On May 30, 2017, Governor Mark Dayton signed the omnibus tax bill (HF 1, 1st Spec. Sess.) (HF1), the first omnibus tax bill in three years. This Alert provides an overview of the key income tax, sales tax, incentives, property tax and other tax changes in HF 1.

Corporate franchise, partnership, and individual income tax updates

Corporation franchise tax updates

HF1 expands the definition of a financial institution beyond corporations to include entities registered under the state's law as a bank holding company, national banks, savings associations, and entities that derive income from finance leases. Insurance companies registered with the Minnesota Department of Commerce are excluded from the definition of a financial institution. This change is in reaction to the Minnesota Tax Court's recent ruling in Associated Bank.¹

Insurance companies that are not licensed in Minnesota or in another state that imposes retaliatory taxes on Minnesota companies must be included on the combined report if they are part of the unitary business.

HF 1 also increases the research and development credit from 2.5% to 4% on all qualifying expenses over $2 million.

These changes are effective for tax years beginning after December 31, 2016.

Partnership, individual income tax updates

HF1 updates in several ways the rules for taxing partnerships including expanded rules around domicile and accelerating the recognition of gain from an installment sale gain for nonresident individuals.

In determining in which other jurisdiction an individual is domiciled, under the new rules provided under HF1, Minnesota will not consider the following factors: (1) the location of the individual's attorney, certified public accountant, or financial adviser; and (2) the place of business of a financial institution at which the individual applies for any new type of credit or at which the individual opens or maintains any type of account.

The new law also includes a provision accelerating the recognition of gain on certain installment sales if an individual becomes a non-resident in the years after the sale. The full amount of any gain on these sales that has not been recognized in any prior year on a Minnesota return will have to be taken into income on the taxpayer's final resident return or the taxpayer can elect to continue to file Minnesota as if the individual continued to be a resident of the state for all periods during which income from the installment sales is deferred and recognized for federal income tax purposes. As currently written, the new law does not contemplate installment sales that occur before an individual moves into the state, and we anticipate the Minnesota Department of Revenue will address this in published guidance.

In addition, HF1 provides:

— New agricultural credits focused on new farmers (beginning farmer management program and agricultural assets) (effective for tax years beginning after December 31, 2017, but expiring for tax years beginning after December 31, 2023)
— Enhanced individual educational credits (student loan, Section 529, and teacher's licensure)
— Income tax modifications for contributions to a first time home buyer savings account and contributions to a Section 529 plan; discharge of indebtedness on education loans, and a subtraction for a portion of social security benefits
— Updates to the estate tax limit and the tax rate tables
— Authorization for an income tax reciprocity study between the Minnesota and Wisconsin Department of Revenue to study residents who earn personal service income in one or both states.

These changes are effective for tax years beginning after December 31, 2016, unless otherwise noted.

Sales and use tax updates

Marketplace provider / affiliate nexus

HF1 expands the sales and use tax statute's definition of a "retailer maintaining a place of business in the state." Among other changes, the definition now includes having a marketplace provider or other third party operating in the state under the retailer's authority to facilitate or process sales in the state. A marketplace provider is defined as a person who facilitates sales for a retailer through any forum (including internet sale sites). Minnesota is the first state to pass marketplace provider legislation.

Additionally, under HF1, a retailer having an in-state affiliate is now required to collect and remit sales and use tax. The new law defines affiliate to include in-state entities that sell the same products as the non-Minnesota retailer; use the same or similar business name; facilitate the retailer's sales; use the retailer's intellectual property; facilitate deliveries for the retailer; assist in maintaining the retailer's market; or delivering, installing, assembling, or maintaining certain property sold by the retailer.

The effective date of this provision is the earlier of July 1, 2019, or the date of a decision by the US Supreme Court modifying the Quill Corp. v. North Dakota² decision. These changes significantly expand the Minnesota collection requirements for remote retailers.

Tangible personal property (TPP) / real property definition modifications

HF1 removes language stating that "large ponderous machinery and equipment used in a business or production activity which at common law would be considered to be real property," from the definition of what is not included in the definition of TPP. The new law also adds language to exclude from the definition of real property any: " … tools, implements, machinery, and equipment attached or installed into real property for use in the business or production activity conducted thereon, that qualify for exemption under section 297A.68, regardless of size, weight, or method of incorporation into the real property."

The purpose of these changes is to synchronize the definitions of TPP and real property under the sales tax and property tax statutes. The changes codify the holding in Dahmes Stainless, Inc. v. Commissioner of Revenue.³

These changes took effect May 31, 2017.

Incentives, property tax and other changes

HF1 increases the available sales tax exemption for a business participating in the Greater Minnesota Job Expansion Program to $5 million annually, and $40 million over the life of an agreement. Businesses may increase the eligibility period to 10 years by agreeing to invest over $200 million. HF1 also provides an additional $3 million of funding for the state border city enterprise zone program. These changes are effective July 1, 2017.

HF1 excludes the first $100,000 of market value of each parcel of commercial-industrial property from the commercial-industrial tax capacity base, effective for taxes payable in 2018 and after.

Other changes in HF1 include:

— Providing a sales tax exemption for petroleum products used in yard dogs, refrigerated units, and auxiliary power units (effective for purchases after June 30, 2017)
— Reducing the premium cigar tax from $3.50 to 50 cents per cigar (effective for cigars brought into, or manufactured in, the state on and after July 1, 2017)
— Providing sales tax exemptions for the 2018 Super Bowl and related activities (effective for sales and purchases made after June 30, 2016 and before March 1, 2018)
— Program modifications to the Sustainable Forest Incentive Act (effective May 31, 2017)
— Property and sales tax exemptions for the Minnesota United FC stadium (soccer) (effective upon approval by the St. Paul City Council and compliance with Minnesota law)
— Changes to Minnesota Tax Court procedures (various effective dates)

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ENDNOTES

¹ Associated Bank, N.A. and Affiliates v. Minnesota Comm'r of Rev., No. 8851-R (Minn. Tax Ct. April 18, 2017).

² Quill v. North Dakota, 504 U.S. 298 (1992).

³ Dahmes Stainless, Inc. v. Commissioner of Revenue, 2015 Minn. Tax LEXIS 46 (Minn. Tax Ct. 2015).