FAIRMONT - As the Minnesota legislative session begins today, business owners are watching closely.
With a $1.1 billion budget surplus forecast in December, the Minnesota Chamber of Commerce is leading a push for lawmakers to undo some business-to-business sales taxes passed last year.
The three business-to-business taxes at issue are the farm equipment repair tax, telecommunication equipment tax and the warehouse tax. Two of those - farm equipment repair and telecommunication - went into effect in July, while the warehouse tax is scheduled to take effect in April.
"The sales tax on labor for farm equipment repair hits the small businesses the hardest," said Jim Pumarlo, director of communications for the Chamber of Commerce. "If they are able to do repairs in-house, or if a company has a subsidiary to do the repair, they don't tax themselves. But if they need to contract out, they have a sales tax on the labor for those repairs. It hits ag equipment and small manufacturers strong; it's a costly price on doing business."
Replacement parts remain exempt from the tax, which was part of a broader expansion of the state's 6.875 percent sales tax to commercial equipment repairs. The Minnesota Department of Revenue estimated the sales tax on farm equipment alone would raise $28.6 million over two years. The department's list of other equipment repairs covered by the new tax, which took effect July 1, includes: commercial refrigerators and freezers; logging equipment; manufacturing and production equipment; mechanical cleaning equipment; mining equipment; heavy machinery; restaurant equipment; and truck scales.
John Oothoudt, owner of the Case IH facility in Fairmont, sees the tax hit in several ways.
"Our whole computer system had to change," he said. "We had to go through workshop orders and figure out if they were taxed or not taxed."
Oothoudt added that having to update software to account for the new tax was costly in terms of money and time. But another issue that hurt is being a border state.
"We have lots of Iowa customers that we don't see anymore," he said. "We base our emphasis on quality of service, but a tax on labor is not beneficial to them at all."
"With a 7 percent tax on $3,000 worth of labor, you're talking some real money there," Pumarlo said. "I think these are sensitive to border communities, because equipment dealers can go across the border to avoid the tax. Those with facilities in several states will start putting more money into those facilities instead of the ones in Minnesota, and if the equipment goes, then jobs go too."
The impending sales tax on warehousing services will average about 7 percent, given the state rate plus local taxes. It will apply to business purchases of warehousing, storage and related logistics services from other businesses that are not affiliates or parent companies. With bordering states not taxing general warehousing services, many organizations are concerned about increasing costs and the potential for businesses taking warehouse and storage needs to other states.
"A 7 percent local sales tax quickly evaporates any profit," Pumarlo said. "There was an expansion of a business planned for the Austin/Albert Lea area. When the financiers learned about the proposed tax, they cut the financing."
Pumarlo shared another business loss story because of the impending warehouse tax.
"There is a warehouse in Eagan," he said. "It was going to expand, but instead it's opened a new facility in Ames, Iowa. The staff at the Eagan plant has gone down from 35 to 25, so there's 10 jobs lost. And the warehouse is a shadow of itself at what they used to store there. Even if this tax gets undone, those 10 jobs aren't coming back, and they will still have that Ames facility in operation."
Finally, the tax on telecommunication equipment goes against Gov. Mark Dayton's own state task force, according to Pumarlo.
"The governor's task force has a goal to implement broadband and Internet services throughout the state," he said. "Yet it's being taxed for cost purposes ... It brought in $85,000 in sales tax for the second half of the year, yet it goes against the governor's own task force goals, because upgrades on broadband are being delayed."
"They want more broadband, but at the same time, they're going to penalize you for it," added Bob Wallace of the Fairmont Area Chamber of Commerce. "I think these are more ill-conceived pieces of legislation, because they don't see what the final price will be on the consumers."
Both Dayton and House Speaker Paul Thissen, D-Minneapolis, have said if the projected surplus holds, they are willing to repeal the three taxes.
"The Senate majority leader (Tom Bakk, D-Cook) has not committed yet," Pumarlo said. "Two weeks ago, our United for Jobs Coalition submitted a petition with 1,600 signatures to repeal the taxes ... We think we can undo all three, and hope we do it early enough that the warehouse tax never takes effect."
Even if the surplus is smaller than $1.1 billion, Pumarlo believes that undoing the business-to-business taxes can be done.
"I feel better than I did about it nine months ago," he said. "I hope the Senate leadership will come on board. If they wait until April 1, it will become a very sensitive issue to the border communities, because businesses can ship their investments away ... The taxes brought in $300 million in revenue and, in perspective, that is less than 1 percent of the state's general fund, or 50 cents on every $100 the state collects. We think we can increase the budget reserve and also repeal these taxes, because it's hitting these three industries very hard. And ultimately, it's the consumer who pays the most in the increase in costs of services."