United States

Minnesota legislature passes tax bill

INSIGHT ARTICLE  | 

On May 30, 2017, Minnesota Gov. Mark Dayton signed House File 1, making changes to numerous tax provisions, including individual income tax, corporate franchise tax and sales and use taxes. A selection of the changes is highlighted below.

Individual income tax

  • When determining where an individual is domiciled, the location of the individual’s attorney, certified public accountant, or financial adviser shall not be considered by the commissioner or any court. In addition, the place of business of a financial institution at which the individual opens or maintains an account will not be considered when determining an individual’s domicile.
  • Individuals with installment sale gains need to be aware of Minnesota changes in the individual income taxation of installment sale gains:
    • An individual who becomes a nonresident of Minnesota in a tax year after an installment sale transaction took place is required to recognize the full amount of any income or gain on the individual’s final Minnesota resident tax return to the extent that it has not been recognized in a prior year.
    • Nonresident individuals are required to include the full installment sale amounts realized upon the sale of assets, or any interest in an S corporation or partnership that operated in Minnesota, in the year of the sale. Nonresidents may elect to defer recognizing the gain by agreeing to file Minnesota tax returns in all subsequent years when gains from the installment sales are recognized and reported for federal purposes and using the apportionment or allocation method from the year of the sale to source the gain to Minnesota.
  • A taxpayer may deduct contributions to a section 529 college savings plan when computing Minnesota individual income tax. The deduction is limited to $3,000 for married couples filing joint returns and $1,500 for all other filers. Alternatively, a tax credit may be taken on 50 percent of contributions made, up to a $500 maximum credit.

The changes impact individuals for tax years beginning after Dec. 31, 2016. Nonresident individuals that recognize installment sale gains should consult their tax advisor to determine whether they should report the entire gain in the year of the sale or over the course of the installment period, as the timing of the tax by Minnesota may affect any credit for taxes paid offered by the individual’s state of domicile. The law change doesn’t preclude claiming allocation treatment of such transactions as nonbusiness income, but it reinforces the state’s aggressive position that virtually all income generated by a business, including the sale of the business or its underlying assets, should be treated as apportionable business income.

Income and franchise tax

  • The definition of financial institution has been amended to include a corporation or other business entity that derives more than fifty percent of its total gross income for financial accounting purposes from finance leases or any other person or business entity that derives more than fifty percent of its gross income from activities that a financial institution is authorized to transact. Any subsidiary of a corporation classified as a financial institution is also considered one, as well.
  • The research and development credit was increased from 2.5 percent to 4 percent of qualified research expenses over $2,000,000.
  • S corporations and partnerships may now petition the commissioner to receive and pay orders of assessment on behalf of their owners. Where the entity has made such a petition, the entity and the owners will be jointly liable for the assessments.

The changes to the business income and franchise taxes are effective for tax years beginning after Dec. 31, 2016. The financial institution definition overturns the Minnesota Tax Court’s recent decision in Associated Bank v. Commissioner of Revenue and may expand what types of businesses must now use the expanded receipts factor for financial institution apportionment.

Sales and use tax

Several definitions in the sales and use tax law have been amended as follows:

  • The definition of tangible personal property has been amended to exclude “large ponderous machinery and equipment used in a business or production activity which at common law would be considered to be real property.”
  • The definition of real property has also been added under section 297A.61. “Real property” includes: land itself; buildings and structures constructed on land and intended to be permanent; improvements and fixtures incorporated and intended to be of permanent benefit to a building or structure given its present use, and that cannot be removed without causing substantial damage. Real property does not include tools, implements, machinery, and equipment attached or installed into real property for use in business or production activity, that qualify for a business exemption.

The Minnesota legislature also became one of the first states to impose a sales and use tax collection obligation on marketplace providers. A “marketplace provider” is defined as any person making a retail sale by a retailer by: advertising taxable tangible personal property, services, or digital goods for sale and, either directly or indirectly through agreements or arrangements with third parties, collecting payment from the customer and transmitting that payment to the retailer regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services. This provision has a delayed effective date based on the earlier of Quill Corp. v. North Dakota being overturned by the US Supreme Court or July 1, 2019. If a federal law is enacted authorizing sales tax on remote sales, then the Minnesota provision is effective when allowed under federal law.

The sales tax changes are effective for sales and purchases made after June 30, 2017. The change in the definition of “tangible personal property” and the addition of the definition of “real property” reflect the Minnesota Supreme Court’s recent decision in Commissioner of Revenue v. Dahmes Stainless, Inc. These new definitions may be particularly impactful on sales made by contractors and those that install trade fixtures.

Minnesota taxpayers that may be impacted by any of the recent tax changes should speak to their tax advisors with questions. 

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