June 17, 2019 Minnesota updates IRC conformity date and economic nexus provisions, makes various other changes On May 30, 2019, Minnesota Governor Tim Walz signed the omnibus tax bill (HF 5, 1st Special Session), which changes the state's tax laws. Changes include updating the state's date of conformity to the Internal Revenue Code of 1986, as amended (IRC), addressing Minnesota's conformity to a variety of the provisions of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), revising its sales and use tax nexus provisions for remote sellers and marketplace providers, and adopting a "Wayfair" nexus standard for purposes of the MinnesotaCare Tax, among other changes. Below is a summary of these changes. Corporate income tax HF 5 updates the state's date of conformity to the IRC as amended through December 31, 2018 (from December 16, 2016). This change is effective May 31, 2019 (the day following final enactment), except adopted federal changes are effective retroactively to the same time they became effective for federal income tax purposes. A similar change applies for Minnesota individual income tax purposes. In computing net income, HF 5 requires certain amounts be subtracted from, or added back to, federal taxable income. Subtraction is required for (i) deferred foreign income recognized under IRC Section 965, effective retroactively to the same time the change became effective for federal income tax purposes; and (ii) global intangible low-taxed income (GILTI) under IRC Section 951A, effective retroactively for tax years beginning after December 31, 2017. Similar subtractions apply for Minnesota individual income tax purposes. Addback is required for the amount of any special deduction under IRC Sections 250 (i.e., deductions for GILTI or foreign-derived intangible income (FDII)) or 965, to the extent not included in taxable income. This change is effective retroactively to the same time the change became effective for federal income tax purposes. A similar change applies to trusts and estates. HF 5 makes clear that income from a controlled foreign corporation included in a domestic corporation's net income under IRC Section 951 (i.e., subpart F income) is dividend income. Accordingly, such income is subject to Minnesota's dividend received deduction (DRD). This provision took effect May 31, 2019. In addition, HF 5 disallows the DRD for dividends received from debt-financed portfolio stock under IRC Section 246A, effective for tax years beginning after December 31, 2018. HF 5 also decouples the Minnesota corporate alternative minimum tax (AMT) from the federal AMT, which was repealed by the TCJA. Decoupling is accomplished by tying Minnesota's AMT reference to the IRC as amended through December 16, 2016. This provision is effective for tax years beginning after December 31, 2017. HF 5 limits the amount of net operating loss (NOL) that can be deducted to 80 percent of taxable net income in a single year. In addition, exempt entities calculating unrelated business taxable income under IRC Section 152 must add back the amount of any NOL deduction claimed under IRC Section 172. Such entities, however, may deduct NOLs under the state's rules applicable to corporations. These changes are retroactively effective for tax years beginning after December 31, 2017. In addition, HF 5 requires the IRC Section 163(j) 30 percent business interest deduction limitation, to which the state conforms, to be computed on a Minnesota basis using only the items from the members included in the combined report. The limitation must be aggregated between combined report entities, consistent with the application to a consolidated group for federal income tax purposes. This change is retroactively effective for tax years beginning after December 31, 2017. HF 5 also requires the income and factors of unitary foreign corporations and other unitary foreign entities that meet Minnesota's newly defined "disqualified captive insurance company" be included in the net income or the apportionment factors of the unitary business. This provision is retroactively effective for tax years beginning after December 31, 2016. Individual income tax Effective for tax years beginning after December 31, 2018, HF 5 changes the starting point for calculating individual net income from federal taxable income (FTI) to federal adjusted gross income (FAGI)1 with modifications as provided in Minn. Stat. Sections 290.0131, 290.0132 and 290.0135 to 290.0137.2 (Note: estates, trusts and C corporations will continue to use FTI as the starting point.) As a result of the switch to FAGI for individual income tax purposes, Minnesota automatically decouples from the 20 percent pass-through entity (PTE) deduction under IRC Section 199A. (The PTE deduction under IRC Section 199A is allowed in determining