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Are GOP and businesses crying wolf over impact of new warehouse tax?

red wing factory
Red Wing Shoes says it was going to build a $20 million warehouse in Red Wing but halted the project when the tax was passed by the DFL-controlled Legislature.

In politics, it’s always difficult to separate genuine concerns, stunts and cries of “Wolf!”

No case exemplifies that lack of clarity more than the noise surrounding a sales tax that was applied to Minnesota warehouses in the final days of the legislative session.

Thursday morning, Republican legislators, surrounded by people affected by the tax, held a news briefing, asking the governor to call a special session to stop the tax, which isn’t scheduled to go into effect until next April.

kelly portrait
Rep. Tim Kelly

“We’ve made a mistake,’’ said Rep. Tim Kelly, R-Red Wing. “As I tell my kids, it isn’t whether you make the mistake — it’s how you correct them.”

Kelly insists this “mistake” is costing the state jobs and business expansion opportunities right now. Therefore, the problem should be fixed immediately with a special session, he said.

Interestingly, though, Kelly and Rep. Pat Garofalo, R-Farmington, went to the media with their calls for a special session before going to the governor.

True concern or political stunt?

Does that mean this is more another un-ending campaign stunt about Minnesota’s tax climate than a real concern?

The governor’s office seems to think so.

Bob Hume, the governor’s deputy chief of staff, made it clear that a special session is not in the offing.

“This is a stunt, not a solution,” Hume said in a statement. “The Legislature is coming back more than a month before this tax would take effect, which is more than enough time, if revenues permit, to review and possibly revise this tax.”

Before proceeding, here’s a quick look at the tax, which is expected to bring in about $100 million over the next biennium and $185 million in outlying years.

The new law would put a 6.5 percent tax on the amount warehouses charge for storing a product. If a warehouse in Red Wing charges a flour mill $1,000 a month for storing flour, for example, there would be a tax of $65 that did not exist before.

According to executives present at Thursday’s event, no other state in the nation has that tax.

'Added value' tax, too

Additionally, there would be an “added value” charged on products stored in a Minnesota warehouse.

Stephen Lawrence, who heads the trucking and warehouse company Lawrence Transportation, said there are times that the company’s warehouses put together parts that arrive from different places and then ship those parts to their final destinations. The “added value” on those products now would be subject to a sales tax.

Again, he said, that would make Minnesota unique in the country.

Those taxes are giving his company — which already has locations in Iowa, Wisconsin and South Dakota — pause about expanding in Minnesota, Lawrence said.  He points out that this tax might be one more reason to expand across the river in Wisconsin, rather than in Minnesota.

Of course, for years Republican politicians and business groups have been claiming that the state’s relatively high taxes will chase businesses away. To date, though, the Minnesota economy is humming at a far healthier rate than the economies in such business-friendly states such as Wisconsin and South Dakota.

So is this just another case of businesses crying wolf?

The GOP likes to point to Red Wing Shoes as an example of a company being stymied by this new sales tax.

The simple GOP/business story: Red Wing Shoes was going to build a $20 million warehouse in Red Wing but halted that project when the tax was passed by the DFL-controlled Legislature.

Endangered projects?

But, after listening to John Sachen, a Red Wing Shoe executive, it’s not so clear there’s a direct link between delaying the warehouse project and the tax.

“It’s on hold,” said Sachen of the project.

Would the project have gone ahead if there’d been no tax?

Sachen couldn’t say that it necessarily would have.

Would the project definitely go ahead if the tax were eliminated?

Sachen couldn’t say that was necessarily the case, either.

He did say that the company, which has a facility in Potosi, Mo., is “in talks with Potosi.”  But again, he wouldn’t say that there’s a direct link between the tax and the warehouse project.

Additionally, it should be noted that the Red Wing Shoes warehouse wouldn’t create jobs -- other than construction ones in building the warehouse. Rather, it would allow Red Wing to consolidate its current the five warehouses into one facility. Those warehouses, by the way, employ about 80 people, a number that would not increase with a new warehouse.

But all of this is not to say that this is a “crying wolf” stunt.

Despite its passage because of heavy pushing from DFLers in the Senate, this is a tax that may well be headed for elimination before it ever is applied. This is a narrow tax to a narrow group of businesses, a remnant of the broad array of business-to-business taxes the Dayton administration initially proposed but then, under fire, withdrew.

