Minn. Agents Rally to Fight State Sales Tax

A Minnesota sales tax proposal with potentially crippling implications for travel agencies came under fire last week when travel sellers joined a throng of small business owners from other industries to testify before the state legislature.

If enacted, Minnesota House Bill HF677 could require the state’s travel agencies to pay a 5.5% annual tax on gross sales. The legislation is based on Gov. Mark Drayton’s proposal to extend the state’s sales tax to a range of businesses and services, including travel agencies. A similar bill is pending in the state’s Senate chambers.

ASTA, GBTA take part
Representatives from ASTA and GBTA were part of the 12-member travel delegation that spoke before the Minnesota House Tax Committee on the bill.

According to ASTA’s estimates, the legislation would mean that an agency with gross sales of $5.4 million would have to fork over $300,000 in additional taxes annually to the state of Minnesota.  

Agencies outside of Minnesota that sell to Minnesotans likely would be hit as well, according to ASTA. (See: ASTA Battles State Plans to Tax Travel Agent Sales)

The travel industry is arguing that travel agencies should be exempt, said Gloria Stock Mickelson, president of ASTA’s Upper Midwest Chapter, who is spearheading a grassroots campaign in Minnesota.  

How agencies differ
In their testimony, travel industry members strove to educate committee members on how travel agencies differ from most other retail businesses and why a tax on gross receipts could put agents out of business.

“We had to emphasize how our money flow differs from other retailers – in that it is pass-through money,” said Stock Mickelson, who is senior manager of education and training for Travel Leaders Franchise Group in Minneapolis. “We don’t own the goods, and we don’t mark them up.”

A tax on travel agency gross sales receipts would result in agents paying taxes that are higher than their income, Mickelson told legislators.

“Because the bill says ‘gross receipts,’ it means that anything that we take in with cruises, tours, etc., would be counted. We’d be taxed on money that we don’t even keep,” she said. “One of our members figured that under the 5.5% tax, his agency would be paying $5,827 in taxes on $105,954 in gross sales,” while only netting $5,575 on those sales.

Impact on corporate agencies
Among those testifying before the committee about the “detrimental” aspects of the bill was Patrick Algyer, president of the North Central Business Travel Association, an affiliate of GBTA.

The sales tax proposal would be devastating to corporate travel agencies, even if they pass on the added expense to their clients, Algyer told Travel Market Report.

“A lot of our corporate travel managers use local agencies and they report what they spend to procurement departments,” he said. “If this makes doing business with Minnesota agencies more expensive, it’s likely that procurement will require them to work with agencies in other states.”

Algyer, who is business sales manager for the Hotel Ivy, a Luxury Collection Hotel in Minneapolis, also argued that “taxing travel services and travel agencies will send a profoundly anti-business message to the entire Minnesota travel industry.”
 
Algyer acknowledged that the sales tax proposal is well-intentioned. “There were some great arguments in favor of the taxation – it would go toward helping disabled and elderly people,” he said. “But the impact on small businesses would be devastating.”

Grassroots efforts
Last week’s testimony was the latest move in a grassroots effort among Minnesota travel agencies to head off the legislation. The agents’ efforts also include a letter and email campaign targeting legislators known to be undecided on the issue.

Among those participating in the grassroots campaign is Bursch Travel, which has 12 offices in Minnesota and has been in business since 1956.

Owner Fred Bursch asked his 50 employees, who live in various parts of the state, to tell their legislative representatives about their opposition to the tax. “Through my local managers, we’ve been able to have conversations with a variety of representatives,” he said.

In a worst case scenario, a tax on his agency’s gross receipts in Minnesota could amount to a tax of $1.5 million a year – “and I don’t make anywhere close to that,” Bursch said.

Alternate scenarios also costly
If the tax is enacted, Bursch Travel would need to pass on the tax costs to clients, and that would be costly, he said.

“You would have credit card fees and the cost of accounting involved. I’d have to add at least one more staff person, so it would still come out of my pocket,” he said. “And if consumers have to pay more, it could be the deciding factor in not booking a vacation.”

Another possible outcome of the legislation is that the sales tax would just be applied to travel agency fees. Bursch estimated this would still cost his agency about $70,000 a year.

“Travel agencies operate on very thin margins, so any added costs are digging into our already limited profits,” he said.

If there is a bright side to the proposed legislation, it’s that the sales tax also would be imposed on online travel sales, he said. “So at least the playing field would be level there.”

Jobs at stake
There are about 300 travel agencies in Minnesota, plus more than 800 independent contractors. That means a lot of jobs are at stake, Stock Mickelson said.

One Minnesota agency owner who lives just over the border in Fargo, N. Dak., has let the governor know she would move her agency out of Minnesota if the proposal becomes law, Stock Mickelson said.

“All the agencies now are looking at their contingency plans and that’s a shame,” she said. “We’ve all weathered a lot in the travel industry over the years – and now we have to deal with our own state.”