A recently issued fact sheet from the Minnesota Department of Revenue reminded me of challenges of our sales tax system that can be avoided.
Fact Sheet 178 on Storage and Warehousing Services reminds businesses that starting April 1, 2014, sales tax is imposed on "business related storage and warehousing services." It also applies to "logistics services" provided by the storage facility. The tax only applies to the storage of tangible items, not digital ones. There is an exception, which highlights the challenge with our typical sales tax structure. Here is the statement from the fact sheet:
"No tax is due when a company stores its inventory in its own warehouse, separate from its production facility.
Reminder: Warehousing or storage is not a taxable service when it is provided by a parent company or affiliate group, or on an isolated or occasional basis."
So, build or acquire your own storage facility and avoid the tax. That is, vertically integrate. If you are unable to afford that, you pay the sales tax on the storage of your items in a third party's warehouse. Clearly a competitive disadvantage.
Two ways to avoid this.
- Do not impose sales tax on goods or services purchased by businesses. Just have the final consumer pay sales tax.
- Use a credit invoice VAT. Every time goods or services are purchased, VAT is paid. If the buyer is a business, they get that VAT paid refunded when they complete their VAT return (they credit it against the VAT they collected).
The storage tax will be harsh on smaller businesses that are unlikely to have their own storage facilities. It also imposes a competitive disadvantage for companies without their own storage capabilities.
Fact Sheet 178 goes on to explain that not all storage services are taxable. It depends on what you store. For example, if coal, lumber or liquor is stored, the tax is owed. If it is agricultural products or refrigerated storage, no tax is owed. The fact sheet then goes on for 3 more pages to define these terms (I'm sure the statute they are summarizing is longer). So, that is another problem with this new tax - it does not apply to all off-site storage by businesses. Thus, definitions have to be provided of what is taxable and what is not. Please skim the fact sheet to get a sense of the complexity involved.
I'm surprised to see this new tax in Minnesota. It is not moving the state forward with a logical, business-friendly tax system. The new tax violates principles of equity, simplicity, transparency and economic growth.
What do you think?
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?