House Considers Sales Tax Exemption for Local Government Construction Projects

The House Taxes Committee heard a bill that would streamline the sales tax exemption for construction materials purchased by cities for projects.

On March 25, the House Taxes Committee heard HF 618 (Rep. Chris Swedzinski, R-Ghent) and HF 1248 (Rep. Matt Norris, DFL-Blaine). Both bills would provide a sales tax exemption for contractor-purchased building materials for local governments. The tax would be paid at the time of purchase, and the local governments would apply for the refund.

While both bills received broad support from committee members, concerns over the exemption’s cost could hinder its passage this year. The bills were laid over for possible inclusion in the tax omnibus bill. However, committee co-chairs suggested that individual refund requests for specific projects are more likely to advance this year rather than the broad exemption.

Background

In 2013, the Legislature reinstated the sales tax exemption for most local government purchases. However, the current process to get the exemption is cumbersome, expensive, and increases liability risks for cities. As a result, many municipalities avoid using the exemption, which drives up project costs and burdens property taxpayers.

Under current law, local governments seeking a sales tax exemption for construction materials must execute separate contracts for direct material purchases. This process increases administration complexity, liability, and costs, which can make utilizing the exemption impractical.

The proposed refund system, though not as simple as an up-front exemption, offers a more manageable alternative. It ensures that local governments receive tax savings while the Department of Revenue maintains oversight to confirm the exemption benefits the public entity rather than the contractor.  

LMC staff take

The increasing cost of the exemption has also led to a patchwork system of special refunds for individual local projects. In 2023 alone, the omnibus tax bill authorized 21 such exemptions, but no broad, statewide refund process. This practice creates inequities, as some communities secure exemptions while others with similar projects do not.   

Ultimately, the current process raises the cost of local infrastructure projects, often requiring higher property taxes to cover the additional state sales tax burden. Moving toward a more standardized refund system could reduce administrative hurdles and ensure fairer tax relief for all local governments.  

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