At Mainstream Fashions For Men in downtown Duluth, co-owner Doug Melander recently helped a customer choose some ties to go with a couple of new suits he needed for job interviews.
The total bill came to nearly $600 — tax free. But Gov. Mark Dayton wants to expand Minnesota's sales tax to include clothing items over $100. If that were in effect, the $35 ties would escape taxation, but the sales tax on the suits would be about $30.
That concerns shop owners in Duluth, who fear they could lose shoppers looking for tax-free clothing. Some Duluth business leaders are concerned that the Dayton's plan to tax clothing and many professional services could hurt Duluth employers.
Melander's partner Tom Henderson worries that taxing clothing that costs more than $100 would affect the store's ability to draw out-of-state shoppers.
"We get quite a few people from Superior or Wisconsin in general or from the UP of Michigan, that shop here just because there's no sales tax," Henderson said. "And they'll save their shopping trip for when they are here for skiing, or a long weekend, and that would impact us."
It's about a six-mile drive across the bridge from downtown Superior, a town of 27,000 that once had a thriving clothing retail sector.
That was before 1962, when Wisconsin enacted a sales tax that also applied to clothing. Today, shoppers won't find much clothing for sale in Superior outside of Target and Walmart, said Kaye Tenerelli, executive director of the Superior Business Improvement District.
"Even if you go there, while they have a selection, it's certainly not anything like you're going to find in their stores across the border," Tenerelli said of the two large retailers.
Wisconsin residents who are going to spend a significant amount of money on clothes just drive to Duluth, Tenerelli said.
But for some big-ticket items, the opposite has been the case. Wisconsin's sales tax is 5.5 percent. Minnesota's sales tax is currently, is 6.875 percent. Add to that Duluth's 1 percent sales tax, and the tax bill can drive Minnesotans into Wisconsin.
"Say someone buys a big ticket item like a kitchen, for $5,000," said Frank Gerard, president of Campbell Lumber in Superior. "They say, geez, I'll come over and pick it up, save the hundred bucks tax."
Gerard and other business owners across the border in Wisconsin even advertise the sales tax difference in mailings. Dayton's proposal would reduce Minnesota's sales tax to 5.5 percent. After local sales taxes, a given purchase in Duluth would still incur a higher sales tax than in Superior. But Gerard said even now, when Minnesotans can shave 2 percentage points off their sales tax cost by buying in Wisconsin, other considerations are often more important.
"We'll call them [and] they'll say, 'just run it over, I'm having a hard time getting a pickup,' " he said. "So it's sort of a hassle factor involved. So the two percent difference, it plays a little bit of a part, but in the end it doesn't seem to be that big of a deal."
Gerard does the majority of his business with Minnesota contractors. But because he typically delivers orders to the job site, in Minnesota, those contractors have to pay the Minnesota sales tax rate. But for those customers, that convenience outweighs the cost difference.
Republicans in the Legislature have made note of the advantage Wisconsin businesses have on sales taxes. When Dayton unveiled his tax code overhaul a couple weeks ago, House Minority Leader Kurt Daudt quickly dismissed it.
"This budget is for a better Wisconsin because that's where Minnesota's jobs will go," Daudt said.
Dayton also wants to tax a wide range of services that Wisconsin does not, including legal, accounting, architectural and consulting.
Robert Enger, president of the Minnesota State Bar Association, fears the governor's plan would siphon business away from Duluth law firms.
"It would be very possible for the businesses who normally are utilizing the Duluth attorneys to represent them, to move over to a Superior attorney," Enger said.
But, Susan Van Mosch, Assistant Commissioner of Tax Policy at the Minnesota Department of Revenue, said Minnesota businesses can't skirt the tax obligation simply by going out of state for their services.
"If they receive the benefit of those services in Minnesota, what that means is the Superior law firm doesn't have to collect and remit the tax, because we don't have any authority in Superior," she said. "But the client who receives the services in Minnesota would be responsible for paying the Minnesota use tax."
Van Mosch said it doesn't matter where the vendor is. The sales tax applies if the customer is in Minnesota.
Editor's note: This story is revised from the original to clarify that the sales tax would not apply to the ties being purchased and to specify that Dayton's proposal would lower Minnesota's sales tax rate to 5.5 percent.