(Another business-to-business tax that survived this session was a sales tax on repair and maintenance of commercial equipment, a tax expected to put $150 million into the budget next biennium.)  

Special session sought

Garofalo thinks the example of Dayton pulling back so quickly from most of the business-to-business sales taxes  makes it possible he might call a special session now.

“Dayton has a long track record,” Garofalo said. “When he makes a mistake, he wants to get over it quickly. And this is a mistake.”

Garofalo says this threat — that warehouses will move across state lines — is real. In fact, moving will be easier than ever, what with new bridges up and down the Wisconsin-Minnesota border. 

“I don’t think this is what we intended when we built the new bridge across the St. Croix,” he said. 

But DFL leaders say a special session is not needed. Given that the tax won’t go into effect until April, there’s plenty of time to fix it.

“I think Minnesotans have had enough of special sessions,” said House Speaker Paul Thissen. “We finished on time, with investments people wanted and with a balanced budget. Coming back for a special session on this one, narrow issue doesn’t make sense.”

Republicans argue, though, that as long as the threat hangs over the heads of businesses, they’ll hold up on making decisions about investing in Minnesota. 

Trucking company executive Lawrence seconded that view. He believes the tax will be revisited — and very likely removed — in the next session. But he’s not certain.

“We think this will go away,’’ he said. “We think it should go away. This is a bad tax. But we’ll hold off on decisions because we’re concerned it could be one of those things that gets lost in the shuffle.”

It is not just warehouse owners and Republicans who oppose this tax.

DFL tax chair also opposes tax

Lenczewski portrait
Ann Lenczewski

Rep. Ann Lenczewski, DFL-Bloomington, who heads the House Tax Committee, opposed it and other business-to-business taxes throughout the session. Senate DFLers and the governor initially pushed the tax, but the governor eventually dropped it.

The fight continued through conference committee, Lenczewski said.

“I don’t support any of the business-to-business taxes,” she said in an e-mail. “Indeed, the House consistently opposed them.”

She urged the Senate to cut spending in order to avoid those taxes. But the Senate held strong.  In the end, the compromise included a handful of business-to-business taxes, such as the warehouse tax.

“That is how compromise works,” Lenczewski said. “We all had to agree to some things we didn’t like.”

She said she will oppose any tax increases next session, so that means spending cuts will have to be made to eliminate the warehouse tax,

“Everyone will need to offer ideas for cutting spending,” she said, “including those who held the news conference.”

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Comments (33)

The Red Wing Shoes example is

The Red Wing Shoes example is bogus. There is no potential tax on storing your own goods in your own warehouse.

We don't know all the facts about Red Wing

Neal you may be right about Red Wind. However, it is not uncommon for a business to build expansion space beyond their current need. To the extent Red Wing did this, and provided pubic warehousing to utilize the extra space, the tax would apply. We just don't know all the facts. In most cases it is best to get all the facts before expressing an opinion.

No, we don't know all of the

No, we don't know all of the facts. And we don't know what plans or strategies is driving Red Wing Shoes, as their spokesman waffles on about. In the end, then, it's a bogus example--there is no clear tie between reported cause and apparent effect. And that is the problem with a lot of supposed examples these days.

Red Wing Shoes

Even more to the point, the Red Wing Shoe project would be unaffected by the tax because they would be warehousing their own product. The tax only applies to companies who warehouse products for other companies.

Warehouse Sales Tax

I have been involved in Logistics/Warehousing for 64 years much of it as an owner of warehouse operations. While I now have very little involvement in the warehouse industry I can tell you from experience that this proposed tax was not well thought out up to an including the ultimate ramifications of job and business shift. Frankly, it is totally ridiculous. A special session may not be in order but it should be high on the priority list of the next legislature. By the way, I am a Democrat!!!!

warehouse tax

Businesses need predictability in making important business decisions. While Mr. Hume's business acumen may tell him businesses affected by the warehouse tax shouldn't be concerned because the legislature might amend or eliminate this tax, the absence of certainty will encourage decisions for taking warehouse facilities- existing, new or expanded- to other states. Many will not want to roll the dice waiting for what might speculatively be legislative good intentions.

