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DID YOU KNOW? The Ins and Outs of City Sales Tax By Susan Naughton E Pro- Typical capital improvements. must display a link on its homepage to ven in tight economic times, cities ceeds of a city sales and use tax must be a notice about the local use tax. The must tackle expensive projects such dedicated exclusively to payment of a notice must explain that residents and as updating the sewer system or businesses in the city may owe a local making park and trail improvements. at least 90 days before the referendum. use tax on purchases of goods and ser- One option cities can explore for Generally, successful city sales and vices made outside the city. funding such necessary capital improve- use taxes have funded capital improve- The notice must provide resources, ments is a sales and use tax. including a link to any relevant Depart- Historically, city sales and use taxes those for: ment of Revenue web page, to allow have been rare. Before 1990, there Convention or civic centers. people to get information and forms to were only threein Minneapolis, Public safety. pay the tax. In addition, a city that pro- Duluth, and Rochester. But due in part Transportation. vides and bills for utility services must to decreasing state funding, cities are Sewer and water. include a similar notice at least once a increasingly looking to local taxes as a Parks and recreation. year in a utility billing statement. way to fund capital improvements. As of The city of Hutchinson, for example, State law requires the Collection. January 2012, 27 cities were imposing a imposed a half-cent tax beginning in commissioner of Revenue to collect sales and use tax. January 2012 to help pay for a new local sales and use taxes, and provides A city must follow Four-step process. water plant and an expanded wastewater that local taxes may be collected with four steps to impose a new sales and use treatment plant. the state sales and use tax. Local taxes tax as authorized by Minnesota Statutes, A complemen- Use tax requirement. are subject to the same penalties, inter- section 297A.99: tary use tax is required in all jurisdic- Step 1. The city council must pass a est, and mechanisms for enforcement as tions where a local sales tax has been the state sales and use tax. resolution indicating its approval of imposed. This tax is imposed on the Zip codes are used to determine the tax and stating (at a minimum) the: consumption or use of taxable items whether a delivery sale is subject to Proposed tax rate. where no city sales tax was paid. The a local tax. The lowest combined tax Intended uses for the revenue. tax is imposed mainly on purchases by rate applies if a zip code area includes Total amount of revenue to be raised. resident buyers from sellers located out- Estimated length of time the tax more than one local tax rate. The state side the taxing jurisdiction. will be in effect.deducts its proportionate share of The use tax is intended to remove administrative costs from the collected Step 2. The city must submit the pro- the disadvantage to local businesses from tax revenue, and pays the tax proceeds posed tax to the voters as a refer- competition with businesses located to the city on at least a quarterly basis. endum at a general election held at outside the local taxing area that are not least 90 days after the resolution was required to collect the local tax. passed. State law was adopted in 2011 A city sales and use tax Exemptions. generally applies to the same tax base the referendum on the proposed tax as the state sales and use tax. A taxable before coming to the Legislature to service is subject to the city tax if more seek its approval. State law was also than one-half of the service, based on adopted in 2011 that prohibits cities the cost, is performed within the city. from advertising or spending funds to There are three types of exempt sales: promote passage of the referendum. Purchases shipped outside the city for Step 3. The city must requestand use in a trade or business outside the city. the Legislature must approvea spe- Purchases temporarily stored in the cial law authorizing the proposed tax. city before being shipped by com- Step 4. The city must adopt an ordi- mon carrier for use outside the city. nance imposing the local tax and must Purchases subject to the direct pay pro- notify the commissioner of the Depart- Susan Naughton is a research attorney with visions for interstate motor vehicles. ment of Revenue at least 90 days before the League of Minnesota Cities. Phone: (651) A city with a sales and Public notice. 281-1232. Email: snaughto@lmc.org. which the tax is to be imposed. J-F 2013 M C 19 ANUARYEBRUARY INNESOTAITIES