Online retail sales are on the rise. The same is true for local sales tax collections in Minnesota.

In Minnesota, 49 counties and 45 cities – from St. Paul to Bemidji and from Hennepin to Crow Wing – have adopted what’s called a “local option” sales tax.

The idea is that when people buy things in these particular cities or counties, a small percentage of the tax generated by the sales goes to the local government.

With the rise of e-commerce, Minnesota residents statewide are buying more products from online retailers located outside of the state than they were just a few years ago. Has this caused a big blow to local sales tax collections? Not quite, according to a new report from the Center for Rural Policy and Development (CRPD).

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Advantage of sales tax

Nationally, e-commerce sales have more than doubled as a percentage of all retail sales in less than a decade, from about 5% of total retail sales in 2012 to over 12% in 2021, according to census figures.

All of this e-commerce means that, overall, more products are being purchased from retailers outside of the immediate consumer communities.

According to statistics from the Minnesota Department of Revenue, the share of taxable retail sales originating from outside Minnesota increased 171% between 2010 and 2019. But taxable retail sales in Minnesota also increased by 32%.

Minnesota Department of Revenue, compiled by the Center for Rural Policy and Development

All of this increase in consumer spending on retail products has benefited local governments that have optional local sales taxes, including cities and counties.

Looking at the trend lines, “There is nothing here that we should be worried about,” Kelly Asche, author of the report and research associate at CRPD, said during a webinar on the report. A graph of the county’s local sales tax revenue showed increases of between 20% and 30% since 2015. From a sales tax perspective at least, e-commerce has not hurt local government results.

The ability of local governments to capture sales tax revenue from online sales benefited from a 2018 U.S. Supreme Court ruling, South Dakota vs. Wayfair. As a result of this ruling, businesses with more than 200 sales or more than $ 100,000 in sales in the previous 12 months in Minnesota must pay local and state Minnesota sales taxes. Previously, businesses were only required to pay these taxes if they were physically present in the state.

Asche also credited the technology that allows businesses to easily pay taxes to the appropriate jurisdictions, as well as clear guidelines for remitting sales tax for businesses established by the Minnesota Department of Revenue.

Crow Wing County Administrator Tim Houle said he was pleased with the report’s findings. The report found that local options sales tax revenues in Crow Wing County, a part of the state that includes the Brainerd Lakes region, have increased in recent years. The tax in Crow Wing County helps pay for transportation infrastructure.

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E-commerce vs brick and mortar

While e-commerce has not reduced the collection of local sales taxes, the growing number of online sales has had a mixed effect on local businesses themselves.

The number of retailers has declined in all types of communities – up to 17% since 2004 in fully urban areas of Minnesota, according to the report, and up to 24% in areas with a mix of city and countryside.

Minnesota Department of Revenue, compiled by the Center for Rural Policy and Development

It’s a continuation of a trend that has continued for more than a century, said Ryan Pesch, author of the report and extension professor at the University of Minnesota in west-central Minnesota.

“This trend that we published in the report of fewer stores but more sales, it’s basically been going on since 1900 or something like that. At one point we hit peak stores in Minnesota, ”he said.

The increase in online sales has also forced changes in brick and mortar stores. First, it made prices more uniform across retailers as physical stores lowered prices to compete with online retailers because, especially in the early days of e-commerce, shoppers could look at an item in a physical store but the buy online if it was cheaper there.

Second, it has resulted in a more experience-based purchase, whether through events, workshops, or demonstrations, as physical stores attempt to attract shoppers by enticing them to come to the stores. .

And third, there is a need for physical stores to incorporate technology – a trend that has accelerated during the pandemic with online shopping and curbside pickup – that makes local shopping easier.

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In general, these changes have resulted in lower profits for physical stores and, in some cases, closures. But it has also brought opportunities for Minnesota businesses, as panelists pointed out in a forum discussing the report.

Andrew Tjernlund, co-owner of White Bear Lake-based Tjernlund Products, said his 83-year-old family business has become the largest supplier to the industrial electrical sector on Amazon. He estimates that Amazon accounts for two-thirds of the company’s revenue.

“We have adapted a family of sheet metal fabrication [company] to a business that represents or sells 400,000 products on Amazon, ”he said.

Jena Thompson, CEO of Daisy Blue Naturals, an Albert Lea-based beauty and wellness company, sells in her physical stores and online on the company’s website. She described how, in a world where it’s easy to find millions of products on Amazon, her business has benefited from not being Amazon. It also helps people want to support local businesses, she said.

Minnesota Department of Revenue, compiled by the Center for Rural Policy and Development

“Amazon has actually helped us by increasing our sales because people are looking for this unique item and you won’t find it on Amazon,” she said. “They’re looking for that unique experience – you’re not going to get it from Amazon.”

In other ways, it’s forced small businesses like Daisy Blue Naturals to adjust to things like customer expectations for faster shipping times, Thompson said.

Stable property taxes

Another fear of local administrators and economic development officials is that the increase in online sales and the decline in physical stores could negatively affect the city’s property tax base.

The CRPD report found that although the number of retail businesses has declined, commercial ownership constitutes a small portion of local tax revenue. Meanwhile, other types of properties, including residential, forestry and agricultural properties, have significantly increased in value, thereby increasing the collection of property taxes.

“Other types of properties are making up for the decline in retail and that just hasn’t had a significant impact so far on our property taxes for our rural areas,” Asche said.

Anne G. Cash