Wipfli Alerts & Updates: Minnesota Tax Omnibus Bill

June 11, 2013
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On May 23, the Governor of Minnesota signed into law the Omnibus Tax Bill, which included many changes to the state of Minnesota’s tax system. The bill is 397 pages and is massive in its scope, with changes affecting corporate franchise and income taxes, individual income taxes, sales and use taxes, gift taxes, and even property taxes. The Minnesota Department of Revenue should be issuing guidance and rules on the changes later this year.
Individual, Trust, and Gift Tax Law Changes
Tax Rates
In an effort to make higher income earners pay more taxes, the state of Minnesota added a fourth-tier tax rate to their traditional three-tier system. The new rate of 9.85% will apply to taxpayers with Federal AGI over $150,000 filing single and $250,000 married filing jointly (effective January 1, 2013). With this rate increase, coupled with the federal government’s increase to 39.6% on AGI over $400,000 and $450,000, Minnesota residents who are in these brackets will pay 49.45% in taxes on that income. The 9.85% rate also will be applicable to trusts with income over $125,000.
Minnesota also increased its rate for its alternative minimum tax. This rate has increased to 6.75% for those taxpayers subject to AMT (effective January 1, 2013).
A new gift tax is being established on accumulated gifts over $1,000,000 in Minnesota. Currently, Minnesota does not have a gift tax. This rate is 10% and goes into effect for gifts after June 30, 2013.
Quarterly Estimated Tax and Underpayment Penalties
Minnesota estimated income tax penalties and interest resulting from the increase in income tax rates are abated through September 15, 2013. For taxpayers who set their quarterly tax estimates under a safe harbor based on the prior-year tax results, this will not be an issue, and any increase in Minnesota income tax for 2013 can be paid without penalty when filed. For taxpayers who set their 2013 Minnesota quarterly tax estimates based 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 to be revised to catch up.
Business Income and Franchise Tax Law Changes
Franchise Tax Fee
Franchise tax fees for Minnesota Corporate Franchise Tax Filers (C corporations and S corporations) are increasing. The minimum fee is based on the sum of a taxpayer’s property, payroll, and sales. The six tiers have changed along with the fees. Below is a summary:    
Sum of Property, Payroll, and Sales
Under $930,000
$930,001 to $1,869,999
$1,870,000 to $9,339,999
$9,340,000 to $18,679,999
$18,680,000 to $37,359,999
Over $37,360,000
(Effective January 1, 2013)
Unitary Change
Minnesota is changing its unitary business principle’s rules from excluding unitary affiliates from the numerator for apportionment purposes if the affiliate did not have nexus. Now, nexus for one entity effectively means nexus for all entities. This will greatly increase some taxpayers’ apportionment to the state of Minnesota (effective for tax years beginning on or after January 1, 2013).
Foreign Income Items
Minnesota changed the treatment for certain foreign income items. The legislation repealed the 80% subtraction for foreign source income received from foreign unitary affiliates and the 80% dividends received deduction from a foreign operating company (a US Company that received more than 80% of its income from foreign operations). Also the legislation changed the rules around foreign entities that are disregard for US Federal Tax purposes and now includes those entities in the Minnesota unitary combined group.
Research and Development Credit
Minnesota changed the law to now make the credit “nonrefundable,” and the credit can now be applied across entities in the unitary group based on the unitary law change above to make the unitary group “one” taxpayer. With the change to the credit being nonrefundable, any excess credit can now be carried forward up to 15 years and used against future tax (effective for tax years beginning on or after January 1, 2013). Some provisions for fiscal year filers and the base periods they can elect to calculate the credit exist.
Sales Tax Law Changes
Amazon Nexus
Minnesota passed legislation adopting what is commonly referred to as “amazon nexus” for out-of-state retailers. The rule states that an out-of-state business making retail sales in Minnesota will be deemed to have a Minnesota sales tax collection obligation if a Minnesota resident or business directly or indirectly solicits on their behalf and has $10,000 of Minnesota sales through these relationships (effective for sales or purchases made after June 30, 2013).
Tax Base Changes
Minnesota expanded the tax base to tax various goods and services that were previously not subject to Minnesota sales and use taxes. Below is a listing of the changes to the tax base:
  • “Digital products” – Specified digital products (whether or not transferred electronically) are now included within the definition of “tangible personal property.” This includes digital music, digital audio (such as ringtones and books), movies, and other digital items such as greeting cards and online games. It does NOT include items considered periodicals (newspapers, magazines, etc.). This is effective for sales or purchases made after June 30, 2013.
  • “Repair services” – Certain business-to-business transactions involving repairing electronic and precision equipment are subject to tax. This includes repairing computer hardware, TVs, radios, communication equipment, scientific instruments, and medical equipment. It also includes repairing commercial and industrial equipment and certain services provided by auto and body shops (effective for sales or purchases made after June 30, 2013).
  • “Warehousing” – Warehousing and storage of tangible personal property will be subject to sales taxes in Minnesota. This will EXCLUDE storage of agricultural products, refrigerated storage, self-storage units where the customer has ready access to the unit, and storage of electronic data (effective for sales made after March 31, 2014).
Tax Exemption Changes
The state of Minnesota expanded certain sales tax exemptions and made changes to others in the new bill. Below is a brief update for those changes:
  • “Capital equipment” – Minnesota will provide an up-front exemption from sales and use taxes for purchases of “capital equipment” used in industrial production. Currently, taxpayers are required to pay the tax on the purchase and then request a refund (effective for purchases made after August 31, 2014).
  • “Medical and drug exemptions” – Medical and drugs purchased in a Medicaid/Medicare transaction are exempt. Single-patient use of durable medical equipment is exempt. Accessories and supplies for durable medical equipment not already exempt will now be exempt. (All the medical exemptions are effective for purchases made after June 30, 2013.) More guidance from the Minnesota Department of Revenue on these exemptions is expected in the fall.
  • “Local government sales” – Sales of goods and services to local governments are exempt as long as the item is not generally provided by private businesses, such as liquor sales, food sales, and golf courses (effective for sales made after December 31, 2013). More guidance from the Minnesota Department of Revenue on this exemption is expected in the fall.
We expect a lot more clarification of these law changes in the coming months as the Minnesota Department of Revenue issues guidance and as the legislation is reviewed in its entirety.
Please contact Robb Eperjesy, Director of State and Local Tax, at 651.766.2872 or reperjesy@wipfli.com or your Wipfli relationship executive for more information.

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