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Construction contractors who work in Minnesota may need to make changes to their operations due to the new Omnibus tax bill, which includes a range of new tax provisions that impact their business.

Sales and Use Tax Bill Significantly Impacts Minnesota Construction Contractors

  • 6/24/2013

Sales and Use Tax Bill Significantly Impacts Minnesota Construction Contractors

Construction contractors who work in Minnesota may need to make changes to their operations due to the new Omnibus tax bill, which includes a range of new tax provisions that impact their business.

“Some sales tax provisions contained in the law will become effective July 1, 2013, while others will not become subject to the new tax until 2014,” says Mike Herold, a tax partner with CliftonLarsonAllen. “Construction contractors should be aware of all of these potential tax increases though, so they can properly plan for them.”

The following law changes are specifically relevant to construction contractors operating in Minnesota, and will take effect soon.

Repair services

Repair services to most commercial and industrial machinery and equipment rendered on or after July 1 will become subject to Minnesota sales and use tax. This includes most equipment used in construction contract work, but excludes repairs to furniture and fixtures, and motor vehicles.

“Since services provided to contractors only after June 30 are taxable, contractors must make sure the repair provider correctly segregates the non-taxable repair labor incurred on the invoice before and the taxable repair labor after the June 30 deadline,” says Herold.

Construction contract transition period

Since certain services or property become taxable after June 30, some types of construction contracts will be exempt from these increases during a transition period of July 1 to December 31.

To take advantage of this transition period, a contractor must have a written lump-sum or fixed price construction contract (or qualifying bids) fully approved before July 1. Also, the contract or bid must not allow the contractor to be able to recoup any tax increase.

Optional maintenance agreements

In November 2012, the Minnesota Department of Revenue changed its position on how optional maintenance contracts are taxable in the state. As a result, the purchase of optional maintenance contracts became subject to sales and use tax at that time. This change of position does not apply to optional warranty contracts.

Increased local tax rates

Some local sales tax rates have increased, and most took effect on April 1.

These local jurisdictions include Cloquet, Hermantown, Marshall, and Medford. Special authority has been granted to Rochester to increase a variety of taxes for the funding of the Mayo Clinic project. Any new construction contracts located within any of these jurisdictions will need to take into account those areas’ increased sales and use tax requirements.

The legislation also gave local governments the authority to institute a 0.5 percent sales tax following a public meeting. In the past, legislative approval was necessary.

Lease and rental payments

These local tax increases may affect lease and rental payments, since they are subject to tax based upon where the actual lease payment was made.

“If you are leasing or renting any equipment after July 1, be aware that the tax you pay may increase if the equipment is located within one of these local jurisdictions,” warns Herold.

Manufacturing process, and warehousing and storage changes

There are other provisions of the new tax law that may also affect a contractor’s business, such as changes for the manufacturing process, and warehousing and storage. Machinery and equipment used in manufacturing, fabricating, mining, or refining tangible personal property is considered capital equipment. Currently, the tax is paid on the purchase of capital equipment and repair parts and then refunded following the application of a capital equipment refund claim.

Beginning August 1, 2014, there will be an upfront exemption on these taxes. However, taxable labor for repairs and maintenance of capital equipment remains taxable and is not refundable. Therefore, no refund will be available for taxes on repair or maintenance labor.

B2B warehousing and storage services of tangible personal property, excluding agricultural products, refrigerated storage, electronic data, and self -storage services will become taxable starting March 31, 2014.

Wheelage tax

A wheelage tax is a tax on motor vehicles kept in a county (location where vehicle is primarily stored) and is paid when the vehicle is first registered, and then annually upon renewal. A tax of $5 is currently authorized for the seven county metro area.

The new law expands the authority to impose a wheelage tax to include all counties up to $10 for 2014-2016 and up to $20 thereafter. Counties must decide by August 1 whether to implement the tax for 2014.

How we can help

Minnesota’s tax bill affects a range of businesses, and may have a different impact on each organization. Contact your tax professional to learn how the upcoming tax law changes, and those taking effect in 2014, will affect your business operations. Since some of these changes are rapidly approaching, you should contact a professional soon.

Michael Herold, Tax Partner or 612-376-4548

John Dorn, Tax Partner or 612-376-4854