Prepare for Minnesota Sales And Use Tax Changes
The new law means a sales and use tax will be added to repair services purchased by a business, effective July 1, 2013.
“The biggest change for businesses will be the tax imposed on repair and maintenance labor,” says Mike Herold, a tax partner with CliftonLarsonAllen. “Individuals should expect to see more sales or use tax imposed on their purchase of most digital products.ˮ
”The sales and use tax changes which take effect on July 1 will affect virtually every business in Minnesota, and some businesses outside the state who have not historically been required to register, collect, and remit sales tax,” says Steve Schamberger, a tax partner with CliftonLarsonAllen. “Businesses need to quickly become familiar with those portions of the law specifically affecting their operations, and have plans in place by July 1.”
Some of the key guidance and clarification provided by the MN DOR includes the following.
Repair services purchased by a business
Beginning July 1, 2013, state and local sales and use tax will apply to certain business related to repair and maintenance services. A repair charge is business related only if the expenditure can be deducted as a business expense under the Internal Revenue Code. The same exact repairs, if provided as personal expenditures (non-business), would be exempt from sales and use tax, provided the repair charges are separately stated on the invoice.
Assuming the repair or maintenance service is business related, it would apply to repairs of items including:
- Electronic devices, such as all types of computer-related equipment
- Office equipment
- Television and sound systems
- Communication equipment
- Commercial and industrial machinery and equipment (even if such assets are exempt from sales or use tax on initial purchase, or if the tax is refundable)
- Scientific equipment and medical instruments
Repairs of motor vehicles, furniture and fixtures, and aircrafts remain tax exempt, as long as the charges are separately stated.
Impact on manufacturers and farm producers
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. This also applies to farm machinery. Therefore, no refund will be available for taxes on repair or maintenance labor. “This will have a significant impact on Minnesota manufacturers and farm producers,” says Schamberger.
If an otherwise taxable repair service began prior to July 1, 2013, but ended after this date, the entire service charge would be subject to sales and use tax. However, if the service provider itemized charges incurred prior to July 1, 2013 on the invoice, only those charges incurred after June 30, 2013, are subject to tax.
Exemption expanded for durable medical equipment
Generally, durable medical equipment is subject to Minnesota’s state and local sales and use tax, unless some other exemption applies. The exemption from tax on durable medical equipment has now been expanded. Beginning July 1, 2013, all drugs and medical devices, including durable medical equipment, paid for or reimbursed by Medicare or Medicaid are exempt from sales and use tax. Prior to July 1, 2013, durable medical equipment that was billed to and paid for by Medicare, Medicaid, or an insurance company was only exempt if the equipment was sold for just home use.
Also, beginning July 1, 2013, the exemption is expanded to “single patient use” items for just home use. These items are typically supplies used once or more by only one patient, including items such as feeding bags, tubes, and catheters. Prior to July 1, 2013, these items were subject to sales and use tax.
Remote sellers (solicitor nexus)
Remote sellers, or non-Minnesota based retailers who do not have property, personnel, or any other physical presence in the state, may nonetheless be required to register and collect Minnesota sales tax. Beginning July 1, 2013, there will be a presumption that a remote seller is maintaining a place of business in the state if:
- the remote seller enters into an agreement with a Minnesota resident (an individual resident or a business with property or employees providing services within the state) for the payment of a commission or similar consideration;
- the resident directly or indirectly solicits business to the remote seller (indirect could simply be a link on the resident’s website directing the buyer to the remote seller’s website); and
- the remote seller’s Minnesota’s gross receipts from this or similar agreements during the previous four quarters is at least $10,000.
This presumption of maintaining a place of business in Minnesota can be rebutted. The remote seller must demonstrate that:
- the Minnesota resident is prohibited from directly or indirectly soliciting on behalf of the remote seller, and
- the resident has actually complied with the prohibition.
Residents can demonstrate these conditions by providing the remote seller with:
- the actual contract or agreement states the prohibition of solicitations, and
- an annual, signed certification that they have not engaged in any solicitation activities on their behalf.
