The sales tax exemption on clothing currently costs the state about $300 million a year.
In a prelude to a coming tax debate, Minnesota lawmakers began to pore over bills Wednesday that would apply the state sales tax to online purchases and expensive apparel.
A state Senate subcommittee didn't take any votes because the Legislature is only starting discussions of how to balance the budget and remake the tax code. With the Capitol now controlled entirely by Democrats, proposals to raise taxes are no longer seen as out of reach. Democratic Gov. Mark Dayton is expected to put sales tax changes on the table when he releases his budget next week.
Of the series of sales tax bills, all from Democratic Sen. Ann Rest of New Hope, the most controversial is one to make clothing sales above $200 taxable.
The sales tax exemption on clothing currently costs the state about $300 million a year. Not all of that would be recouped under the Rest bill because the tax wouldn't kick in until a clothing purchase exceeds $200, making it hard for finance officials to pin down a revenue estimate. Rest said whatever money comes in could be used to drive down the overall sales tax rate, which stands at 6.875 percent.
She argued that taxing only pricey clothes would help people of lesser means avoid it.
"If you bought an item of clothing for $190 you don't pay anything," Rest said. "If you bought an item that cost $210, the sales tax would be imposed on $10."
Sen. Rod Skoe, DFL-Clearbrook, said shoppers will easily be able to game the system.
"When I buy a suit the next time I'll probably just buy a pair of pants and I'll buy a jacket and I'll get them both for under $200," he said.
Republican Sen. Julianne Ortman, R-Chanhassen, said Minnesota stores would lose a marketing advantage for a pittance in return.
Maureen Bausch, an executive for the Mall of America in Bloomington, said the state's top tourism attraction — luring 17 million shoppers a year from inside and outside the state — would suffer. She said 50 percent of the sales at the megamall involve clothes.
"If we add this tax on apparel, it will absolutely affect our tourism trade," Bausch said. "The ability to market Minnesota's lack of sales tax is absolutely our clear competitive edge. And the word 'no' is so important. Once we have to add a percent — whether it's 1, 5, 10 it doesn't matter — you can't use the 'no sales tax on clothes.' We lose our competitive edge."
Separately, Rest has a bill that would offer Minnesota residents a sales tax credit for clothing purchases that could be claimed as part of income tax filing. The credits would amount to $60 for a family of four, but the total amount would depend on a family's income.
The online sales tax push has more force behind it. Republicans have backed it in the past, and the major business groups with a Capitol lobbying presence are on board. Supporters argue that it is not a new tax but a matter of compliance because purchasers are technically required to pay the tax, although few do and enforcement is lax.
Roberta Bonoff, CEO of Creative Kidstuff toy stores, said it's an overdue change in state law. She oversees six stores around the Twin Cities and has an online presence as well.
"A sale is a sale," Bonoff told the committee. Giving online-only businesses a pass on collecting the tax allows them to offer merchandise at lower prices or entice shoppers with free shipping.
The requirement to collect taxes would apply to businesses with at least $10,000 in sales to Minnesota residents. The potential state tax collection from the law change isn't great; a Department of Revenue estimate figures it would raise $4.5 million in the first year.
Some have advocated for a federal fix, but Congress has been slow to act. Major online retailers have sued other states that have tried to enact a tax on their sales and others have broken off ties with in-state solicitors who are involved in e-commerce.
Dayton supports the bill and has advocated for the change as part of previous budget proposals.