Minnesota Sales Tax Reform: Proposed Rate Cut & Expansion of Taxable Services

The Governor of Minnesota published a bi-annual budget proposal for 2026 and 2027. The proposal includes reducing government spending, decreasing sales and use tax rates, and adding more services to the list of taxable services.

Should the proposal be adopted, the measures proposed by the governor will contribute to a surplus of around USD 2.1 billion in the 2027 fiscal year and a USD 355 million surplus in the 2028-29 fiscal year.

Impact of Proposed Sales Tax Changes

The proposed decrease in the sales tax rate of .075% is the first reduction since the sales tax was introduced in 1967. It means that the new sales tax rate will be 6.8% instead of the current 6.875%, which was set in 2009. The governor highlighted that the decrease in the sales tax rate will contribute to more taxes being collected.

In addition to the change in sales tax rate, the budget proposal includes the proposition to broaden the tax base to include more services. Broadening the tax base would eliminate the existing sales tax loopholes. Therefore, accounting, legal services, brokerage, and some bank services will become taxable under the new sales tax rules. However, business-to-business (B2B) transactions should remain exempt from sales tax.

Besides these sales tax-related changes, the governor's budget proposal includes an anti-fraud package with stricter penalties for those who fraud state agencies, broadening the agencies' authority and a 5% reduction in special education transportation reimbursement costs.

Conclusion

The House and Senate will consider the governor's proposal when making their budget proposals. The decision on proposed changes and any new proposals must be made by July 1, 2025. If the decision is not made, all or certain parts of the state government will shut down. 

Nevertheless, since the governor's proposed measures are not binding, the final decision could include different measures from those proposed by the governor, where the Republicans already expressed dissatisfaction and disagreement with the proposal to broaden the tax base.

Source: Minnesota House of Representatives