Local Taxes Subject to the Statutory Provisions
The statutory provisions apply to all local sales taxes authorized after June 2, 1997, unless the enabling legislation specifically exempts the local authority from these rules by reference. Starting January 1, 2000, the statutory provisions apply to and preempt any contrary provisions of all local sales taxes authorized before June 2, 1997. Minn. Stat. § 297A.99, subd. 1.
Steps That a Local Government Must Follow to Impose a Local Sales Tax
In order to impose a local sales tax, a political subdivision must obtain legislative enactment of a special law authorizing it to do so by taking the following steps (in the order listed):
- The governing body of political subdivision must pass a resolution proposing the tax stating (at least) the:
- Proposed tax rate,
- Amount of revenue to be raised and its intended uses, and
- Anticipated date that the tax will expire.
- The proposed tax, then, must be submitted to and passed by of the voters at a general election held at least 90 days after the resolution was passed. The political subdivision may not expend money to advertise or promote the tax.
- The political subdivision must request and the legislature must enact a special law authorizing imposition of the tax.
- The political subdivision must pass an ordinance imposing the tax and notify the Commissioner of Revenue at least 90 days before the first day of the calendar quarter on which the tax is to be imposed.
A political subdivision must get special legislation authorizing the imposition of the sales tax. The statute requires that the governing body of the political subdivision pass a resolution indicating its desire to impose the tax prior to requesting the enabling legislation. The resolution must include information on the proposed tax rate, the amount of revenue to be raised and its intended use, and the anticipated date when the tax will expire. This resolution requirement was added during the 1998 session.
Since 1999, political subdivisions have been required to hold a local referendum at a general election2 before imposing an authorized local sales tax. The revenue may only be used to fund specific capital improvements, which must be identified at least 90 days before the referendum. This codified existing practice, since most special legislation authorizing local taxes passed in recent years already imposed this requirement. However the 1999 law was ambiguous on the timing of the referendum—whether it should be held before or after the enabling legislation had passed. In 2011 the law was clarified to require the local government to hold the referendum prior to coming to the legislature for authority to impose the tax. Minn. Stat. § 297A.99, subds. 2 and 3.
In 2008, a temporary prohibition was added to the law forbidding a local government to “advertise, promote, expend funds, or hold a referendum to support imposing a local option sales tax” unless it was to extend or change an already authorized tax. The prohibition was until May 31, 2010, and the practical intent was to eliminate new local sales tax proposals coming before the legislature during the 2009 and 2010 legislative sessions. In 2011 the expired provision was replaced with a new limitation allowing local governments to hold referenda to impose a local sales tax but still prohibiting them from advertising or spending funds to promote imposing the tax. Minn. Stat. § 297A.99, subd. 1, para. (d).
Determination of the Local Tax Rate
The local tax rate is set in the legislation authorizing the tax. The statute clarifies that the full local tax rate applies to all taxable sales. SSUTA allows lower rates to apply to certain items but all current local sales taxes have only one rate.3 Minn. Stat. § 297A.99, subd. 5.
Definition of the Tax Base for the Local Tax
The statute provides that the local sales tax applies to the same tax base, with the same exemptions, as the state sales tax. A taxable service is subject to the local tax if more than one- half of the service, based on the cost, is performed within the local jurisdiction. Minn. Stat. § 297A.99, subds. 4 and 7. The following sales made within the local taxing jurisdiction are exempt from the local tax:
- Purchases shipped outside the taxing jurisdiction for use in a trade or business outside of the jurisdiction
- Purchases temporarily stored in the taxing jurisdiction before being shipped by common carrier for use outside of the jurisdiction
- Purchases that are subject to the direct pay provisions for interstate motor carriers under Minnesota Statutes, section 297A.90
Although the statute does not apply to or preempt a local sales tax on motor vehicles, a law passed in 2000 prohibits a local tax on motor vehicles greater than $20 per vehicle. Laws 2000, ch. 490, art. 8, § 21.
Requirements of a Complementary Use Tax
A complementary use tax4 is required in all jurisdictions with a local sales tax. Four local taxes enacted before 1997 did not include a use tax; a local use tax was imposed in these political subdivisions beginning January 1, 2000.5
The statute also allows a credit against the use tax owed for a local sales or use tax paid to another political subdivision. This is similar to the credit against state sales and use tax for the amount of taxes paid to another state.
