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April 27, 2021

Minnesota Supreme Court holds partnership not required to reduce depletion deduction for occupation tax purposes

In Hibbing Taconite Co., J.V. v. Commissioner of Revenue,1 the Minnesota Supreme Court (court) held that two mining partnerships could claim a full federal depletion deduction for occupation tax purposes and were not required to reduce the deduction by 20%, as required for corporations for federal income tax purposes.

Two entities, classified as partnerships for federal and state income tax purposes, were engaged in the business of mining and subject to Minnesota's occupation tax.2 Under Minn. Stat. 298.01, Subd. 4, the occupation tax applies to taxable income, which is determined in "the same manner" as the state corporate franchise tax but does not include all the income modifications provided under the franchise tax statute. In computing their occupation tax liability, the two partnerships claimed a depletion deduction was allowed under federal law but did not reduce that deduction by the 20% that federal law requires for corporations.3

Following an audit, the Minnesota Department of Revenue (Department) adjusted the partnerships' 2012 and 2013 occupation tax liabilities by applying the federal 20% reduction to their depletion tax deduction, resulting in an assessment of additional tax. The Department reasoned that the statutory phrase "determined in the same manner as [the franchise tax]" required the taxpayers to be treated the same as corporations subject to the franchise tax. The Minnesota Tax Court held that the partnerships could claim the full depletion deduction without the 20% reduction. The Tax Court reasoned that "in the same manner" was understood to be procedural and not substantive. The Department appealed the decision.

The court reviewed the statute, observing that the legislature did not specifically define the phrase "[t]he tax is determined in the same manner" as the franchise tax. The court rejected the Department's argument that the tax liability should be determined as if the partnerships were corporations. The court did not find any support in the statute to conclude that the legislature intended to ignore legal-entity status for occupation tax purposes. Instead, the court construed the statute to mean that the tax is determined in the same manner as under the franchise tax provisions. Accordingly, the court upheld the Tax Court's conclusion that the taxpayers were not required to reduce their depletion deduction by the 20% that must be taken by corporations.


The Minnesota occupation tax applies to a limited number of taxpayers. While the court's decision has a narrow application, it raises interesting questions. In states that impose income-based taxes on pass-through entities at the entity level, are references to federal tax law procedural or substantive in nature? For example, Ohio cities impose net profits taxes on pass-through entities based on federal taxable income "as if"4 the entities were C corporations. The Minnesota court based its decision on the absence of an express "as if" reference in the applicable statute. Language for similar tax impositions may be amenable to review based on this analysis.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation
   • Bill Nolan (
   • John Heithaus (


1 No. A20-0977 (Minn. Apr. 21, 2021).

2 Mines and facilities used in the production of taconite are exempt from the Minnesota property tax. In lieu of the property tax, the iron-mining industry pays a production tax based on the tons of taconite produced. The industry is also exempt from the general corporate franchise tax and instead pays the occupation tax, which is similar in structure to the franchise tax and applies only to mining profits. The occupation tax rate of 2.45% is lower than the corporate franchise tax rate of 9.8%. The lower rate is a trade-off for the requirement that all taconite sales (which occur out of state and would not be used to determine how much income is taxable under the corporate franchise tax) are deemed to be Minnesota sales for occupation tax purposes.

3 IRC Section 291(a)(2) requires corporations to reduce the depletion deduction by 20%.

4 See Ohio Rev. Code 718.01(D)(5).