Clothing sales tax has uncertain price

Teenage girls flock to MaryAnne London's shop at the Mall of America in search of the perfect prom dress.

While the dress is rarely cheap, parents at least get a break -- no sales tax.

London said about a third of the customers at her shop, Glitz, come from out of state to take advantage of Minnesota's sales tax exemption on clothing. It's an edge that would disappear under Gov. Mark Dayton's current proposal to tax garments over $100, a price London's dresses easily exceed.

"What brings tourists to Minnesota? I don't know if the Legislature realizes the full value of the no sales tax to the tourism industry," London said. "If I lose these customers, how is that going to affect my bottom line and the number of people I employ?"

Minnesota is one of only 10 states that don't tax clothing, a policy that is celebrated by local businesses that compete on price and shoppers who want the most for their dollar. But this advantage comes with a cost: The state estimates that it loses out on more than $300 million a year in tax revenue.

Dayton says his proposal to tax only items costing more than $100 would capture some of that revenue without hitting the vast majority of clothing purchases. His focus on the popular clothing exemption is part of a sweeping package of tax changes, including a lower overall sales tax rate, that his administration believes would help the state's beleaguered budget while bringing more fairness to tax collections.

About three-quarters of all clothing purchases are items under $100, meaning that most consumers wouldn't pay the tax on most of the clothing they buy, said State Revenue Commissioner Myron Frans.

Retailers counter that the purchases with the highest price tags are business they don't want to see at risk. Luxury retailers in particular have had difficulty in Minnesota, most notably with the departures of Bloomingdale's and Neiman-Marcus in recent years.

The tax issue resonates at the Mall of America, the largest mall in the United States, which has dozens of clothing stores. The mall draws 17 million visitors a year from out of state, in part because there's no tax on clothing, mall officials say, citing a 2010 survey that found nearly a third of out-of-state shoppers said the sales tax exemption influenced their decision to shop there.

"Twenty years ago, no one thought of coming to Minnesota for fashion," said Maureen Bausch, the mall's executive vice president of business development. "Tax-free shopping [for clothing] gives us a competitive edge that has been instrumental to our success."

Bausch also cautioned that the proposed 5.5 percent sales tax on some clothing could be just the beginning. "Anyone who thinks that the state won't eventually raise that tax is naive."

Price sensitivity

Does a few percentage points of sales tax really matter when a shopper is shelling out $100 or more for a jacket, shoes or a handbag? It depends on the shopper.

Steve Dennis, a retail consultant and former top executive at Neiman-Marcus, said shoppers who like to splurge once a year for themselves or someone else will definitely pull back. Likewise, many of the affluent, but-not-quite-rich, will notice the extra cost.

Of course, there also are a lot of people who won't let a few extra dollars stand between them and the styles they want, analysts say.

Kate Gliske, a 28-year-old St. Paul resident who works at the University of Minnesota, said she buys dresses at Anthropologie several times a month for $100 to $200. If she has to pay a little more because of a sales tax, she figures it will fund important government services in the state.

"The extra 5.5 percent I have to pay for that dress will not make me not want to buy that dress," Gliske said.

John Mikesell, a professor at Indiana University who specializes in tax policy, said a tax on items over $100 would certainly impact sales -- but not dramatically so.

"I'm guessing that the sales-tax saving isn't going to be a huge factor in deciding to travel or in what amount gets spent on clothes," Mikesell said.

Tourism impact

People coming from out of state have a lot of other factors to weigh against any extra cost of a sales tax, some analysts and economists say.

People come to the Mall of America, for example, for the entertainment, the restaurants and the sheer number and breadth of stores. For those traveling long distances, the cost of a sales tax on expensive clothing would pale next to gasoline or a plane ticket, said Kim Rueben, a public finance economist at the Urban Institute.

"I don't want to say there will be no effect if the tax increase goes into place," Rueben said. "But I feel like some of the reason people go to the Mall of America is not because they are facing tax-free shopping as much as it's sort of an experience and a tourist attraction."

Still, cost matters. Chris Douglas, a 49-year-old Minneapolis transplant who lives in Chicago and travels a lot for work, returns to Minnesota at least once a year to visit his house, see family and stock up on as much tax-free clothing as he can.

He shops at the Mall of America and at Edina's Galleria and Southdale Center, but he said that would change if he had to pay a sales tax on high-dollar items.

"We delay our purchases so we can buy them in Minnesota," said Douglas, a project office manager. "It's probably more convenient for us to shop in Chicago and New York, plus there's better choice. But there is definitely an advantage to not paying a sales tax."

Lower tax rate

Frans, the revenue commissioner, pointed out that the proposed tax on clothing still would be lower than in 27 other states. Even under Dayton's proposal, people from Chicago who travel to Minnesota to shop at the Mall of America would be paying less in tax than they do in Illinois, where the rate can get as high as 9.75 percent, including local taxes.

Plus, only half of all sales at the Mall of America are clothing. Frans said this means the other half of products sold at the mall already are taxable, and thus would get a lower tax rate under Dayton's proposal.

"I think it actually opens up the opportunity for the mall to be more competitive with neighboring states," Frans said.

In fact, Rueben said one benefit to Minnesotans of a tax on clothing over $100 is that it does exactly what the mall fears: shift part of the tax burden onto residents of other states.

"There is a reason that places like Hawaii and Florida and Nevada like having sales taxes," she said. "If you're actually having more of your taxes paid for by people who don't live in your state, you can raise money and not burden your own citizens."

Effect on Minnesotans

Of course, most clothing sold in Minnesota is sold to Minnesotans.

State residents spend an average of $144 a month on clothing and shoes, according to Bundle, a website that tracks shopping habits. And the $100 item is not as unusual as it once was.

"I haven't seen a decent winter coat that costs less than $150," said Scott McGee, a 40-year-old Minneapolis resident.

But most Minnesotans don't routinely shell out $100 or more for one item of clothing, said Dave Brennan, co-director at the Institute for Retail Excellence at the University of St. Thomas.

While there are some big spenders in the state, they are less likely to be sensitive to the added cost of a tax than people who are on a tight budget, Brennan said. In the end, the effect of the sales tax would come down to the priorities and needs of each Minnesota shopper.

"Minnesotans are not ostentatious people," he said. "They would rather spend money on boats and cottages than clothing."

thomas.lee@startribune.com • 612-673-4113 adam.belz@startribune.com • 612-673-4405