City Council Meeting Date: March 17, 2026
To: Mayor and Members of Council
From: Ben Martig, City Administrator
Scott Wopata, Community Development Director
Brenda Angelstad, Finance Director
Emery John, Program Associate
Title
Consideration of Ordinance 1092 Amending Northfield City Code, Chapter 74-Taxation (Related to Allowing Lodging Tax Administrative Collection Responsibilities to Be Transferred from the City Finance Department to the Minnesota Department of Revenue).
Body
Action Requested:
Staff recommends a motion to approve Ordinance 1092 (First Reading) Amending Northfield City Code, Chapter 74-Taxation.
Summary Report:
This proposed ordinance amendment creates the ability to transfer lodging tax collection from the City Finance Department to the Minnesota State Department of Revenue (DOR). This change will streamline tax collection and compliance, including the work of ensuring that all lodging operators who owe taxes are paying them. Currently, the City’s Finance Department is responsible for collecting revenues. This change will save staff time and make this more administratively efficient for the short-term rental license holders.
Most local governments collect their lodging tax locally but jurisdictions may contract with the DOR to have them collect the lodging tax. The department is allowed to retain from the collected revenues an amount to cover the costs of collection. The DOR now administers local lodging taxes for many municipalities - including Minneapolis, St. Paul, Rochester, Biwabik, Bloomington, Cottage Grove, and Faribault. This enables the state to enforce lodging tax collection through third-party booking platforms such as Airbnb and VRBO. These platforms collect lodging taxes directly from individual hosts, similar to how they collect sales tax.
Background
Lodging taxes are imposed on short-term lodging by a number of local governments in Minnesota, mainly by cities and towns. All cities and towns, and counties on behalf of unorganized townships, may impose up to a 3 percent tax by statute, if 95 percent of the revenue raised is used for tourism promotion.
The City of Northfield has collected a lodging tax since 1987, revised in 2013, in accordance with Minnesota Statute § 469.190. The City is consistent with the statutory maximum local lodging tax rate of 3% and requires that 95% of tax proceeds be remitted to the local Convention and Visitors Bureau.
The City updated the Short-Term Rentals Ordinance and related language in the summer of 2025. The overall intention of the updates was to: a) improve life-safety protections through licensing and inspections; b) create more equal playing field for local lodging taxes to include short-term rentals in addition to traditional hotels and bed and breakfasts; and c) generate additional revenue for marketing Northfield via the Convention & Visitors Bureau (CVB) activities.
The rental licensing ordinance changes in 2025 expanded the number of rental units subject to inspections and licensing. These inspections are primarily concerned with fire and carbon monoxide safety, including smoke and CO detectors, fire extinguishers, and compliant bedroom egress windows. These requirements are essential to protecting occupants and preserving the long-term quality of the City’s housing stock.
Additional updates in 2025 also added definitions to the short-term rentals as lodging establishments, which subjects them to the local lodging tax. The City chose to postpone collection of lodging taxes from newly defined units until two conditions were met: 1) the units were inspected and licensed; and 2) booking platforms were able to collect and remit lodging taxes directly. This ordinance enables that transition, as the Department of Revenue can work directly with booking platforms to implement tax collection efficiently.
Northfield has seven traditional lodging establishments. A small number of independent bed-and-breakfast operators have also been paying lodging taxes manually to the City. This process consists of completing an Microsoft Excel spreadsheet form and submitting it electronically or by mail, along with a physical check, on a monthly basis. This system is time-consuming and inefficient for both lodging operators and the City’s Finance Department. It is expected to become more complex and challenging with the added short term rental licensing properties.
Northfield has an estimated 35 short term rental licensing (Airbnb/VRBO) listings. The current lodging tax system would be difficult to administer if it were expanded to include manual tax collection from all app-based rentals, in addition to traditional lodging establishments.
The proposed ordinance (attachment #1) and pre-recorded staff presentation (attachment #2) are included.
City Plans & Policies Relevance:
Staff has reviewed the City of Northfield 2045 Comprehensive Plan and finds that, while the Plan does not specifically reference the City’s 3% lodging tax, the use of lodging-tax proceeds for tourism and convention marketing through the Convention and Visitors Bureau is consistent with the Plan’s broader policy direction. The Comprehensive Plan supports City funding decisions that advance economic opportunity, strengthen the downtown core, support small business development, reinforce Northfield’s historic and cultural identity, and improve Northfield’s role as an attractive destination for residents and visitors. Accordingly, staff finds that dedicating local lodging-tax revenues to tourism-related marketing is reasonably supported by and consistent with the Comprehensive Plan.
Alternative Options:
None recommended. The cost-benefit seems clear on the benefits. However, if the ordinance doesn’t pass the City Finance Department will continue to do the collections.
Financial Impacts:
This change is expected to increase lodging tax revenue by ensuring that all lodging establishments, as defined in the City’s updated code, are subject to the same tax requirements. It also shifts responsibility for tax administration and enforcement to the state, which is better equipped to manage the evolving short-term rental market. In turn, it also lessens the administrative burden of collection from the City’s Finance Department to the DOR.
More than 110 cities in Minnesota are authorized to collect local lodging taxes. While many cities impose a standard 3% tax to fund tourism promotion, the exact number changes frequently as more cities adopt it or increase their rates. The following is the last two years of total revenue generated through Northfield’s 3% lodging tax:
• $202,414 in 2025
• $200,778 in 2024
We do not have estimates on how much additional revenue this may generate due to difficulty in estimating due to lack of public data on how many stays are occurring in our short-term rental license holders.
There is no upfront cost to the City. The State DOR deducts a one-time transition fee (estimated at approximately $4,000) from the first month or several months of collected revenue.
The state charges a 1% administrative fee, after which the funds would be forwarded to the local CVB. The State recommends remitting the proceeds to municipalities to then be distributed to the local CVB, instead of directly; it is consistent with their practices. The city maintains a 4% fee for all remitted dollars (as there is a maximum 5% total administrative fee allowed by Statute that would apply to both the City and State fee), State Statute 469.190 Subdivision 3. The Assistant City Attorney provided legal counsel on this interpretation of the maximum fee allowed to be collected. Even though the City is receiving less administrative fees, there will be added revenue collected from short-term rentals and the staff cost of time will be dramatically less to be used for other more productive purposes.
This change is being made in concert with the City’s CVB, which supports the transition.
Tentative Timelines:
2026
• March 17 Approval of First Reading
• April 7 Approval of Second Reading and Summary Publication
• April 15 Publication
• May 15 Ordinance Takes Effect
• October Estimated Department of Revenue Full Implementation of Collections