Minn. Cities Defer Large Purchases Awaiting 2014 Sales Tax Break

Updated: 12/16/2013 6:56 PM
Created: 12/15/2013 12:54 PM
By: Kate Renner

In just a matter of weeks local governments will get big savings on their purchases. The Minnesota legislature voted to exempt cities and counties from the 6.875 percent sales tax.

A few city managers are holding out on buying big ticket items until the calendar says Jan. 1.

A new bucket truck will soon replace White Bear Lake's 1989 model. A large part of the new bucket truck won't be taxed next year, saving the city more than $5,000.

A wood chipper is getting an upgrade as well, it will be tax free in 2014, meaning it costs $2,400 less. "We looked at what we were planning to replace in 2013, and saying can we actually stretch them 6-9 months out and place the order in 2014?" said Donald Rambow, White Bear Lake Finance Director.

The City of White Bear Lake saw they could save $55,000 in sales taxes by postponing a few purchases. "In my opinion this is good financial policy, and it's just something you should be doing," said Rambow.

There's just about enough salt to get White Bear Lake Public Works through the end of the year, but they are in dire need of the new order. That order of 750 tons of bulk salt is coming Jan. 2 and it's enough to last them until April. By waiting for a shipment, the City of White Bear Lake saves $3,400 in salt.

"We did put the pencil to the paper and came up with a pretty big number," said Patrick Klaers, Arden Hills City Administrator.

Klaers says Arden Hills didn't intentionally defer any purchases, but by buying some big equipment in 2014 they'll save $7,000.

Both White Bear Lake and Arden Hills say the money they save means lower taxes for their residents.

Ramsey County, Washington County, and Hennepin County administrators say they're not postponing any purchases due to the sales tax exemption in 2014.
The state's 87 counties and more than 850 cities paid an estimated $54 million in sales taxes in 2012, according to a report compiled by the League of Minnesota Cities, the Association of Minnesota Counties and the Minnesota Inter-County Association. A Department of Revenue projection puts the potential savings much higher - about $130 million in the first full year.
In Sauk Centre, west of St. Cloud, officials had been pricing out a new wood chipper and a lawnmower. City council members decided this fall to hold off on buying both - at a combined $60,000 - because they could save $4,000 in sales taxes a few months later.
Every bit adds up in a city with an annual budget of roughly $3 million, said Sauk Centre administrator Vicki Willer.
"It can be significant when you start looking at things all the way down from office supplies to salt, sand and equipment purchases," Willer said of the savings, which helped city leaders keep the property tax levy flat for the coming year.
Gravel, road salt, paper clips, phone service, police accessories, lawn care and fire trucks are some of the things that will no longer be taxed.
The tax will still apply to items bought for public golf courses, marinas, liquor stores, fitness centers, campgrounds and other government-owned enterprises because they can compete directly with private businesses. Unmarked squad cars, electricity and candy are among things that also will remain taxed.
Minnesota hasn't always compelled local governments to pay sales taxes. As they worked through a 1992 budget crunch, state lawmakers offered to avoid deep cuts to local government aid programs in exchange for making their purchases taxable. Local leaders figured it would be temporary. But it stuck around and their lobbying groups have had repeal on their wish list for years. Townships caught their break in 2011.
Revenue Commissioner Myron Frans approached local government representatives last spring with a proposal that took them by surprise. Key budget negotiators were ready to adopt the sales tax exemption for cities and counties while also adding to the pot of local government aid. In a letter this month to 5,700 city and county officials, Frans said the tools were meant "to rebuild the state-local fiscal partnership."
The expectation was that the steps would help relieve pressure on property taxes. But levies could rise in some places anyway. Preliminary figures show an average levy increase of 2.1 percent, though nothing is considered final until later this month.
Senate Taxes Committee Chairman Rod Skoe, DFL-Clearbrook, said many local governments are still catching up from lean years. It might have been worse if lawmakers hadn't relieved them of sales tax obligations, he said.
"You charge our local partners sales tax and they put it on their property tax statement to pay the bill," Skoe said. "It just doesn't make any economic sense."
For freshman Rep. Nick Zerwas, a bill to scrap the sales tax on local government purchases was the first legislation he introduced. The Elk River Republican argued it was a better way for the state to assist cities and counties than local government aid. Not every city qualifies for local government aid, or LGA in Capitol parlance.
"That savings can be built into a budget and not this game every year of 'Are we going to get LGA or not?' That question mark doesn't let cities budget it into lower property taxes," Zerwas said.
The new law didn't lift the sales taxes on purchases made by governments banding together in "joint powers" arrangements. For instance, supplies will still be taxed for the Arrowhead Regional Corrections, an agency that provides some detention and probation services for five northeastern Minnesota counties.
"I think it was an oversight," said St. Louis County's Raukar. "They drew some lines that were hard to figure out."
Skoe said he favors fixing the law next year to cover the joint activities.

The Associated Press Contributed to this Report.

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