HF4604

Purpose

This bill changes how sales tax exemptions apply to purchases by government entities, with a new focus on local governments buying motor vehicle leases and construction materials through contractors or subcontractors. It amends Minnesota Statutes 2024 section 297A.70 subdivision 2 to redefine who is exempt from sales and use tax and to specify which purchases are not exempt.

Key Provisions

• Amends the exemption rules for sales to governments and political subdivisions.
  • Entities generally exempt from sales tax when purchasing government-related items include: the United States and its agencies/instrumentalities; school districts; local governments; the University of Minnesota; state universities; community colleges; technical colleges; state academies; the Perpich Minnesota Center for Arts Education; and an instrumentality of a political subdivision accredited as an optional special function school.
• Not-exempt items (the “b” list) include:
  • Building construction or reconstruction materials purchased by a contractor or subcontractor as part of a lump-sum contract with a guaranteed maximum price, for use in construction/alteration/repair, except when purchasing on behalf of local governments.
  • Construction materials purchased by tax-exempt entities or their contractors to be used in constructing buildings/facilities that will not be used principally by those tax-exempt entities.
  • The leasing of a motor vehicle (with an exception: leases entered into by the United States or its agencies/instrumentalities or by local governments are not exempt under certain circumstances).
  • Lodging; prepared food; candy; soft drinks; alcoholic beverages; and taxable cannabis products (with exceptions for certain direct purchases by the United States or its agencies/instrumentalities).
  • Goods or services purchased by a local government as inputs to certain activities (e.g., liquor store, taxable cannabis product retailer, gas/electric utility, solid waste hauling/recycling service, landfill, golf course, marina, campground, cafe, laundromat).
• Definitions and scope:
  • The bill clarifies what counts as a “local government” for the exemption, including historical and modern definitions (pre-2017 vs. post-2017).
  • It also defines school districts as public school entities and districts, including an instrumentality of a school district as defined in statute.
  • It specifies that some entities and joint boards organized under certain statutes are recognized as government purchasers for exemption purposes.

Notable Changes

• Adds a specific exemption for local governments on the purchase of motor vehicle leases and construction materials when these purchases are made by a contractor or subcontractor on behalf of the local government.
• Creates and clarifies the boundaries of which construction materials and related services remain taxable, particularly when used for local government projects or by tax-exempt entities in certain scenarios.
• Expands or confirms the list of government entities eligible for exemptions, while simultaneously enumerating notable exceptions (non-exempt items) that may affect project budgeting for local governments and contractors.

Potential Impacts

• Local governments could save money on certain purchases (motor vehicle leases and construction materials) when arranged through contractors or subcontractors, depending on how the purchase is structured.
• Contractors and subcontractors involved in government-funded projects may face different tax handling for construction materials and related services, especially where projects involve local governments.
• Tax planning for construction projects involving public entities or tax-exempt entities may require closer attention to whether materials are bought directly or through a contractor and whether the project is for a local government.

Definitions to Note

• Local governments: includes cities, counties, townships (pre-2017), and from 2017 onward also special districts, certain instrumentality entities, and joint powers boards/organizations.
• Lump-sum contract and guaranteed maximum price: contract types referenced in determining when construction materials are taxable or not.
• Instrumentality: includes entities created or governed by statute, such as those defined under 471.59.

Relevant Terms exemption, sales to government, construction materials, motor vehicle leases, lump-sum contract, guaranteed maximum price, tangible personal property, local governments, instrumentality, school districts, local government inputs, public libraries, joint powers board, special districts, tax-exempt entities, 471.59, 6.465, United States, agencies, instrumentalities, lodging, prepared food, cannabis, cannabis products, liquor store, cannabis retailer, gas utility, electric utility, solid waste hauling, landfill, marina, campground, golf course, cafe, laundromat