Minnesota may tax more services, lower sales tax rate

Governor Tim Walz of Minnesota has introduced a budget proposal that includes broadening the sales tax to more services and lowering the state sales tax rate. If adopted, the sales tax changes would take effect October 1, 2025.

Minnesota’s general state sales and use tax rate has never been cut. It has increased by nearly 4% since it was introduced in 1967:

• 1967: 3%
• 1971: 4%
• 1981: 5%
• 1983: 6%
• 1991: 6.5%
• 2009: 6.875%

Under Governor Walz’s plan, the state sales tax rate would drop by 0.075%, to 6.8%. Also, the sales tax base would be expanded to numerous services that are currently exempt.

Walz maintains eliminating sales tax “loopholes” that tax some services but not others would allow the state to collect more sales taxes overall. It would also be fairer. “If a tree falls in your yard and you hire someone to remove that tree, you pay sales tax on that,” Walz said. “If you call your stockbroker and make a deal you do not pay sales tax on that.”

Minnesota sales tax currently applies to the following services:

• Admission and entry fees
• Building cleaning
• Delivery
• Landscaping
• Laundry
• Motor vehicle towing
• Pet grooming
• Telecommunications

Under the Walz plan, sales tax would be extended to accounting and legal services as well as brokerage and some bank service charges. Yet business-to-business (B2B) transactions would remain sales tax exempt, as would the following:

• Banking overdraft and late fees
• Legal aid attorney services
• Pension services
• Tax advisory services for the child tax credit and working family credit

Together, the proposed sales tax changes would raise an additional $185.2 million in the FY 2026–27 biennium and $235.8 million in the FY 2028–2029 biennium.

Broadening the sales tax would help modernize Minnesota’s sales tax system. Because Americans buy more services than things today, sales tax is capturing a smaller percentage of overall revenue: By some estimates, the sales tax base in the United States captured about 45% of personal income in the late 1970s. Today, it’s closer to 30%. Spreading sales tax to more services would help bring that number back up.

Nevertheless, this tax policy change could be a hard sell. Republicans are generally against expanding the sales tax and they control the House by a narrow margin. The Senate is split.

A similar plan introduced more than a decade ago failed. In 2013, then Governor Mark Dayton proposed reducing the state sales tax rate to 5.5% and expanding the sales tax base. He said his plan would stabilize state revenue collections while allowing Minnesotans to pay roughly the same amount of sales tax overall. The Minnesota Legislature rejected the idea.

Nebraska, Virginia, and several other states that have tried to tax more services faced pushback. Some states have succeeded in making a broader base, but usually not without some concessions.

Scott Peterson, VP of Government Relations at Avalara and former Director of Sales Tax at the South Dakota Department of Revenue, offers two examples of the kind of opposition states can face.

“When South Dakota first expanded its sales tax to services generally in 1965, the securities industry argued that having to charge sales tax would drive all investors to Minneapolis firms in neighboring Minnesota. For that reason, the securities industry was excluded from the sales tax, but South Dakota increased their license fees,” he explains.

“Attorneys argued that the tax on their services would effectively be a gross income tax that would put them at a competitive disadvantage with out-of-state attorneys,” Peterson continues. “While they were not excluded from the expansion, the state had to promise to rigorously enforce the tax on out-of-state attorneys.”

Whether Minnesota lawmakers will support the governor’s plan remains to be seen. We’ll update this post once more information becomes available. In the meantime, you can learn about other states’ efforts to modernize sales tax in the Avalara Tax Changes 2025 report.