Legislators raise concerns over governor’s proposed sales tax changes

“Goods and services” is a common term when discussing what sales taxes Minnesotans should pay. But Gov. Tim Walz’s administration believes that we should focus less upon goods and more upon services.

That’s why it’s recommending a revision of the state’s tax code that reflects the state’s move to a more service-oriented economy.

In a presentation to the House Taxes Committee Tuesday, Revenue Commissioner Paul Marquart laid out the governor’s priorities for tax changes, including lowering the stage’s general sales tax rate while expanding its base.

In what Walz has touted as the first sales tax rate cut in state history, his administration is proposing that Minnesota lower the rate from 6.875% to 6.8%. But sales taxes would expand to include services in legal, accounting, brokerage and some bank service charges for consumers. There would be exceptions to that change for:

• advice from tax services on the child tax credit and working family credit;
• employing Legal Aid attorneys;
• using pension services; and
• banking overdraft and late fees.

“It’s a long overdue improvement to the sales tax code,” Marquart said. “It creates more fairness, because we are already taxing a lot of services. Lawn care, laundry, building cleaning, security, pet grooming, towing, all sorts of services. So it levels the playing field.

“It also rightsizes the tax code to a more service-orientated economy,” he continued. “So, back in 1967, when we initiated the sales tax at 3%, about 60% of our economy was goods, which is taxed, and 40% services. Today, that has flip-flopped. So you are taxing a narrower and narrower portion of the economy, which increases the rate you have to enact to get to the same amount.”

Marquart said business-to-business sales would remain exempt. He said the change would raise an additional $185.2 million of revenue in the 2026-27 biennium.

[MORE: Spreadsheet of governor's tax proposal]

Among the governor’s other priorities in tax legislation this year would be proposals to:

• expand the state’s research and development credit;
• clarify the definition of attachments and appurtenances for electric cooperatives;
• exempt low-income housing tenants from personal property tax when their housing units are exempt from real property taxes;
• create a $50 penalty for landlords who fail to submit certificates of rent paid to tenants;
• create a corporate franchise tax audit unit dedicated to complex pass-through audits;
• establish a credit transfer for short line railroad infrastructure modernization; and
• repeal the option to assign a refund in advance of claiming the K-12 education credit on a tax return.

The governor’s recommendations also include eliminating or reducing some existing aids, such as:

• repealing the tax filing modernization account;
• reducing sustainable forest incentive payments;
• repealing local government cannabis aid; and
• reducing aquatic invasive species aid.

Legislators will delve more deeply into the proposals when they come before the committee in the form of a bill, concerns were raised about some proposals, some seeking clarity about what type of bank fees and charges would be subject to sales taxes.

And Rep. Aisha Gomez (DFL-Mpls) said of expanding the research and development credit, “I’m concerned about this being the thing we’re going to do for business,” explaining that an Office of the Legislative Auditor report suggested that the credit may not be fulfilling its intended purpose.

Rep. Cheryl Youakim (DFL-Hopkins) concurred, saying that businesses frequently tell her that the Angel Tax Credit is a far more effective incentive for businesses.