FTI, not FAGI.) Further, retroactively effective for tax years beginning after December 31, 2017, the HF 5 requires trusts and estates to add back to FTI amounts deducted under IRC Section 199A. In computing net income, HF 5 requires certain amounts be subtracted from, or added back to, federal taxable income. In addition to the adjustment mentioned previously, HF 5 requires individual addback amounts of foreign-derived intangible income (FDII) deducted under IRC Section 250 to the extent deducted from net income, effective retroactively for tax years beginning after December 31, 2017. HF 5 modifies the definition of "alternative minimum taxable income" to include (i) the amount of income deducted under IRC Section 199A that must be added back to FTI under Minn. Stat. Section 290.0131(16); (ii) the amount of the deduction allowed under IRC Section 199A not included in the addback amount; and (3) the amount of FDII deducted, to the extent not included in federal alternative minimum taxable income. This modification is effective for tax years beginning after December 31, 2018. Also effective for tax years beginning after December 31, 2018, HF 5 modifies provisions for determining the sales factor to include a "person" as a type of provider that must source receipts from management, distribution, or administrative services performed for a regulated investment company (RIC). "Persons" must now apply the RIC sourcing rules (i.e., look to the location of the fund shareholder). In addition, HF 5 makes the following changes to Minnesota's individual income tax laws:
These changes are effective for tax years beginning after December 31, 2018. Sales and use tax Provisions of HF 5 amend Minnesota's economic nexus provisions for remote retailers and marketplace providers. Notably, effective October 1, 2019, the economic nexus threshold is changed to retail sales totaling more than $100,000 or 200 or more retail sales. Before that date, the threshold is (i) $100,000 in sales from at least 10 transactions or (ii) 100 transactions. The revised law provides additional guidance around collection and remittance requirements for remote retailers and marketplace providers, including who is responsible for collecting the tax, when remote sellers and marketplace providers must begin collecting tax and when they can discontinue collecting the tax. The law also reorganizes the definitions. HF 5 adopts the IRC as amended through December 16, 2016, for the state sales tax exemption for occasional sales (which, among other requirements, applies to sales occurring in a transaction described in IRC Section 1031) and the motor vehicle sales tax exemption (which, among other requirements, applies to a purchase or use of a motor vehicle previously registered in Minnesota when the transfer qualifies as a IRC Section 1031 exchange). In doing so, it decouples these provisions from the TCJA, which limits IRC Section 1031 like-kind exchanges to real property. These changes are effective retroactively for sales and purchases made after December 31, 2017. In addition, HF 5 increases the percent of the accelerated payment of June sales tax liability for calendar year 2020 and 2021 to 87.5 percent (from 81.4 percent), adjusted down to 84.5 percent in 2022 and thereafter. Other tax changes HF 5 makes various changes to the MinnesotaCare Tax. Key changes include (i) adopting economic nexus provisions with a Wayfair threshold ($100,000 or 200 transactions) (effective May 31, 2019); (2) setting the tax rate for certain taxes at 1.8 percent (from 2 percent) of gross revenue (starting in 2020); and (3) repealing the sunset provision for certain taxes. Other tax changes contained in HF 5:
Implications Provisions of the new law make changes to Minnesota's tax laws. Notably, the law updates the state's date of conformity to the IRC and addresses provisions contained in the TCJA, which was not done in 2018. Taxpayers will need to review these changes and determine whether it is necessary to amend returns filed for tax years 2017 and 2018. Further, remote sellers and marketplace providers should review the changes to the state's nexus thresholds and adjust their sales and use tax compliance systems accordingly. It is also worth noting that proposed data center qualification and exemption changes were not included in the final bill. ———————————————
——————————————— 1 For individual income tax purposes, "adjusted gross income" (AGI) and FAGI is defined to mean AGI as defined in IRC Section 62, including any elections made by a taxpayer under the IRC in determining FAGI for federal income tax purposes. This provision took effect May 31, 2019. 2 The law amends various individual income tax provisions to change the reference from FTI to FAGI. | |||||||||
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