New sales tax exemption: What local governments should know
A new Minnesota sales tax exemption went into effect for local governments on January 1, 2014. The exemption allows local governments1 to purchase taxable goods and services without paying sales tax (certain exceptions apply).
The new exemption is sure to have a significant impact on the operations and bottom lines of local governments. Here are several things local governments should know about it:
1. The new exemption impacts all cities, counties and townships
The exemption applies only to sales and purchases made by cities, counties, and townships; it does not apply to other local government agencies. (Up until the first of the year, it applied only to townships.)
2. The new exemption applies only to the purchase of goods and services necessary for local government services
The exemption does not apply to purchases used to provide services commonly provided by a private business. For example, the purchase of Internet services for a municipal liquor store would not qualify.
Examples of exempt goods and services include the following:
• Housing services
• Sewer and water services
• Wastewater treatment services
• Ambulance services
• Public safety services
• Correctional services
• Chore or homemaking services (for elderly or disabled)
• Road and street maintenance services
The list of exempt purchases is not cut and dried. For this reason, local governments should enlist the help of their audit professional when determining which purchases are exempt from sales tax.
3. The new exemption requires a close look at budgeting and cash flow
As noted above, local governments can expect to save money on several key purchases; however, since the exemption applies only to certain purchases, local governments should closely examine budget line items to identify—and plan for—cost-savings.
But planning may not be so straightforward, and here’s why: The Minnesota Department of Revenue cannot require vendors to accept an exemption certificate, and different guidelines may apply to out-of-state vendors.
4. The new exemption affects everyday operations (it’s not simply a “one time” change)
The exemption changes the way local governments do business, most notably in the way of new required forms. These include Form ST3, which local governments must provide to vendors to claim the exemption, and Form ST11PUR, which local governments must use to request a refund if sales tax was paid but not owed.
The exemption may change local governments’ purchasing habits, too. In order to be exempt, a purchase must be billed to and paid for directly by the local government. This means that purchases made by a local government office or employee (using a personal check or credit card and later reimbursed) do not qualify for the exemption.
5. Not understanding the new exemption could result in forfeited cost-savings
This exemption has the potential to produce significant cost-savings for local governments. However, several exceptions apply, involving everything from out-of-state vendors to third-party purchases. Knowing these ahead of time can help local governments plan accordingly.
With the new exemption in place, several operational changes may be on the agenda for local governments. Contact your audit professional to make sure you’re making the most of it—and taking this opportunity to boost your bottom line.
Andy Berg, CPA, is AEM’s Government Segment Leader. When he’s not fishing for ways to help governments boost efficiency, he’s casting lines for whopper muskies. You can reach Andy at 952.715.3003 or at email@example.com.
1 Note: In this article, “local government” refers to cities, counties and townships.