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Minnesota’s Ombibus Tax Bill will touch most businesses and individuals, with increases in individual rates and AMT, and changes to the sales and use tax and R and D credit.

Minnesota Income and Sales Tax Changes

  • 5/28/2013

Minnesota Income and Sales Tax Changes

After much contentious debate, Minnesota legislators passed H.F. No. 677 (Omnibus Tax Bill) in the late evening of May 20, 2013, and it was signed by Governor Dayton on May 23. The tax bill is projected to raise approximately $2.1 billion in additional revenue and eliminate the state budget deficit. Many tax provisions have been touched by this legislation, and will affect most entities and individuals doing business or residing in Minnesota.

The 552-page bill is massive in its scope. We expect the Minnesota Department of Revenue to issue its interpretative rules for sales tax provisions by the end of June, and for income tax by the end of December.

“These changes cut across nearly all businesses and industries, and hit higher income taxpayers, business-to-business transactions, and digital consumer purchases," says Ellen McCabe, state and local tax managing partner with CliftonLarsonAllen. “It's critically important that you take some time to understand how these new provisions will impact you.”

Most income tax provisions are retroactive to January 1, 2013.

Individual tax changes

Individual tax rates

Minnesota previously used a three-rate income tax system. A new 9.85 percent tax bracket has been created for the top Minnesota taxable incomes. The new income and rate brackets are as follows:

Joint Filers Unmarried
Under $35,480 5.35% Under $24,270 5.35%
$35,481 – $140,960 7.05% $24,271 – $79,730 7.05%
$140,961 – $250,000 7.85% $79,731 – $150,000 7.85%
Over $250,000 9.85% Over $150,000 9.85%

Effective date: years beginning after December 31, 2012.

Observation: The new Minnesota rates will affect taxpayers who also are impacted by the new top federal tax rate of 39.6 percent that begins in 2013 (that rate applies to joint income above $450,000 and single income above $400,000).

“For those at that level, the combined federal and Minnesota rate will be approximately 50 percent,” says McCabe. “Minnesota’s 9.85 tax rate brings it to the top five in terms of highest state income tax rates,” she added.

Alternative minimum tax rate

Like the federal system, Minnesota requires a dual tax computation for individuals, estates, and trusts. The regular tax is compared to a separately computed alternative minimum tax (AMT), and the taxpayer pays the greater of the two numbers. The AMT is computed at a flat rate on a larger base of income: deductions such as personal exemptions, all state and local taxes, employee business expenses, and other deductions are not allowed.

  • The alternative tax rate for individuals, estates, and trusts has increased to 6.75 percent (from 6.4 percent)

Effective date: tax years beginning after December 31, 2012.

Estimated income tax penalties

Minnesota estimated income tax penalties and interest resulting from the increase in income tax rates are abated through September 15, 2013. For most taxpayers, who set their quarterly tax estimates under a safe-harbor based on the prior year tax results, this provision is irrelevant: Any increase in Minnesota income tax for 2013 can be deferred until filing and paid without penalty.

But for those that set their 2013 Minnesota quarterly tax estimates on actual income, it will be important to consider the impact of the Minnesota rate increase. No change in quarterly estimate payments is required through September 15, 2013, but the fourth quarter payment at year end may need revision.

Business tax changes

Minimum franchise tax

Background: From a federal income tax standpoint, pass-through entities such as partnerships and S corporations do not pay tax; their income is taxable in the tax returns of their owners. Regular or C corporations pay tax only if they have net income. But for Minnesota purposes, in addition to parallel treatment for income tax purposes, a minimum franchise tax applies on entities whose sum of annual sales, payroll expenditures, and property, exceeds specified thresholds. The omnibus bill nearly doubles franchise tax at all levels.

The new tax brackets for the sum of the entity’s Minnesota property, payroll, and sales are:

New Franchise Tax for C or S Corporations/Partnerships Old Franchise Tax for C or S Corporations/Partnerships
Under $930,000 $0 Under $500,000 $0
$930,001 – $1,869,999 $190 $500,001 – $999,999 $100
$1,870,000 –$9,339,999 $560 $1,000,000 – $4,999,999 $300
$9,340,000 – $18,679,999 $1,870 $5,000,000 – $9,999,999 $1,000
$18,680,000 – $37,359,999 $3,740 $10,000,000 – $19,999,999 $2,000
Over $37,360,000 $9,340 Over $20,000,000 $5,000

Effective date: tax years beginning after December 31, 2012.

