Public warehousing interests pass litmus test in defeating Minnesota tax

The public warehousing industry in Minnesota dodged a bullet in late March when state lawmakers repealed a law imposing a 6.875-percent sales tax on virtually all aspects of public warehousing activities. However, the executive who led the charge against the law warned recently that the industry must stay vigilant because revenue-hungry states could be loading similar bullets in their chambers.

Gov. Mark Dayton repealed the tax March 21 as part of broad-based legislation providing $616 million in tax relief. The tax, which was to take effect April 1, had also been aimed at the telecommunications and farm equipment repair sectors. The taxes on the latter two industries, which had taken effect last July, were also rescinded under the March law.

State lawmakers approved the measure in the spring of 2013 during the last three weeks of the 2012-2013 legislative session. The tax was projected to raise $95.4 million in the 2014-2015 fiscal cycle and $184.4 million in the 2016-2017 period, according to estimates from the Minnesota Department of Revenue. In Minnesota, a fiscal year actually extends for two years.

The timing of the move stunned the public warehousing industry, which didn't expect any action given already stated opposition from Gov. Dayton and the state House of Representatives to the measure. Richard T. Murphy, president and CEO of Murphy Logistics, a third-party logistics provider based in the Twin Cities, said Sen. Rod Skoe, chair of the state Senate tax committee, was the principal driver behind the bill's passage.

What made the Minnesota bill so significant to public warehousing interests was that it was the first time a state had targeted the industry with a sales tax on virtually all facets of its business. Three states—New Mexico, Nevada, and South Dakota— tax public warehousing as part of a broad array of levies on business-to-business services. A fourth, Mississippi, singles out the sector, but does not tax goods that are warehoused in the state but move in interstate commerce. The state also exempts the warehousing of perishable commodities. In Minnesota, the only exemptions were given to so-called "freezer warehousing" operations, digital storage, self-storage, and motor and recreational services. The tax did not apply to the operations of privately owned and operated warehouses.

Murphy said executives were dumBíounded that lawmakers would single out their industry given that Minnesota is hardly the geographic hub for goods movement throughout the U.S. "This isn't the center of the universe from a distribution standpoint," he said.

The all-encompassing nature of the Minnesota levy prompted the state's public warehousing industry to assemble a coalition that spent nearly a year lobbying lawmakers. The coalition commissioned consultancy KPMG to produce a study showing that implementation of the tax would crimp profits of warehouse logistics practitioners, drive existing business to neighboring states that don't have a tax, and persuade companies that were considering relocating to Minnesota to go elsewhere.

During the lobbying process, coalition members recognized that their efforts had national implications given that all states, especially those strapped with legacy retiree pension and health care costs, are continually looking for new ways to raise revenue. "We all saw this as a litmus test" of how effective public warehousing interests could be in marshaling their resources to defeat a potentially crippling levy, Murphy said.

Murphy said most of Minnesota-based warehouse logistics companies operate at net profit margins of 3 to 5 percent. Many couldn't absorb a new 6.5-percent sales tax and remain profitable, he said. Murphy said that several customers told him they might have to move their operations out of the state if the tax became law. Prospective customers planning to relocate to Minnesota said they would consummate the move if the tax was repealed, but would not follow through if it took effect, he added.

The tide turned in favor of the industry early in 2014 when it became clear the state was running a sustainable surplus and didn't need to raise the additional revenue if it meant damaging the competitiveness of several industries. Murphy also credits the coalition members, who worked to convince lawmakers of the importance of their industry in maintaining the health of Minnesota's economy and the quality of life of its citizens.