Proposed Business-to-Business Sales Tax Draws Heat

Created: 02/27/2013 11:34 PM By: Tom Hauser

The Minnesota House Tax Committee asked for public testimony on Governor Dayton's tax proposals and might have gotten more than they bargained for. The hearing started just after 7 p.m. Wednesday and was still going close to midnight. 

The governor's plan to erase a $1.1 billion deficit and boost funding for education is predicated on several controversial tax proposals.  It would lower the state sales tax rate, but expand it to include many things not currently taxed, including many consumer services (like haircuts and auto repairs) and business-to-business services (accounting and legal).  The plan would also increase the cigarette tax and income taxes on the wealthiest two percent of Minnesotans.
The business-to-business sales tax on services is drawing most of the heat from critics.  The business community is galvanized in opposition. 

One company, MotivAction of Plymouth, says the 5.5 percent sales tax on services would more than eliminate their usual 5 percent profit margin.  The corporate incentive and marketing company employs 100 Minnesotans, but does business with major corporations inside and outside the state. 

MotivAction President and COO Joseph Keller says on a hypothetical $1,000,000 marketing plan the company would expect a $50,000 profit.  If they have to charge a client a 5.5 percent sales tax, it would total $55,000, effectively eliminating their profit.  In their highly competitive industry, they say they wouldn't be able to pass that cost along to clients.
The Dayton administration clarified last week that companies like MotivAction wouldn't have to charge the tax to companies in other states.  But MotivAction also does business with Minnesota Fortune 500 companies.  Even when they do business with out-of-state companies, much of the work they do in building marketing programs for them is done by other Minnesota companies they hire. When they do that, they say they would end up paying the new sales tax and still be less competitive with companies in other states without a business services tax.