Taxes

The bottom line is it takes money to keep our infrastructure intact and society rolling along smoothly. Everyone wants the amenities of living in Minnesota, but no one, businesses included, want to pay for it. And yet that investment is necessary so we don't have problems like bridges collapsing and streets with so many potholes it shakes your fillings loose. If people don't like the taxes, there's always Wisconsin next door. Need I point out though that Wisconsin has one of the worst economies in the nation while Minnesota has one of the fastest growing?

Let's say there's a company

Let's say there's a company called ABC Widgets with plants in Anoka, Burnsville, and Chippewa Falls, plus a warehouse in Brooklyn Center where they distribute their product.

Chances are they have (at least) three legal companies: AB Manufacturing, C Manufacturing, and ABC Distribution. AB Manufacturing and C Manufacturing are different companies because they're subject to different taxes, credits, depreciation, etc. (plus different payroll rules) since they're in different states. Both AB Manufacturing and C Manufacturing sell their product to ABC Distribution, and ABC Distribution sells to the retailer.

Are they subject to the tax? What about if they also buy widget accessories from a 3rd party, both to resell individually and to kit with the widgets? This is a very frequent structure for larger companies.

Ignorance of business is bliss for DFL

When a business expands in another state they don't issue a press release. Mr. Grow and others can pretend it's not happening now, I just challenge them to write another story next year when revenues fall short from this tax. Same goes for the cigarette tax and e-pulltabs.

Spreading ignorance around

When a business expands anywhere, they don't do it in secret. They issue a press release, and, if there was anything even remotely political behind it, count on the local elected officials to step up to the mike and take credit.

40% of Red Wing products made - or materials from - overseas?

I see that Red Wing shoes released the following statement...

"More than 60% of Red Wing brand footwear is either made entirely in the U.S. or is assembled in the U.S. with imported materials. Less than 40% of Red Wing styles are made complete elsewhere." (from http://www.americanmadeheroes.com/red-wing.html)

Maybe we ought to look for the "Country of Original Label" (COOL) inside the boots before buying. There is a perception of declining quality of this company's products since they began buying so much of their line from Chinese manufacturers.

See...

http://complaintwire.org/complaint/B7EBAAAAAAA/red-wing-shoes; or
http://www.garagejournal.com/forum/showthread.php?t=41098; or
http://madeintheusabyamericans.blogspot.com/2008/06/mixed-message.html; or

...there seem to be plenty of other sites where people complain about getting a Chinese-made product when they buy from Red Wing in the belief they are made in the USA. The quality of the Red Wing products made in China does not justify the higher price typical for their boots, as opposed to the higher value in USA made boots, in the opinion of most of those with complaints.

An interesting story about Red Wing Shoes' recent $18 million investment in Red Wing:

http://www.postbulletin.com/business/red-wing-shoes-nears-end-of-million...

Red Wing has more employees and more invested in Minnesota, and this is unlikely to change.

Exactly...

...in their quest of ever increasing profit they started cutting costs and now the brand is diluted. Companies like Red Wing, Filson is another, exist on past reputation, they're in a race to suck the last penny of profit out of the business before the consumer catches on to the poor quality of their products. Once word gets out though, they are doomed. At some point sustainability rather than growth will be the prudent business persons mantra.

Certainty

Never having owned a warehouse, nor operated a warehouse business, I can't speak to the specifics of the tax on warehouse operations in detail. What I'll speak to instead is the delusional notion of "certainty."

There is no such thing.

There has never been the sort of "certainty" in business that Mr. Peterson suggests is necessary, nor is there likely to be. If it's certainty you're after, you're bound to be disappointed, if not traumatized, by a capitalist economy. The whole point of entrepreneurial enterprise is to take a risk so that you can reap some degree of reward. If there's "certainty," there's no risk, or the risk is so consistent that it can be programmed into business operations and projections as simply one more line item, thus negating its impact.

There may be other, perfectly reasonable, arguments against a warehouse tax, but the desire for "certainty" isn't among them.

ut

Well of course there is very little certainty although it is hardly a delusional notion if a business determines that an enacted law, even if not yet effective, is likely to be specifically detrimental to its bottom line. It would also be less certain that law will be amended or changed even if some legislative leaders suggest that might be possible. It is also quite certain, and not delusional, there could be real benefits to moving or expanding warehouse facilities to any other state as none have this tax burden. There are still plenty of business risks but minimizing risks (i.e. - targeted taxes) is something any successful business will do when the right opportunity presents itself.

