Clothing subject to sales tax

While Speedos may be taxing to some, the swimwear, along with other clothing sold in the state, is not subject to sales tax. That could change under a bill discussed in the House Taxes Committee proposing a sales tax on clothing.

HF2551, sponsored by Rep. Ron Erhardt (R-Edina), was laid over Feb. 26 for possible inclusion in an omnibus tax bill. A companion bill, SF2346, awaits action by the Senate Taxes Committee. Sen. Ann Rest (DFL-New Hope) is its sponsor.

Sponsored by Rep. Melissa Hortman (DFL-Brooklyn Park), HF2163 would also expand the sales tax to clothing. However, the bill would also allow the state to tax tattoo and body piercing, along with some legal, repair, financial, funeral and salon services. Hortman’s bill has been referred to the Taxes Committee. There is no Senate companion.

Paul Wilson, director of tax research at the Department of Revenue, told the committee that most states approach their sales tax in two different ways: taxing a broad array of goods and services with a lower sales tax rate, or taxing fewer items with a higher tax rate. Of 45 states with a sales tax, Minnesota ranks 30th in the scope of its sales tax base, he said. If the state were to start taxing clothing, it would rank 25th.

In 1987 and 1991, the state added services like pet boarding and grooming, dry cleaning, heath club admission and lawn maintenance to the tax base. Even with the additions, the sales tax base is growing at a slower rate than the economy, Wilson said.

A clothing tax would bring in about $400 million in additional annual revenue to the state, Wilson said.

Both bills would use the additional revenue to reduce the overall sales tax rate and create a clothing sales tax credit for low-income filers.

Opponents argued that the retail industry will suffer because stores will lose out-of-state shoppers who are drawn to Minnesota to buy tax-free clothing.

Chairwoman Rep. Ann Lenczewski (DFL-Bloomington) suggested the committee continue the discussion after the state budget forecast is released Feb. 28. The forecast shows a $935 million biennial budget deficit, up from the November 2007 estimate of a $373 million shortfall.