In 2005, the law began requiring political subdivisions with a local sales and use tax to notify their citizens about the local use tax and provide information or electronic links to allow persons to get information and forms needed to pay the tax. The local government must post the information on the main page of its website and provide an annual notice with the billing statement for any public utilities provided by the jurisdiction. Minn. Stat. § 297A.99, subds. 6, 8, and 12a.
Collection, Administration, and Enforcement of Local Taxes
The statute requires the Commissioner of Revenue to administer and collect local sales and use taxes. This merely codified preexisting practice. All local sales taxes, except for the tax imposed in the city of Duluth, have been administered and collected by the state. The city of Duluth, at its own request, was specifically exempted from the collection and administration provisions of the statute. However, the commissioner began collecting the Duluth tax January 1, 2006, because the SSUTA requires collection of all local and state sales taxes by one agency.
The local taxes are subject to the same penalties, interest, and enforcement provisions as the state sales tax. Refunds of excess state sales taxes paid must also include a refund of any excess local sales tax paid. The state deducts its collection and administration costs from the tax revenue returned to the local taxing jurisdiction. The net local tax revenue is paid to the local taxing jurisdiction on a quarterly basis. Minn. Stat. § 297A.99, subds. 9 and 11.
Imposing and Repealing Local Sales Tax
To facilitate state administration of local taxes, the imposition of a tax may only begin on the first day of a calendar quarter. Repeal of a local tax is only effective at the end of a calendar quarter. A local taxing jurisdiction must give the Department of Revenue at least 90 days’ notice before a tax is imposed or repealed. The notice provision was amended in 2003 to include SSUTA requirements. The tax will only be effective after the commissioner has given sellers located in the area at least 60 days’ notice and will apply to catalog or remote sales only after the commissioner has given these sellers 120 days’ notice. The practical effect is that local taxing jurisdictions will have to give the commissioner more than 90 days’ notice.
The statute was amended in 1999 to require a break between the repeal of an existing sales tax and the reimposition of a sales tax for another purpose. A new local sales tax must now expire after completion of the specified project, and the local government must wait one year after the expiration before imposing a new tax for a different project. A number of local governments in the past have had their sales taxes extended and the allowed uses of the tax proceeds expanded before the tax expired. Despite this requirement, extensions were granted to three existing taxes in 2005 without the one-year wait. In 2008 and 2009 four existing taxes were extended to allow funding of additional projects, and Rochester was granted an additional extension in 2011.6 Minn. Stat. § 297A.99, subds. 3, para. (d), and 12.
Determining the Site of a Delivery Sales for Local Tax Purposes
The 1999 Legislature added a provision dealing with the use of zip codes to determine whether a delivery sale is subject to a local sales and use tax. This was amended in 2003 to follow SSUTA requirements. Under the change, the lowest combined tax rate applies if a zip code area includes more than one tax rate. For example, if a zip code includes both a portion of Edina (with no local sales tax) and a portion of Minneapolis (with a half-cent local sales tax), the Minneapolis tax may not be collected. Nine-digit zip codes should be used, if available, to determine the tax rate. Minn. Stat. § 297A.99, subd. 10.
The content of this and any related posts has been copied or adopted from the Minnesota House of Representatives Research Department’s Information Brief, Local Sales Taxes in Minnesota, written by legislative analyst Pat Dalton.
This is also part of a series of posts on local sales taxes in Minnesota.
2 A general election means either the state general election held on the first Tuesday after the first Monday in November of an even-numbered year, or a regularly scheduled election for local public officials for that political subdivision.
3 The one-rate-per-taxing-jurisdiction requirement in SSUTA does not apply to the sale of the following items: electricity, gas, or other heating fuels delivered by the seller, or the transfer of motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes.
4 The use tax is imposed on the consumption or “use” of taxable items for which no sales tax was paid. The tax is imposed mainly on purchases by resident buyers from sellers located outside of the local taxing jurisdiction. The use tax removes the disadvantage to local businesses from competition with businesses located outside of the taxing area that are not required to collect the local sales tax.
5 A complementary use tax was not originally authorized in Cook County and the cities of Hermantown, Mankato, and St. Paul.
6 Mankato, Rochester, and the Central Minnesota cities were allowed to extend their taxes without a one-year wait; however, the extensions still required voter approval. In 2008, Mankato, Hermantown, and Proctor were allowed tax extensions to fund additional projects, and in 2009 Cook County was allowed to extend its tax to fund two additional projects.