How Accurate are City Sales Tax Savings Estimates?

by James Warden

In November, property owners will receive the tax estimates they’re used to getting every fall. This year’s statement will be a bit different, though. A law that exempts cities from most state sales taxes starting next year also requires cities to tell taxpayers how much money that exemption would have saved in 2012. The notices will show that the new law should save many cities hundreds of thousands of dollars.

There’s just one problem: The numbers are estimates and vary from city to city—and not always in proportion to the size of a city’s budget, according to a Patch analysis of the estimates and financial reports across Hennepin County cities.

Minnetonka, for example, estimated it paid $484,500 in sales taxes in 2012—the fifth-biggest estimate among Hennepin County cities. The figure is just .8 percent behind Bloomington’s $488,646 estimate even though Bloomington spent 80 percent more in 2012 and has 70 percent more people.

“The requirement is an estimate, but I suppose there’s some leeway there—even what that word means and how much work to put into it,” said Rachel Walker, manager of policy analysis for theLeague of Minnesota Cities. “I think the idea is just to give people an idea, not the exact dollars and cents.”

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An Unclear Message

The legislators who crafted the new law initially planned to require that cities report their actual savings from the exemption each year, starting with a look back to 2012. The idea was that the requirement would let property owners see the benefits of the exemption.

Cities balked at the workload that would entail, and lawmakers eventually decided to allow an estimate instead and only require the report for the first year of the exemption.

However, the Legislature never spelled out a uniform process for calculating that estimate. Cities worked with the Department of Revenue to determine what to do with gray areas in the law. The League of Minnesota Cities advised them on how to come up with an estimate. But cities had to have their estimates to the county by Sept. 15, and even today, certain details remain unclear.

“There are still some questions,” said Minnetonka Finance Director Merrill Shepherd King. “Actually, there are quite a few questions.”

Different Ways of Counting

The result is that different cities calculated the numbers different ways. Since Eden Prairie’s financial reporting system already recorded the exact amount spent on sales tax, it could run a report and get an exact figure. It only had that system because it had gone through a sales tax audit earlier.

Minnetonka also has a financial reporting system that allows the city to examine specific line items. But like the systems in most cities, those line items aren’t aligned with sales tax laws. Shepherd King gave the example of food to illustrate the challenge. Raw ingredients at the grocery store aren’t subject to tax but prepared foods are.

To add to the challenge, Shepherd King writes 600 checks a month. Reviewing every check from back in 2012 just wasn’t feasible.

So she and another staff member spent a lot of hours over a couple weeks looking at fund accounts or line items—not specific purchases. If the fund will clearly be exempt under the new law, the department calculated the percentage that went to sales tax and tallied it up as part of the savings.

“It’s a sophisticated analysis,” Shepherd King said. “It’s not something you can give to your line clerks.”

Others took a different tack. Rogers’ estimate likely underestimates the full benefit because it only reported sales taxes related to tax levy funds, Finance Director Lisa Wieland wrote in an e-mail.  That excludes funds that pay for themselves. Rogers also left out capital projects, like roads, since they vary so much from year to year there.

“I personally think that what is truly relevant is not the theoretical 2012 benefit but instead the 2014 actual benefit of the exemption,” Wieland wrote.

Underlying Differences

Cities also differ in the purchases they make and how they put those purchases on the books. Some cities have large bills that aren’t exempt—like those for city golf courses, liquor stores or ice arenas. Others have different ways of computing expenses shared between cities. The Revenue Department published changes to its interpretation of how the law applies to these types of joint powers agreements just 10 days before the reporting deadline.

Shepherd King speculated that Minnetonka’s estimate is bigger because the city does a lot of its own road maintenance. Under the new law, cities don’t have to pay for asphalt and other materials that they use themselves—but contractors that work for cities are not exempt.

“Every city has a nuanced difference in the services they provide,” she said.

Difficulties aside, the benefits of the exemption are real. Thanks, in part, to the sales tax savings, Minnetonka plans a 2.87 percent levy increase instead of the 4 percent it originally expected.

“I think your normal taxpayer is going to be impressed. Period,” Shepherd King said. “I believe it is a significant amount. It kept our levy low. That’s what kept our levy low, by and large."