Minnesota communities still capturing sales tax revenues despite ‘Amazon effect’, new research finds
The growth of online shopping and its effect on local taxes was a cause for concern among civic leaders. New research has shown those concerns are largely unfounded.
NEW LONDON, Minn. — Concerns that online shopping has eaten away at sales tax collection in rural Minnesota communities have been largely unfounded, new research from Minnesota’s Center for Rural Policy and Development determined.
The findings were presented via webinar Monday, Dec. 13. Speaking from his home in New London, research associate Kelly Asche laid out what the Center for Rural Policy and Development termed the “Amazon effect”, the broadscale shift to online shopping among consumers.
Asche outlined three disruptions the move to e-commerce has caused: uniform pricing, an increase in experience-based, in-person shopping and the incorporation of technology into brick-and-mortar retailers. The result, Asche said, is that brick-and-mortar establishments have needed to spend more to remain competitive and have therefore become less profitable.
While taxable sales have increased 32% among Minnesota retailers since 2010, the figure is paltry in comparison to the 171% increase among out-of-state retailers. Despite this, non-Minnesota sales made up only 13.2% of all the state’s sales in 2019, a number which Asche described as “relatively modest”, though it would continue to increase.
The sharp and continued growth in online shopping, Asche said, has prompted concern among local policy-makers that tax revenues — specifically from local option sales taxes and commercial property taxes — would be negatively impacted.
LOST in the weeds
Minnesota is one of 37 states which allows municipalities and counties to assess a local option sales tax.
What that has meant for the Land of 10,000 Lakes, Asche explained, is that cities and counties which are “tax importers” have often opted to assess a local option sales tax to capture revenue from visiting shoppers.
Regional centers such as Willmar in Kandiyohi County emerged as shopping destinations over the years, making them tax importers. Therefore, Asche said, a place like Kandiyohi County would have plenty of reasons to fear the loss of taxes to online shopping. “A place like Kandiyohi County would be a little nervous because we’re tax importers,” he said. “We take customers from outside of our county, bring them in, charge them a tax and send them back out.”
Another cause for concern among civic leaders was watching brick-and-mortar businesses close up shop. The sight of closed signs and boarded up storefronts stoked fear among officials that local option sales tax revenue would dry up. “The concern was valid because, as the report shows, retail sales taking place online are increasing while at the same time the traditional, brick-and-mortar retail stores are decreasing quite a bit,” Asche remarked.
The discussion surrounding e-commerce’s ramifications for tax collections is relatively new, Asche noted.
That’s because it wasn’t until 2018 that the United States Supreme Court determined in South Dakota v. Wayfair that states could force online retailers with an “economic nexus” in their state to collect and remit sales tax. In Minnesota, a retailer is considered to have an economic nexus when it has 200 sales or over $100,000 in sales revenue in the state.
Since the ruling, Asche credited the Minnesota Department of Revenue’s work to streamline the process and make sure the tax revenues are going to the right places.
In fact, the 50 communities in Minnesota which deploy a local option sales tax have seen revenues rise, Asche asserted.
For the most part, local option sales tax revenues have been captured successfully and directed where they need to go despite the rise of online shopping. Only one group of consumers resulted in lost local option sales tax revenue: those who live in tax-exporting counties who shop online and have products delivered as opposed to shopping in tax-importing counties. “Even though we may be losing a little bit of that, we’re still seeing plenty of people coming to shop and still picking products up,” Asche said.
This drop is made up for by an increasing number of residents in tax importing counties staying home and ordering goods to be delivered instead of driving to larger shopping areas like St. Cloud or the Twin Cities. “It’s kind of like it’s equaling out,” Asche said. “When we looked through the data, there was nothing concerning.”
While it sounds like regional centers would come out on the wrong end of online shopping, Asche said that hasn’t been the case yet. “Even though you may be importing less, you’re also having a lot more people that live in your community shop online, thus the tax is still getting charged,” he summarized. “That’s the balancing act. I know it sounds like regional centers are going to get hacked up, but the research and numbers we’re seeing show that’s not the case at all.”
‘A shift in burden’
In addition to local option sales taxes, property taxes have also been impacted by online shopping. Again though, Asche reiterated that tax collections are doing “just fine.”
The loss of property taxes generated by retail stores has been made up for in other areas. “When we look at the data there, retail stores are decreasing,” he said. “The property taxes collected from retail is kind of evening out. It’s plateauing. Every other property tax collection continues to increase, whereas in retail it’s flatlining.”
Rural counties which survived the farm crisis of the 1970s and 1980s already weren’t reliant on retail property taxes anyway. Additionally, the value of agricultural, residential and resort properties continues to rise sharply, “overshadowing” retail’s modest drop-off.
The retail stores still in existence are also buoying tax revenues. “You may be seeing a decline in the number of retail stores, but the value of the stores that still exist continues to increase because they’re strong,” Asche said.
Where there is concern, however, is in the distribution of tax responsibility. Asche and the researchers worry that agricultural lands may become too heavily relied upon to generate property taxes. They also fear what would happen to the tax base if agricultural property values stopped rising or began to fall.
A full report on the subject is coming soon. “It’s a shift in burden a little bit,” Asche said, noting though that it wasn’t done deliberately. “That isn’t the case. It’s just that the value of the land is increasing so much. Really the county has nothing to do with the shift.”
For now, the state of tax collection in rural Minnesota looks largely positive. As the COVID-19 pandemic has shown though, “things can change in a hurry again,” Asche remarked.
Redefining Main Street
The webinar also explored the way in which the Amazon effect has changed one of a small town’s most visible signatures: its Main Street.
For decades, Main Street served as a small community’s heartbeat, but that is all changing, Asche said.
Cruising down a small town’s Main Street today looks starkly different than in days of yore, though that doesn’t mean a town isn’t prosperous. “You drive down Main Street and you’re going to have this interpretation that the town is dying,” Asche said. “I grew up in Hancock, a town of about 800 people. It doesn’t have a Main Street at all, yet it can’t keep a house on the market.”
Asche advised small towns to move past the perception that Main Street needs to define a community. Rather, he believes towns should showcase themselves as good places to live, raise a family and attend school. “If you’re going to define your town by a Main Street, which makes up a small percentage of your actual activity in that community, you’re setting yourself up for failure,” he said.
Overall, Asche said small towns will see “global economic wins” thanks to decentralization and a new opportunity to attract residents. “The idea that we have an economic center within 60 to 80 miles of everyone will still exist to some extent,” he commented. “People can now live in these bedroom communities and have access to really great products and quality of life things that I don’t think were previously available.”
That doesn’t mean major cities like Moorhead will suffer either. “I think some people still will go to Moorhead just because there’s things there that are fun to do,” he concluded. “They want a different experience or to get out of their town a little bit. It’s just going to be different.”