Updated: 02/15/2013 3:43 PM KSTP.com By: Leslie Dyste
On defense over its sweeping tax plan, Gov. Mark Dayton's administration struck back Friday back against perceptions that his proposed sales tax expansion would put Minnesota businesses at a disadvantage when bidding for out-of-state service contracts.
Dayton's proposal to make a range of consumer and business-to-business services subject to the sales tax is a cornerstone of the budget he released last month with the aim of closing a $1.1 billion deficit and boosting spending on education and other priorities.
The plan has produced plenty of protest, particularly from companies that would collectively pay more than $2 billion in new sales taxes on legal services, accountant contracts and other transactions.
The Department of Revenue issued a 16-page clarification of its sales tax proposal that commissioner Myron Frans explained in detail to reporters.
The department's new primer says that when the recipient of a service is from out of state, no tax would be owed. When the buyer and seller are in the state, the tax would apply. When the buyer is in Minnesota but the service provider isn't, the buyer could be responsible for paying the tax.
"As long as the buyer is in Minnesota, it's taxable," said Revenue Commissioner Myron Frans.
Minnesota would join a select few states in taxing services. Officials argue the shift is essential for providing a more stable budget foundation. When Minnesota enacted its sales tax in the 1960s, more money was spent on goods than services. Today, it's the reverse.
The widening of the sales tax base comes in conjunction with Dayton's proposal to lower the underlying rate from 6.875 percent to 5.5 percent.
Veteran public relations consultant Doug Spong, president of the Minneapolis-based Carmichael Lynch, is among the business professionals who have voiced concern in the past month. He has said Dayton's plan would hamper efforts for firms like his with a national client base that are trying to land new contracts.
Even with word Friday that those out of state contracts wouldn't be taxed, Spong said his opposition remains because it still hits his bottom line when Carmichael Lynch hires lawyers, auditors and the like.
"You get this tremendous amount of a tax upon a tax upon a tax," Spong said. "How expensive are we going to make it to do business in the state of Minnesota?"
Frans said he understands the resistance because it's a dramatic change in tax culture. But he said some businesses that use more goods than services would come out ahead because their raw supplies they rely on for their products would be taxed less than they are now. The Dayton budget would also cut corporate tax rates and freeze business property taxes.
Democrats who control the Legislature are more than a month away from voting on tax-and-spending bills. On Friday, both House Speaker Paul Thissen and Senate Majority Leader Tom Bakk said there's a strong chance some form of new business-to-business taxes will be part of the final budget deal, but stopped short of saying it would mirror Dayton's plan.
"I haven't had a huge outcry from our caucus on the business-to-business aspect of this package," said Thissen, DFL-Minneapolis.
Republican leaders maintain that tax increases are not the route to a balanced budget, but Democrats can pass a budget without GOP help if they remain unified.
Associated Press reporter Kyle Potter contributed to this report.
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