Minnesota manufacturers stand to gain from property tax exemptions, rate freezes, expanded R&D credits, and other provisions found in newly passed state legislation.
The omnibus Minnesota tax bill signed into law earlier this year contains several changes to state income, sales, property, and other taxes. These exemptions, rate freezes, R&D credits, and clarifications could provide significant benefits to manufacturers.
New exemptions for property tax and levy freeze
The legislation provides an exemption from the state general property tax of the first $100,000 for each parcel of commercial-industrial property, effective for property taxes payable in 2018. Local taxes will still apply to this amount. The law also freezes the state general property tax at the 2018 level for commercial-industrial property. While local property tax levies may still increase, the law will help reduce property taxes on manufacturers for years to come. While Governor Mark Dayton supports the $100,000 exclusion, he opposes the general property tax freeze and is seeking to retroactively repeal it as described below.
Expanded research credits
The omnibus bill expanded credits for research and development expenses in the second tier from 2.5 percent to 4 percent. Specifically, the credit is now available for 4 percent of research expenses exceeding $2 million, and for 10 percent of qualified expenses for less than $2 million.
“This is a great answer for our Minnesota manufacturing companies as the research credit is a significant benefit to them, with an average of 65 percent of total research credits being claimed in recent years,” says Samantha Metcalf, managing principal of manufacturing and distribution with CLA. “Minnesota is demonstrating a continued focus on the manufacturing sector through its increase to this credit.”
As the manufacturing industry continues to develop new products and process, manufacturers should consider whether they are taking advantage of opportunities to benefit from the research tax credit and how this research credit can help them achieve their goals. Research tax credits can help businesses reduce their tax liability, increase earnings per share, reduce effective tax rates, and improve their cash flow.
Sales tax real property definition enacted
The law clarifies the definition of real property for sales tax purposes as:
- Land
- Buildings and structures, and
- Permanent improvements and fixtures of benefit to the building if they cannot be removed without causing substantial damage
It also clarifies that machinery and equipment that is exempt from sales tax (because it is used in production or manufacturing) is not considered to be part of real property. This changes the definition for sales tax purposes to match the definition used by the Department of Revenue prior to the Minnesota Supreme Court’s 2016 ruling in Dahmes Stainless Inc. v. Commissioner.
Fortification of the Greater Minnesota Job Expansion Program (sales/use tax refund)
The Greater Minnesota Job Expansion Program, which applies to certain businesses outside of the seven-county Twin Cities metro area but includes Northfield, Hanover, New Prague, and Rockford, has been in place for several years and provides benefits to companies located in or expanding in greater Minnesota.
Because this program does not apply to businesses primarily engaged in making onsite retail sales or in providing many services, the manufacturing sector is one of the primary beneficiaries.
Effective July 1, 2017, Minnesota has expanded the benefits available under this program to further incentive growth:
- Increases the program’s maximum sales tax exemption available from $2 million to $5 million annually and from $10 million to $40 million over the total period of an agreement
- Expands the maximum period over which a business may participate in the program from seven years to 10 years if the business is investing a minimum of $200 million over a 10-year period
What didn’t make the cut
Some noteworthy provisions were considered but ultimately were not included in the tax bill for this year. These included:
- Conformity with federal Section 179 expensing. Minnesota remains one of 12 states that do not conform with this section and require Section 179 items be depreciated instead of expensed.
- A provision for the Department of Revenue to establish a private letter ruling program that would have offered taxpayers the ability to request and receive an official response from the Department.
Possible changes later this summer
While the tax bill and several budget bills were passed and signed into law, there was not a clean ending to the legislative session. There remains some controversy over specific provisions that may result in retroactive changes to the law.
In a letter to Minnesota’s legislative leadership, Governor Dayton explained that he had eliminated the Legislature’s funding via line-item veto as an incentive to prompt a special session where some of the key tax provisions would be repealed. Those items include the commercial/industrial property tax freeze (though Dayton supports excluding the first $100,000 of business property from statewide property taxes).
However, on July 20, 2017, a Minnesota district court ruled that the governor’s line-item veto violated the separation of powers clause of the Minnesota constitution and declared the veto “null and void.” The issue is not fully settled as Governor Dayton has indicated he will appeal the ruling to the Minnesota Supreme Court. Because the commercial/industrial property tax levy freeze was enacted into law, however, it will remain effective unless Governor Dayton either fails to appeal the district court’s ruling or the Minnesota Supreme Court chooses both to hear the appeal and to overturn the district court’s ruling.
How we can help
You may be eligible for a property tax exclusion, sales and use tax refund or an R&D tax credit. CLA can help Minnesota manufacturers take advantage of these exemptions and credits or understand the implications of tax changes.