This time they mean it: No taxes on construction materials for local government projects

Each year they come to the Capitol, queuing up for a spot at the testifiers’ table before the House Taxes Committee. They are mayors, city managers, school superintendents, sometimes police and fire chiefs. Each asks for roughly the same thing: To have purchases of construction materials for a project be exempt from sales taxes.

Technically, such purchases are tax-exempt, but in practicality, they’re not.

“To utilize this exemption, they must undertake a complex process, separately bidding labor and materials, designating the contractor as a purchasing agent, and assuming liability for damages caused by defective materials or delivery delays,” said Rep. Matt Norris (DFL-Blaine). “Or they can purchase all the materials directly themselves, which is impractical for most projects. As a result, most local governments kind of throw their hands up and pay the state sales tax. Or they come to the Legislature seeking an individual exemption.”

Norris is the sponsor of HF1603, which is designed to halt that parade of pleas to the tax committee by streamlining the process and providing a sales tax exemption for all contractor-purchased building materials for local governments and nonprofits. The tax would be paid at the time of purchase and the local government or other nonprofit entity would apply for the refund.

The bill was laid over Thursday for possible omnibus bill inclusion.

The Department of Revenue estimates the bill’s changes would reduce the General Fund by $36.5 million in fiscal year 2024 and $77 million in fiscal year 2025.

“Keep in mind that this means that local governments are paying $77 million in sales tax on projects that are technically but not practically exempt because they’re cumbersome and risky,” said Woodbury City Administrator Clint Gridley.

Tiffany Gustin, associate director of management and insurance trust services for the Minnesota School Boards Association, said students would directly benefit from the bill.

“On Tuesday, there were three school districts that successfully passed bond referendums totaling $41.7 million,” she said. “The Department of Revenue estimates that approximately 40% of project costs are supplies and materials that would be affected by the sales tax exemption in this bill. So when you add up the impact of just these three projects, we’re looking at $1.14 million in sales tax that will be saved.”

The committee chair, Rep. Aisha Gomez (DFL-Mpls), sees the bill and two extensions of previously approved exemptions for projects (also heard Thursday) as a possible end to the march of municipalities to the committee’s hearing room.

“My intention is for these to be the last construction materials bills we hear,” she said. “But one never knows what could happen in the wild world of taxes.”