Of COURSE There are Headlines When a Business Expands

outside of Minnesota, because we've got "conservative" Republican politicians and the MN Chamber of Commerce trumpeting every single one!

But even so, they haven't had much to talk about along those lines, lately, and it's likely they won't as the result of this tax, either,...

especially since the added cost of fuel to transport materials from a more distant location would outweigh the small additional expense of this tax.

Agreed - this tax will have an impact, but will not be decisive.

The added cost of this tax will be a line item in a Red Wing's accounting system and its models, and it will contribute to the bottom line, but so will a host of other matters.

You've named one item, the cost of fuel, but there are other costs of transport which could well differ between the two locations. Just ask one of the responsible parties in ANY company of size how simple and easy it is to choose one location over another. It is neither simple nor easy, because of the numerous factors that will impact a company's business over time, and they are all subject to change. It is only natural that Red Wing Shoes would be considering Potosi alongside Red Wing.

The notion that ALL other factors would be 100% identical between the Red Wing, MN location and the Potosi, MO location - therefore perhaps making this one lone item determinative - is ridiculous.

Dems who speak like Republicans.

"She urged the Senate to cut spending in order to avoid those taxes." Apparently this Lenczewski person didn't get the message in the last election. Minnesotans said that we've cut enough and we need to start repairing the damage all this "cutting" has done. What proud Minnesotan finds that fact that a major interstate bridge in our largest city fell into the Mississippi acceptable? All due to Republicans and Democratic enablers who think their wealthy benefactors should not be taxed. Enough!

Two points

First, the 35W bridge failed because of an original flaw in the gusset plate specification, not from lack of maintenance funding. Other bridges may fail soon for lack of funding, but not that bridge.

Second, I have a neighbor couple who both recently retired from $100,000+ state jobs who immediately went back to work in their old jobs on a half time basis. Now they are collecting both a generous, inflation adjusted pension, and a good salary for doing their old job half-time work. This is unheard-of in the private sector. There is plenty of room for savings in state spending.

35W

The failed gusset played could have and should have been found and replaced. It's not like the science of metallurgy is in its infancy. Instead we're replacing road surfacing to make the bridge look good rather tan taking care of the underpinnings.

I, for one, am tired of cosmetic fixes and budget shifts while all the while wringing our hands about how there's waste in the system and we need to cut more funding. Enough is enough. Get the state back on sound footing, both in finances and and infrastructure.

The anti-business environment

in Minnesota is sickening. I've had three employers pick up and move to other states and take their jobs AND TAX REVENUE with them.

Northern Telecom moved to Tennessee, causing me to look for another job, Applied Learning Systems moved to Texas, causing me to look for another job, and Sterling Software moved to New York causing me to say "screw it" and become self-employed.

People who think this isn't an issue should take the time to read a list of the Star Tribune's Top 100 local businesses sometime and see how its changed over the past 20 years. It's depressing.

I guess that...

Is why Minnesota's economy is booming. Telco's have consolidated, software companies move to where they can get coders. Sterling Software moved to New York to avoid taxes? Wrong state for that. Likely wanted a deeper pool of talent in coders. I think you, again exaggerate facts to make your story.

Imagine how frustrated a right winger must be...

...that the economy in MN is doing relatively well compared with other states - in spite of the liberal idiocy of its Marxist state gov't. - while the promised land of Wisconsin - in spite of the brilliant Scott Walker, the darling of the conservatives, leading the way - is turning into the poor cousin of the Midwest.

There is nothing to do but spit foam and invective !!

Sterling Software

was purchased by New York-based Computer Associates who said there was no way they were going to base their new product line in the land of 10,000 taxes. FYI

Please provide bona fides for your statement of CA's intent...

...that there was no way they were going to base operations for new products in the land of 10,000 taxes.

By bona fides, I mean a company quote with sourcing which can be independently verified - or, failing a CA source, ANY credible source at all which would indicate this is not merely more invective.

I have never heard any corporate entity make such a statement, ever. In this specific instance, I have searched for information in support, and I can find no evidence whatsoever to support your claim here in this specific instance. But I'm willing to change my mind.

Or is this just YOU talking ? I just want to know whether I can take what you claim in this specific instance as a factual matter..