Research and development credit

Background: Minnesota allows a business conducting technological research to claim a tax credit using the same definitions as the federal research credit. The Minnesota credit is allowed only for research conducted in Minnesota, and is computed as 10 percent of the first $2 million of qualifying research expenses for the year, plus 2.5 percent of remaining expenses. In the past, this credit has been refundable if it exceeds the tax attributable to the business.

The new changes are as follows:

  • The credit now becomes nonrefundable
  • The credit may be applied to taxable incomes of other members of a unitary group if the generating entity cannot use the credit entirely
  • Any remaining credit in excess of tax is to be carried forward 15 years and used against future tax

Effective date: tax years beginning after December 31, 2012.

Unitary business principal

Background: Minnesota, like all states, uses an apportionment formula to determine the portion of the net income of a multi-state business that is allocable to Minnesota. The state has made a change that will significantly expand the reach of its income tax to these multi-state business entities.

  • When calculating the numerator of the Minnesota unitary return’s apportionment factor, all entities in the unitary group must include their sales into Minnesota, even if some entities would not be required to file on their own (if it lacks sufficient Minnesota nexus to be subject to tax). Previously, these entities were allowed to exclude their Minnesota sales from the numerator of the Minnesota unitary sales factor.

Effective date: tax years beginning after December 31, 2012.

Sales and use tax

Background: Presently, a Minnesota business or consumer that purchases a product from an out-of-state vendor is required to pay a sales tax through the voluntary submission of a “use tax” form. But this provision is widely ignored and rarely enforced. Minnesota now adopts the “Amazon Rule,” stating that an out-of-state business making retail sales (but with no presence in Minnesota) is presumed to have a Minnesota sales tax collection requirement if a Minnesota resident or business directly or indirectly solicits on their behalf, and $10,000 of Minnesota sales are generated by the referrals.

The result is that Minnesota residents and businesses who purchase online through vendors such as Amazon will find their purchases subject to Minnesota sales tax imposed by the vendor.

Effective date: sales or purchases made after June 30, 2013.

New exemptions to the Minnesota sales tax
  • New medical-related sales and use tax exemptions:
    • Drugs and medical equipment purchased in a Medicare/Medicaid transaction
    • Single-patient use of durable medical equipment
    • Accessories and supplies required for durable medical equipment or prosthetic devices not otherwise exempted

Effective date: sales or purchases made after June 30, 2013.

  • Exempt sales to local governments, including cities, counties, and townships as long as the item is not generally provided by private businesses (i.e., liquor stores and golf courses).

Effective date: sales or purchases made after December 31, 2013.

  • In a procedural simplification, the law provides an up-front exemption for capital equipment purchases instead of the requirement to pay the tax and file a refund claim.

Effective date: sales or purchases made after August 31, 2014.

New digital tax on sales and purchases

Specified digital products or digital products transferred electronically are now included in the definition of tangible personal property (other than tangible storage media). A digital product includes:

  • Digital audio works (music, songs, ring tones, audio books)
  • Digital audiovisual works (movies, music videos, news programming, or entertainment)
  • Digital books (any literary work generally thought of as a book, other than what is included above; excludes magazines, periodicals, newspapers, chat rooms, and blogs.)
  • Other digital goods such as electronic greeting cards and online video games

Effective date: sales or purchases made after June 30, 2013.

Additional B2B taxes
  • For business-to-business transactions (B2B), repairing electronic and precision equipment such as computer-related hardware, TVs and radios, communication equipment, scientific instruments, and medical equipment
  • For B2B transactions, repairing and maintaining commercial and industrial equipment (excludes furniture and fixtures)
  • Warehousing and storage services of tangible personal property, excluding agricultural products, refrigerated storage, electronic data, and self-storage services

Effective date: sales or purchases made after June 30, 2013. Warehousing effective for sales and purchases after March 31, 2014.

Taxable retail sales (sold in the normal course of business) now includes:
  • Motor vehicle paint and materials sold by a repair or body shop
  • Specified digital products or other digital goods to an end user (see digital tax information above)

Effective date: sales or purchases made after June 30, 2013.

How we can help

This legislation is broad in its scope, and further guidance from the Minnesota Department of Revenue will be needed on some aspects of this new law. Contact your tax advisor with specific questions.

Ellen McCabe, State and Local Tax Managing Partner or 612-376-4807