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Governor Mark Dayton signed an omnibus tax bill that contains several changes to state income, sales, property, and other taxes, although some provisions may be retroactively repealed.

Tax strategies

Minnesota Tax Bill Includes Nearly $650 Million in Tax Relief

  • Dan Kidney
  • 6/9/2017

The big “winners” in Minnesota’s recently passed tax legislation are seniors on Social Security ($117.2 million), owners of lower-valued business property ($95.5 million), indebted college students and college-saving parents ($70 million), counties and cities ($40.5 million in general purpose aids), families with child or dependent care expenses ($35.8 million), and farmers supporting school construction ($35.5 million).

Because Minnesota had not enacted any tax legislation since 2014, the large number of changes in this 2017 law reflect a significant amount of pent-up demand. Most of the changes add or increase credits or subtractions to tax, and they are generally effective with the 2017 tax year unless otherwise noted below.

Here is a summary of the bill’s most notable provisions:

Individual income tax

  • Accelerates individual income tax on installment sales of interests in or assets of Minnesota pass-through entities (S corporations, partnerships, or LLCs federally taxed as partnerships that operated in Minnesota during the year of sale) by nonresidents or by residents who move out of the state
  • Allows new subtractions for certain Social Security benefits
  • Allows a new credit for student loan principal and interest payments and a new income exclusion for discharge of debt on student loans with income-based repayment plans
  • Allows a new credit and a new subtraction for 529 college savings plans (taxpayers must choose one or the other)
  • Allows a new subtraction for earnings of first-time homebuyer accounts
  • Authorizes the commissioner of revenue to enter a new reciprocity agreement with Wisconsin, modifies the credit for taxes paid to other states for Minnesota residents who work in Wisconsin in years when an income tax reciprocity agreement is not in effect, and allows for that credit to be refundable
  • Modifies the domicile test for residency so that the location of the individual’s CPA, attorney, or financial adviser and the place of business of the individual’s bank is not considered
  • Increases the credit for child or dependent care expenses to match the federal credit
  • Increases the second-tier rate under the research credit from 2.5 percent to 4 percent
  • Repeals the Greater Minnesota Internship Credit
  • Changes the due date for partnership returns to match the federal due date of March 15 for calendar-year partnerships, or the 15th day of the third month following the partnership’s year end
  • Allows S corporation shareholders and partners to request that DOR assessments be issued to and paid by the entity after initiation of an audit
  • Creates new nonrefundable credits for sales of assets to beginning farmers, and for beginning farmers who take financial management courses

Estate tax

  • Modifies the domicile test for residency so that the location of the individual’s CPA, attorney, or financial adviser and the place of business of the individual’s bank is not considered (The same modification is made for individual income tax.)
  • Increases the estate tax exclusion from $2 million to $3 million, phased in four steps and fully effective for estates of decedents dying in 2020
  • Clarifies that taxable gifts made within three years of death are subject to the Minnesota estate tax. Present law could be read to imply that they are taxable only if they are deducted in computing the federal table estate, but under federal law they are never included in the federal estate because they were subject to the federal gift tax instead. Effective retroactively to the original date for the requirement to include these gifts in the Minnesota taxable estate (gifts after June 30, 2013).

Sales tax definitions, exemptions, and rates

  • Expands the exemption for nonprofit fundraising sales on leased property from five days to 10 days
  • Extends the sales tax exemption on telecommunications equipment to fiber and conduit purchases
  • Provides that when a foreign business entity purchases a motor vehicle that is under the “control” of a Minnesota resident, the Minnesota resident is presumed to be the owner of the vehicle for motor vehicle excise (sales) tax purposes if two or more of the following factors are true of the business entity:
    • It lacks a specific business activity or purpose other than tax avoidance
    • It maintains no physical location in the jurisdiction where it is organized
    • It earns de minimis or no revenue o It maintains minimal or no business records
    • It fails to employ individual persons and provide them with W-2 statements  
    • It fails to file federal income tax returns or a required state tax return where it is organized
  • Authorizes new local sales taxes for various cities and counties up to:
    • Clay County – 0.5% to 1%
    • Garrison, Kathio, and West Lake Millacs Sanitary District – 1%
    • East Grand Forks – 1%
    • Fairmont – 0.5%
    • Fergus Falls – 0.5%
    • Moose Lake – 0.5%
    • New London – 0.5%
    • Proctor – 0.5% increased to 1%
    • Spicer – 0.5%
    • Walker – 1.5%
    • Sleepy Eye – 2% lodging tax

Sales tax nexus

  • Extends the duty to collect and remit sales tax to “marketplace providers” (such as Amazon.com) with a place of business in Minnesota unless retailers selling through the marketplace site are already collecting the tax. Retailers are not required to collect Minnesota sales tax if their sole physical connection to Minnesota is making less than $10,000 of taxable sales in the state through a marketplace provider who has a place of business in Minnesota. Effective July 1, 2019, or earlier, if states become federally authorized to require sales tax collection from remote sellers without physical presence in the state  
  • Requires retailers to collect and remit sales tax if they have a storage facility in the state, employ a state resident who works from a home office in the state, or has an “affiliated entity” in the state. “Affiliated entity” is defined to include in-state entities that sell the same products as the retailer; facilitate the retailer’s sales; use the retailer’s intellectual property; deliver, install, assemble, or maintain certain property sold by the retailer; facilitate deliveries for the retailer; or assist in maintaining the retailer’s market

Property tax

  • Exempts the first $100,000 of each parcel of commercial-industrial property from the state general tax
  • Freezes the state general property tax at the 2018 level for both commercial-industrial property and seasonal-recreational property
  • Provides a “school building bond agricultural credit,” which is a property tax credit for agricultural property equal to 40 percent of the tax attributable to school district bond levies on that property

What didn’t make it

Some noteworthy provisions were considered but ultimately were not included in the tax bill for this year. These included the following:

  • Section 179 expensing federal conformity. Minnesota remains one of 12 states that do not conform with this section
  • A provision for the Minnesota Department of Revenue to establish a private letter ruling program
  • Sales tax exemptions for construction materials, whether purchased by an entity or its contractors, for local governments, charitable religious and educational nonprofits, and certain other governmental and nonprofit organizations

Possible tax changes later this summer

While the tax bill and several budget bills were passed and signed into law on May 30, 2017, there was not a clean ending to the legislative session. Some controversy remains over specific provisions in the bills that may result in retroactive changes to the law.

In a letter to Minnesota’s legislative leadership, Governor Dayton opposed the following key provisions of the tax bill he enacted and explained that he had eliminated the Legislature’s funding via line-item veto as an incentive to prompt a second special session where these key provisions would be repealed: 

  • The estate tax exclusion increase from $2 million to $3 million
  • The commercial-industrial property tax freeze (though Dayton supports excluding the first $100,000 of business property from statewide property taxes)

How we can help

We can help you take advantage of newly created Minnesota tax credits or understand the implications of these tax changes. Contact your tax advisor with your questions.