Minnesota's sales tax generates one-fifth of the state's total tax revenue.
Minnesota is one of 45 states that add a state sales tax to the retail price of purchases. In addition, 21 Minnesota cities and two counties add a local sales tax. The state Department of Revenue collects Minnesota's 6.5 percent sales tax, plus local sales taxes, on all sales of tangible goods except for goods explicitly excluded. Sales of services aren't taxed except for services designated by law as taxable. Minnesota also exempts sales of intangible investments, intangible digital goods like
downloads, real estate and real estate improvements. In 2009, said the state revenue agency, sales taxes generated $5.02 billion, or 21.6 percent of the state's total tax collections,
Exempt Consumer Goods
Minnesota exempts from sales taxes consumer goods deemed basic necessities. Exemptions include food for home consumption, clothing, home heating fuels, prescription drugs and medical devices, caskets and funeral urns. According to a 2010 study of Minnesota's tax structure by the state House of Representatives, 25 other states exempt food but only four others exempt clothing.
Exempt Business Goods
Minnesota exempts from sales tax businesses' purchases of materials and machinery used directly for production of taxable items. Businesses must pay sales tax on purchases of items not used directly in production, such as office furniture and supplies. Businesses that provide nontaxable services, intangible property and home improvements must pay sales tax on the things they buy because they are considered to be the final user of those items. According to the House tax study, the state collects 40 percent of its sales tax revenues on purchases made by businesses.
Services That Are Taxed
Minnesota's sales tax law specifically taxes 10 types of services, said the House tax study. They include lodging, amusements and recreation, parking, dry cleaning and laundry, janitorial and other cleaning, motor vehicle care other than repairs, security and detective services, pet care and boarding, landscaping maintenance and massages except when prescribed by a doctor.
Use Taxes
Businesses and consumers who buy goods out of state that would be taxable if bought in Minnesota are supposed to pay a 6.5 percent use tax on their purchases. Minnesota can't require businesses to collect its sales tax if they have no physical presence in the state. The House tax study estimated that 50 percent to 90 percent of businesses comply with the use tax law, depending on the nature and size of the business. But it said hardly any consumers pay use taxes, and enforcement is all but impossible.
Sales Tax Administration
Retail businesses operating in Minnesota must get a sales tax collection permit from the state Department of Revenue. Operating a retail business that sells taxable items without a sales tax permit is a felony under state law. The revenue agency calls the sales tax a "trust tax" because consumers expect the retailer will forward the collected tax to the state rather than using the money for its own purposes. Retailers that fail to remit sales taxes or file the required sales tax returns could see their sales tax permit revoked, and would face criminal prosecution if they continued operations without a permit. The revenue agency maintains a public online list of retailers whose tax permits are revoked.
Local Sales Taxes
Minnesota law allows cities and counties to levy a local sales tax of up to 1 percent, subject to state legislative approval. The city or county government wanting a local sales tax must pass a tax resolution and then submit for the legislature's approval a detailed proposal laying out the particulars of the tax and how the locality will use the revenue. Local sales taxes are levied on the same types of sales as the state tax. The state collects local sales taxes at the same time that it collects the state tax, deducts an administration fee, and remits the remainder to the taxing jurisdiction quarterly. Local sales taxes are enforced by the state through the same mechanisms as the state sales tax.
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