Every legislative session, they queue up. Mayors, police and fire chiefs and city administrators from various Minnesota municipalities come to the House Taxes Committee with requests for tax exemptions on materials they need to build or improve a fire or police station.
While local governments are tax exempt, construction projects involve subcontractors. And when they have to make purchases for the project, that’s when sales taxes get complicated.
Sponsored by Rep. Greg Davids (R-Preston), HF1503 would provide a refundable sales tax exemption for all materials, supplies and equipment used in constructing or remodeling a fire or police station owned by a local government, beginning July 1, 2021.
The bill was laid over for possible inclusion in an omnibus tax bill. It has no Senate companion.
The Department of Revenue estimates the proposed change would reduce revenue for the General and Legacy funds by $2.1 million in fiscal year 2022 and $4.4 million in fiscal year 2023, the first full year of implementation.
“Many of the city-specific exemptions sought in the past several years have covered these types of facilities,” Gary Carlson, intergovernmental relations director for the League of Minnesota Cities, said in a letter to the committee.
Under current law, in order for cities, counties, towns and school districts to receive the sales tax exemption for building construction, they must follow what Carlson calls “a very cumbersome set of rules.” Local units of government must separately bid labor and materials, designate the contractor as a legal purchasing agent on behalf of the local unit of government, and assume liability for damages caused by defective materials or delivery delays.
“The current required process to secure the sales tax exemption adds considerable risk and potential cost to the contracting process,” Carlson wrote. “As a result, many cities, counties, towns and school districts choose not to pursue the sales tax exemption at all.”
The exemption would also include work on such related facilities as access roads, lighting, sidewalks and utility components on or adjacent to the fire or police station.
Contractor purchases on behalf of local units of government for public safety facilities would initially be subject to the sales tax, but a city would be able to apply for a refund of state sales tax paid after completion of the project.