tickets are exempt, but not hockey sticks.

"The lines have been drawn over the years, and they've been relatively arbitrary," said Myron Frans, commissioner of the Minnesota Department of Revenue. "There's some people that say the rationale is simply, it depends on who was in the room when the bill was written."

Under Dayton's proposal, a raft of retail services would lose their exemptions -- things like wedding planning, shoe shines and dance instruction. Also, the state would begin to tax a range of fees that businesses charge each other for services like accounting and IT work. That's the part of the budget that has taken so much criticism.

"We do support broadening the base and lowering the rate on final retail [sales to consumers]," said Beth Kadoun, tax and fiscal policy director for the chamber.

Many economists argue that a consumption tax should be levied against as many consumer purchases as possible to avoid favoring certain goods and services over others.

Walter Hellerstein, a professor at the University of Georgia Law School who specializes in tax law, said states tend to tax more goods than services. For instance, the tax in Minnesota and many other states applies to auto parts. Yet it doesn't apply to the cost of labor for installing the part.

"When I get my muffler repaired, the muffler's no good to me if it's not installed, so when you think about it there's simply no rational basis for not taxing all consumer services," Hellerstein said. "But we have a long history of that."

Rules vary

The sales tax applies to an estimated 66 services in Minnesota, according to a 2007 survey by the Federation of Tax Administrators. That compares with as many as 160 services taxed in Hawaii, and as few as zero in Oregon.

Brian Mickelson, owner of Minnesota Tree Surgeons in Delano, has been collecting sales tax on tree trimming jobs for 10 years. "In my opinion, they should probably do it for everything and make it across the board," he said.

The state needs revenue to balance the budget, he said, and customers don't decide whether to buy a product or a service because of a sales tax. "You don't sit and bitch at Chipotle about paying the sales tax," Mickelson said. "You just do it."

One important distinction is between the tax on sales to consumers and a tax on business-to-business sales that are ultimately passed on through a cascading effect. For example, a restaurateur who had to pay taxes on legal work would likely add at least some of that cost into the prices on the menu.

Complaints from the business community about the tax on business services, which would raise a crucial $2.2 billion in new revenue to fund the governor's plans, should be taken seriously, said Dane Smith, president of Growth and Justice, an economic policy group that supports the governor's proposal.

Absorbing the cost

The merchants who have been charging sales tax and succeeding in Minnesota for decades tend to agree. They see it as an added cost, but one that firms can adjust to in an economy that never stops changing anyway.

"It's really silly that we've narrowed our sales tax so much," said Wade Vitalis, owner of the Drive-In Restaurant in Taylors Falls (closed for the winter) and Grantsburg, Wis.

Vitalis has been collecting sales tax for 26 years, adding it to the price of each patty melt and butterscotch malt. When businesses argue that they wouldn't be able to handle it and still prosper, he doesn't buy it.

"I don't have a lot of sympathy for that argument," he said. "If you can't figure out how to do it, someone will, because this is America."