Sales tax changes: what would be covered

Gov. Mark Dayton is proposing Minnesotans pay a lower overall sales tax rate but that it should be applied to more goods and services, including clothes that cost more than $100. Dayton proposes to cut the statewide sales tax rate from 6.875 percent to 5.5 percent, a 20 percent reduction.

Revenue from the base expansion would be used to reduce the existing sales tax rate on all items, the governor's office said. Broadening the sales tax base would help stabilize the state budget by providing a more reliable revenue source for funding public services, the administration argues. The tax changes would go into effect on Jan. 1, 2014.

Here's a closer look at what purchases would be subject to the 5.5 percent sales tax under the governor's plan.

Select goods and consumer services, including:
• Clothing items over $100
• Admissions and memberships
• Over-the-counter drugs
• Personal care services and instruction
• Legal and accounting services
• Auto and other repair services

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Revenue from those changes: $1.06 billion in FY 2014-15

Business services, including:
• Legal
• Accounting
• Architecture
• Specialized design
• Computer
• Management consulting
• Advertising
• Employment
• Business support services

Revenue from those changes: $3.2 billion in FY 2014-15

Certain digital/online transactions, including:
• Digital goods, such as music downloads
• Purchases from Minnesota affiliates of larger online retailers (Read more)
• Parallel taxation of direct satellite services and remote access software
(Read more below)

Revenue from those changes: $31.2 million in FY 2014-15

Sales tax exemptions to be repealed:
• Telecommunications equipment
• Court reporter documents
• Advertising materials and publications

Revenue from those changes: $134.5 million in FY 2014-15

More about parallel taxation of direct satellite services and remote access software:
The governor first made this proposal in his 2012-13 budget, which included the following amplifications:

Parallel Taxation of Direct Satellite Services

The Governor recommends expanding the definition of "direct satellite service" to include digital video recorder (DVR) services and programming services requiring subscriber interaction, such as pay-per-view. Those services are already taxable when provided by a cable TV provider. The proposal will increase general fund revenue by $2.3 million in FY 2012-13.

As the economy and technology continue to evolve, statutory definitions related to the applicability of the sales tax often need to be adjusted to keep pace and to ensure a level playing field with taxation of similar products and services.

Under current law, DVR services and programming services are taxable when sold by a cable TV service provider, but are not taxable when sold by a direct satellite service provider. The proposal would treat similar services equally by having the sales tax apply to all DVR and programming services, whether they are sold by a cable TV or direct satellite provider.

Parallel Taxation of Remote Access Software

The Governor recommends that the sales tax apply to charges for the access and use of remote access (web-based) software maintained by the seller or a third party. Remote access models may also be known as "software as a service" (SaaS), application service provider (ASP), or cloud computing. The sales tax already applies to other software purchases or leases. The provision will increase general fund revenues by $3.4 million in FY 2012-13.

This modification will ensure that the purchase or rental of computer services that are hosted remotely will be subject to sales tax, the same as would be the case if a customer purchased computer equipment or purchased software for installation on a computer.

Under current law, the sales and use tax applies to charges for a license to use prewritten computer software, but does not apply to the access charges for the use of similar software if provided by the seller because the customer does not have title to or control over the prewritten computer software they are using.

Minnesota Rule 8130.0500 states that the making available of a computer on a time-share basis for use by customers securing access by remote facilities is a nontaxable service, not the granting of a "license to use" which is taxable.

Also, Minnesota Rule 8130.9700 states that the use of equipment on a time-sharing basis, where access to the equipment is only by means of remote access facilities, is not a taxable leasing of such equipment. This makes the applicability of the sales tax more fair by leveling the playing field by making the time-sharing of hardware and the time-sharing of software the same for tax purposes.

This proposal would tax the use of prewritten computer software as a license to use prewritten computer software and the use of computer equipment by remote access as a taxable lease of tangible personal property.

Source: Office of Gov. Mark Dayton