Gov. Mark Dayton's administration offered more specifics Thursday about its plan to collect the sales tax on business services.
In addition to taxing legal and accounting services, the expanded tax would cover architectural services, computer and employment services, management consulting and electronic repair.
That has led some Minnesota business leaders to criticize the governor's proposal as a terrible idea that would hurt the state's economy.
"It's a bad idea because it adds additional costs to the services that we provide our clients," said Scott Kadrlik, an accountant in Eden Prairie, Minn. "I think firms like ours would lose business."
Kadrlik is a partner in Meuwissen, Flygare, Kadrlik, & Associates, P.A., which employs 15 people and handles a variety of accounting and tax work for businesses and individuals. Under the governor's sales tax plan, for the first time the firm's clients would have to pay taxes on his work, or 5.5 percent of the bill.
Minnesota would also lose, Kadrlik said, as firms like his would find ways to avoid the tax by directing the work that would be taxed in Minnesota to states that do not tax professional services.
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Beth Kadoun, director of tax and fiscal policy for the Minnesota Chamber of Commerce, said all businesses that would have to start collecting the new sales tax would be at a competitive disadvantage.
"I think it will have a detrimental impact on Minnesota's job climate and our economic growth," she said. "I mean, you also have to look at what other states are doing around us and how we compare with our other states."
According to the Tax Foundation, a non-partisan tax research group, Hawaii, New Mexico and South Dakota are the only states that apply a sales tax to legal and accounting services.
Taxing business services is rare, said Indiana University Professor John Mikesell, who studies state and local taxation. He said if the new tax is imposed, large companies might start doing their own legal and accounting work, which would take business away from smaller companies specializing in those fields.
Also, other companies that are not big enough to have their own legal and accounting departments might look out of state to try to avoid the tax, he said.
In the end, Mikesell said, individuals will end up paying the tax.
"It sounds like, 'Oh my goodness. We're going to tax business and not people,' " he said. "Yeah, except the impact is going to end up on consumers of things that business sells. It's just hidden."
But state Revenue Commissioner Myron Frans argues that expanding the sales tax to include business services is fair, and he disputes the notion the expanded sales tax will hurt Minnesota businesses.
"When you start making claims about 'it's going hurt the whole economy,' you have to look at the governor's overall package," Frans said.
Businesses will ultimately be in a better position if the governor's budget passes, Frans said, because many will see corporate income tax rate reductions, flat property taxes and an overall sales tax rate that will be 20 percent lower.
"We think that in many, many ways this tax change is going to be helpful for main street Minnesota," he said.
Frans also said Minnesota purchasers of businesses services out of state, would still be required to pay the sales tax.
Kadrlik, the Eden Prairie accountant, doubts the Democratic governor's proposal will find much support, even in the DFL-controlled Legislature.
"A lot of our legislators are lawyers, and they don't want to see legal services subject to sales tax," he said.
Frans acknowledges that enacting the sales tax expansion won't be easy.
"Politically it's a difficult thing to do. I think one of the things when you see different states try to expand to the service area, people come out and complain about it," he said. "They've never been in the system, why should they be taxed now? And the fact of the matter is they've been untaxed in Minnesota since 1967, and it's time for them to pay their fair share like everybody else."
Frans said the Dayton administration is open to alternatives even though the governor is convinced extending the sales tax to business services is fair and won't leave Minnesota businesses at a competitive disadvantage.