Don't hold

Your breathe Steve.

If CA thought they were moving to lower taxes in NY...

...sheesh, were they ever WRONG !!

Here is a sample of NY vs MN taxes from a comprehensive comparison of state taxes reported by The Tax Foundation dated March 2013. There are 40 different categories in the workbook they offer for download here, but a sampling shown below clarifies that in very significant ways, New York is MUCH WORSE than Minnesota in terms of its tax environment. http://taxfoundation.org/article/facts-figures-2013-how-does-your-state-...

I offer this in the vein that a few facts, rather than mere conjecture, would help clarify matters here.

If CA indeed took the view that Minnesota was to be avoided at all costs (you know, the land of 10,000 taxes) in favor of New York, and that the relative taxation in the two states was the DECIDING FACTOR, boy-oh-boy did they ever make a mistake !!

Perhaps if you were to forward these figures to them, point out the error of their ways in a kind way, you might also invite them back as a way to correct their misperception !!!

(In the table below, I've marked the "better" of the two with 3 asterisks for easier reading.)

Tax Fact

2010 State And Local Tax Per Capita
NY $6,375
MN $4,727 ***

State and Local Tax As % of State Budget FY 2010
NY 12.8%
MN 10.8% ***

State Business Tax Climate Index (composite Of 5 factors) 2013 - # 1 is the best, 50th the worst.
NY 50th
MN 45th ***

Corporate Income Tax as % of State & Local Taxes collected
NY 6.7%
MN 3.0% ***

Corporate Income Taxes per Capita 2011
NY $207
MN $188 ***

State Debt per Capita 2011
NY $6,944
MN $2,421 ***

and so on, and so on.

It defies logic

So if my business is large enough to afford its own warehouse, or have my own people to repair my equipment I don't pay a tax. But if I'm small and have to rely on outside warehousing or outside repair people I do?

What's the logic and sense of that? Why not simply establish a "small business tax" and be done with it.

Stop supporting

The mn chamber of commerce and the business partnership.

Chamber of Commerce

You'll find very few small businesses that support either of these organizations. They're big corporate advocates. Check out "Small Business Minnesota" who is an advocate for the little guy.

I agree completely

But the chamber and business partnership always claim the support of small businesses. Let's end that idea once and for all.

Of course the lie

Is complete. Big business does not want to pay for anything - just make more to the detriment of the middle class. LOL

Red Herring

The only thing that makes a business invest in more jobs, warehouses, supplies, equipment or anything is increased demand. If the demand is there, then the business will do everything it can to meet that demand. Effective and truthful market is key here but only secondary to a high quality product that meets consumer's needs at a reasonable price. Why would a business go through all the expense of moving, rehiring, retooling etc. out of a cynical perception regarding taxes or business environment if demand for their product is up? It would be a grossly poor stewardship of resources.
Driving short term profits up through cost cutting measures like diluting the product with overseas processes and/or cutting personnel/wages and the like only goes so far before your high quality product is not the product you gained your reputation on. It represents another poor stewardship of resources that in the not too long a run becomes a race to the bottom - for everyone: owners, investors, employees, vendors and consumers alike.
Endemic myopic avarice throughout the entire economic system is the culprit here. The requirement to forgo common sense to meet unreasonable shareholder demand is proof enough of this. Shipping production/supplies overseas reduces demand by diluting the quality of your product and the job loss deprives you of the engine of demand – working people with money to demand your product; as is cutting wages or personnel. Over time the cycle just spirals downward becoming a race toward the bottom.

Yes & No

If you are going to play a game you need to know the rules. Would you play a game when the rules are changed during the game? Most people would say no. Businesses want certainty of tax laws so they can worry about the uncertainty of what their competitors will/are doing.

The biggest problem with this tax is no one knew about this new tax until after the legislature adjourned. There were no public hearings or public debate in the legislature before this was passed.

The democrats waited until the very last hours of the session pass the tax bill so people tlike the people writing comments here could not express their opinion before the tax bill was passed.

A national real estate company with a local office in MN is working with Amazon to build a series of 1 million sq ft warehouse throughout the US so Amazon can promise next day delivery to more of the US without having to pay FedEx next day rates. This tax & the way it was passed killed any chance MN had of getting one of these 1 million sq ft. warehouses. This would be double the size of any warehouse in MN today.