SF4834

Purpose

This bill changes Minnesota’s sales and use tax rules for government purchases. It clarifies which government entities qualify for exemptions and adds specific limitations related to construction materials, motor vehicle leases, and certain purchases by contractors working for local governments. It also updates how “local governments” are defined, including references tied to years 2017 and later.

Main Provisions

• Expands and clarifies the exemption for sales to governments and political subdivisions, covering a broad set of governmental entities (including the United States and its agencies, school districts, local governments, universities, and certain state education and library entities) for tangible personal property and taxable services used by them.
• Carveouts from the exemption (things that would not be exempt):
  • Building construction or reconstruction materials purchased by a contractor or subcontractor as part of a lump-sum contract with a guaranteed maximum price for work on a building or facility. There is an exception if materials are purchased on behalf of local governments (these would not be exempt in that case).
  • Construction materials purchased by tax-exempt entities or their contractors for projects that will not be used principally by the exempt entity.
  • The leasing of a motor vehicle (with an exemption generally not applying, except for leases entered into by the United States or its agencies/instrumentalities or by local governments).
  • Lodging; prepared food; candy; soft drinks; alcoholic beverages; and taxable cannabis products (with some limited exceptions for purchases directly by the United States or its agencies/instrumentalities).
  • Goods or services purchased by a local government as inputs to certain retail or service operations (e.g., liquor store or cannabis retailer), as well as related utilities and services (gas or electric, solid waste hauling/recycling, landfill, golf course, marina, campground, cafe, laundromat).
• Local government scope for the exemption:
  • The term “local governments” is defined with a transition: prior to January 1, 2017 it includes cities, counties, and townships; beginning January 1, 2017 it also includes certain special districts, any instrumentality of a city/county/township, and joint powers boards/organizations created under state law.
• Notable definitions:
  • School districts are defined to include public school entities and any instrumentality of a school district.
  • The bill references and aligns with existing statutory definitions and organizations (e.g., state agencies, North Central Association accreditation for certain schools, and specific government-related entities).

Notable Changes / Impacts

• Adds and clarifies which government-related purchases remain exempt and which do not, with particular emphasis on construction materials and motor vehicle leases.
• Narrows or removes exemption status for construction materials used in local government projects if purchased through a contractor or subcontractor in certain contract types.
• Updates the definition of “local governments” to reflect changes made in 2017, expanding who qualifies as a local government for exemption purposes.
• Maintains exemptions for certain government purchasers but creates specific exclusions for a range of consumer-facing goods and services (lodging, prepared foods, cannabis, etc.) and for certain local government inputs to particular businesses.

How This Affects Stakeholders

• Local governments and their contractors may see changes in sales tax treatment for specific construction materials and motor vehicle leases, depending on contract structure and who purchases the materials.
• Private entities working with local governments on construction projects may face different tax treatment for materials if the purchase is made through a contractor or subcontractor.
• Purchases of lodging, prepared foods, cannabis products, and certain utilities or inputs to specific government-operated ventures may no longer be exempt.

Definitions to Note

• Local governments: defined with a 2017 expansion to include special districts, certain instrumentality entities, and joint powers boards under 471.59.
• School districts: public school entities and instrumentalities under 471.59.
• Lump-sum contract and guaranteed maximum price (GMP) concepts referenced for construction materials.
• The exemption interacts with various Minnesota statutes and agencies, including 471.59, 134.001, 134A, and 6.465.

Potential Fiscal Considerations

• Revenue impact will depend on how many transactions fall under the carveouts versus the exemptions, particularly for construction materials and motor vehicle leases.
• The changes may alter the tax burden for local governments and their contractors on specific projects and purchases.

Relevant Terms - sales to government - exemption - local governments - construction materials - building construction or reconstruction materials - lump-sum contract - guaranteed maximum price (GMP) - contractor - subcontractor - motor vehicle lease - lodging - prepared food - cannabis products - taxable cannabis products - inputs to liquor store - cannabis retailer - gas utility - electric utility - solid waste hauling service - solid waste recycling service - landfill - golf course - marina - campground - cafe - laundromat - school districts - instrumentality - joint powers board - 471.59 - 6.465 - North Central Association of Colleges and Schools - Perpich Minnesota Center for Arts Education