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MN’s planned business-to-business tax expected to negatively impact port industries

DULUTH — If Minnesota’s business-to-business tax on warehouse rental and storage goes into effect April 1 as scheduled, the impact on port activity in Duluth could be huge.

Cargo held in rented storage at docks and storage facilities in Duluth after being unloaded or before being shipped out would face more than 8 percent in sales taxes.

That added cost to companies could drive business to Superior, says Mike McCoshen, president of Hallett Dock Co. And it’s a looming threat not generally known to the public, he and others say.

The temporary storage of wind turbine components and iron ore, coal, limestone and other non-grain cargo in the Duluth ports would be subject to the tax.

So it was good news for tax opponents Friday when the state budget forecast was announced. The predicted $1.2 billion surplus was $408 million more than expected.

That means the chances of repealing the storage tax before it takes effect and repealing two other controversial business-to-business taxes passed by the 2013 Legislature just got better.

Gov. Mark Dayton wants them repealed by mid-March. The House is supportive. The holdout has been the Senate led by Majority Leader Tom Bakk (DFL-Cook).

The surplus, business leaders say, is big enough to cover the $300 million in revenue that would be lost by repealing the three business-to-business taxes. The first two taxes — on the installation and repairs of business equipment and on purchases of telecommunications equipment — took effect in July.

“We’re encouraging an early repeal,” Jim Pumarlo of the Minnesota Chamber of Commerce said during a stop in Duluth last month. Striking the taxes early would prevent the storage tax from being implemented and would make filing tax returns easier.

Pumarlo, who has been traveling around the state to drum up support for the repeal, said the business-to-business taxes could force companies to raise prices, lower wages and hire fewer workers.

He said the taxes make Minnesota less competitive, especially for border cities like Duluth. It could prompt businesses to relocate or expand to Wisconsin, which doesn’t have the tax.

Fortunately for ME Global Inc., the expansion of its foundry in Gary-New Duluth was completed before the tax on installation and repair of business equipment took effect. The expansion boosted production of the plant’s steel and iron castings by 25 percent and created 30 permanent jobs paying about $50,000 a year.

“We spent about $24 million in Duluth expanding the facility,” said Andy Fulton, president of ME Elecmetal which owns the Duluth foundry. “These laws weren’t in effect. If I were to do it today, I couldn’t do as much.”

While the tax doesn’t apply to in-house repairs, the foundry’s expansion included contracting with others to install large equipment. Labor to install a $700,000 arc furnace, for example, costs about $300,000, which would be subject to the new 6.87 percent state tax. Add the local sales tax which would kick in, and the total tax is more than 8 percent in Duluth.

“That’s serious money,” Fulton said.

The company typically spends $4 million a year in capital improvements and $4 million in maintenance. But because of the new taxes, the company spent half that in 2013, he said.

“So it’s a significant cost to us,” he said. “If this tax continues, it’s questionable whether we would make that investment again.”

The company also is a big recycler of materials from Iron Range mines and materials acquired on the open market. The storage and warehouse tax would add significant costs to those recycling efforts.

The bottom line is the taxes cut into profit margins.

“We’re trying to recover it,” Fulton said. “But we can’t always pass on the cost to customers.”