On June 14, 2025, Minnesota Governor Tim Walz signed into law House File 9 (HF 9), the state's 2025-27 biennial budget and "omnibus" tax legislation that is expected to increase revenues by $118 million in the fiscal year ending June 30, 2026, and $190 million in the fiscal year ending June 30, 2027. Major revenue-raising provisions include an increase in the gross receipts tax rate from 10% to 15% on taxable cannabis products and the repeal of a sales and use tax exemption for sales and purchases of electricity by qualified data centers, effective for sales and purchases made after June 30, 2025. This Tax Alert also includes highlights from other provisions of HF 9.

Research and development (R&D) tax credit

Minnesota currently has an R&D tax credit, that is equal to 10% of qualifying expenses up to $2 million, and 4% for expenses above that level. Qualifying expenses are defined by reference to IRC Section 41 but must be for research done in Minnesota.

HF 9 makes the credit partially refundable starting with tax year 2025. The refundability rate is 19.2% for tax year 2025 and 25% for tax years 2026 and 2027. Beginning in tax year 2028, the refundability rate will be determined by formula. If the Department of Revenue (Department) determines that the total amount of refunds paid will exceed $25 million for the immediately succeeding tax year, the refundability rate must be adjusted so that the projected amount of refunds will approximate $25 million or less. The Department is required to determine the refundability rate by December 15, 2027, and annually thereafter and publish the rate on its website.

Individual income taxes

HF 9 amends Minn. Stat. 290.0132 to add subtraction adjustments for the following:

• The amount of discharge of indebtedness income relating to coerced debt as defined in Minn. Stat. 332.74, subd. 3
• Consumer enforcement public compensation received as a distribution to an eligible consumer under Minn. Stat. 8.37, subd. 5
• Compensation received from a pension or other retirement pay from the federal government for service in the foreign service and established under 22 USC Sections 4041 to 4069 and 4071
• Student loan educational assistance payments received from a critical access dental clinic, effective for tax years beginning after December 31, 2025.

Unless otherwise provided, these new subtraction adjustments are effective for tax years beginning after December 31, 2024.

Sales and use tax changes

HF 9 will require vendors with sales and use tax liabilities of $250,000 or more in a fiscal year to remit 5.6% of their June liabilities two business days before June 30, beginning in calendar year 2027. The remaining amount not remitted in June must be paid on or before August 20 of the calendar year. A penalty of 10% of the actual required June liability minus the amount actually remitted in June will be assessed on vendors who fail to pay the required estimated liabilities. The penalty does not apply if the amount remitted in June equals the lesser of 5.6% of the preceding May's liability or 5.6% of the average monthly liability for the previous calendar year. These changes are effective for taxes remitted after May 31, 2027.

Data centers

HF 9 repeals the sales and use tax exemption for electricity used or consumed in the operation of a qualified data center or qualified refurbished data center, effective for sales and purchases made after June 30, 2025.

A separate bill, HF 16, (enacted June 14, 2024), makes broad-based changes to data centers requirements and extends the sunset date of the data center sales tax exemption to the later of June 30, 2042, or 35 years after the first qualified purchase. HF 16 also adds new provisions for "qualified large-scale data centers," which must invest $250 million within a five-year period beginning after June 30, 2025, meet prevailing wage and labor requirements for construction or refurbishment and meet applicable sustainable design/green building standards. HF 16 also establishes a new water use permit process for data centers that propose to use more than 100 million gallons per year and requires the public utility commission (PUC) to establish a new subclass of electric utility service users for "very large" customers. The PUC may approve, modify or reject a proposed tariff or electric service agreement between utilities and very large customer, with some exceptions. Lastly, HB 16 imposes a new qualified large-scale data center fee. The annual fee will be collected from large-scale data centers based on the data center's peak electric service demand forecast, ranging from $2 million for peak demand of 100 to 250 megawatts (MW) up to $5 million for peak demand of 750 MW or more. An exemption from this fee is provided for large-scale data centers for energy conservation optimization plans.

Implications

This Minnesota tax omnibus is not as comprehensive as those enacted in past sessions, with multiple proposals this cycle failing to pass. Those failed proposals include an expansion of the sales/use tax base to many services, a corporate income tax return disclosure requirement, adding a fifth tier to Minnesota's individual income tax structure with a 10.85% rate on individuals making $500,000 or more ($1 million for married filing jointly), and increased funding for a new corporate franchise tax division to audit complex pass-through entity structures. While not enacted, similar provisions were proposed in prior cycles and may appear in future legislative sessions.