If the remote seller meets both these conditions, they will not need to register for, collect, and remit Minnesota sales tax.
“It’s important to make a distinction between the above presumption of nexus and that of simply placing an advertisement,” says Herold. “Placing an advertisement on a resident’s website, where the remote seller is required to pay the resident based only on the number of clicks linking to its own website, would not create the presumption of nexus on the remote seller in Minnesota. The key is whether or not the remote seller compensates the resident based on the volume of sales generated by the resident’s direct or indirect solicitation activities.ˮ
The new law clarifies the taxation of certain digital products, and provides definitions of such products. Beginning July 1, 2013, sales and use tax applies to the sale or granting of a right for consideration to use “specified digital products” or “other digital products” transferred electronically. Taxable transfers apply to downloads, streaming over the internet, or emailing. The taxable sale occurs either when the digital product is transferred from the seller to the purchaser, or when initially used, whichever occurs first.
Specified digital products include:
- Digital audio works (music, songs, ring tones, and audio books)
- Digital audiovisual works (movies, music videos, news programming, and 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 products such as electronic greeting cards and online video games
The tax does not include digital photos and pictures.
Multiple points of use (MPU) exemption
A new “multiple points of use” sales and use tax exemption will exist for purchases beginning on or after July 1, 2013. The exemption is designed to help alleviate Minnesota sales and use tax in certain situations.
Specifically, this exemption is available only to business purchasers of digital products, computer software delivered electronically, and taxable services. Also, the purchaser must know at the time of purchase that these items will be concurrently used in more than one jurisdiction. If these conditions are met, then the business purchaser can provide the seller a Form ST3 “Certificate of Exemption” and circle exemption “L” to indicate the MPU exemption. The seller is then relieved of any obligation to collect and remit applicable tax. The purchaser is responsible for directly submitting the applicable tax to the proper jurisdictions, based on a reasonable and consistent allocation method.
Construction contractors are allowed an exemption on certain services or items that become taxable effective July 1. The exemption is for the change in tax on those items or services if purchased during the transition period (July 1, 2013 –December 31, 2013).
For construction contracts:
- the contractors must have documentation of a bona fide written lump-sum or fixed price construction in force before July 1, 2013;
- the contract must not provide for allocation of future taxes; and
- for each contract, the contractor must give the seller documentation of the contract on which an exemption is to be claimed. Deliveries must be made before January 1, 2014.
Note: this does not cover time and material contracts, which is required for tax exempt projects!
For construction bids:
- the building materials or services must be used pursuant to an obligation of a bid(s), and they must be submitted and accepted prior to July 1, 2013;
- the bid(s) must not be able to be withdrawn, modified, or changed without forfeiting a bond; and
- for each qualifying bid, the contractor must give the seller documentation of the bid on which an exemption is to be claimed. Deliveries must be made before January 1, 2014.
Determining the sale date
Determining when sales are deemed to occur is the earlier date of either when title or possession of the property is delivered to the purchaser or when an item is first used.
If a sale occurs prior to July 1, 2013, but payment is received on or after July 1, the transaction is taxed under prior law (payment does not determine when a sale occurs). Also, if property is ordered prior to July 1 but is received after that date, it becomes subject to the new sales and use tax laws.
Lease and rental situations
Each lease or rental payment (i.e., car rental) is deemed a separate sale. Therefore, any lease or rental payments invoiced for periods on or after July 1, 2013, would be subject to the new sales and use tax law changes.
Invoices for services rendered prior to July 1, 2013, but ending after that date will be subject to the new sales and use tax laws. However, service providers can separately state service charges for periods prior to and on or after July 1, and tax accordingly.
How we can help
These tax changes are complex and require thoughtful planning in a short amount of time. Contact your tax advisor with questions about your specific situation.
Mike Herold, Tax Partner
firstname.lastname@example.org, or 612-376-4518
Steve Schamberger, Tax Partner
email@example.com or 612-376-4715