United States: Minnesota Enacts Omnibus Tax Legislation Including Major Tax Increases, Click-Through Nexus

On May 23, Governor Mark Dayton signed omnibus tax legislation intended to raise $2.1 billion in taxes by adding a higher individual income tax rate, making significant changes to both the corporate income tax and to the sales and use tax, and reinstituting a gift tax.1 Notably, Minnesota will no longer be a member of the Multistate Tax Compact.

The revenue expected to be raised pursuant to the legislation will be used to offset a projected $627 million deficit for the next two-year budget period and provide revenue to fund additional spending on education and for property tax relief.

Corporate Income Tax

Treatment of Foreign Income Items

The legislation changes three provisions involving the treatment of foreign income effective for tax years beginning after December 31, 2012:

  1. The 80 percent subtraction of foreign source royalties received from unitary foreign affiliates is repealed.2
  2. The 80 percent subtraction of deemed dividends received from a foreign operating company which was a U.S. entity that earned more than 80 percent of its income from foreign sources is repealed.3
  3. The income and apportionment factors of a foreign partnership or a foreign entity which is disregarded for U.S. purposes will now be included in the Minnesota combined group as long as the income from that partnership or entity is included in the federal return.4 Historically, the income and apportionment factors from such entities have been excluded from the Minnesota combined group.5

Finnigan Rule Adopted

For taxable years beginning after December 31, 2012, all Minnesota sales made by any member of the unitary group are includible in the Minnesota sales factor numerator.6 Commonly known as the Finnigan rule, the legislation requires that sales made to a customer in Minnesota by a unitary member that does not have nexus with the state are included in the sales factor numerator.7

Multistate Tax Compact Repealed

The legislation contains an affirmative repeal of Minnesota's adoption of the Multistate Tax Compact effective August 1, 2013.8 Minnesota enacted the entire Compact in 1983, but in 1987 the Minnesota Legislature repealed the adoption of Articles III and IV of the Compact. Article IV of the Compact contains the Uniform Division of Income for Tax Purposes Act (UDITPA) which provides for the use of an equally-weighted three-factor apportionment formula and for the use of the cost of performance method in determining the sales factor for services. Article III provides taxpayers with the opportunity to elect to use the equally-weighted three-factor apportionment formula in lieu of state-specific apportionment.

The legislation adopts a request from the Minnesota Department of Revenue to affirmatively repeal the Compact. In a statement to the Legislature, the Department said:

The Department strongly believes that the legislature's repeal of Articles III and IV of the compact 26 years ago properly eliminated the option to use the Uniform Law to apportion income. However, the Department believes it is prudent for the legislature now to repeal Minn. Stat. § 290.171 in its entirety to avoid even the possibility going forward of the State having to pay refunds on some previously filed returns or lose future tax revenue as is the case in California if the California court decision is upheld.9

The Commissioner of Revenue is authorized to continue to use the audit services provided by the Multistate Tax Commission.10

Research Credit No Longer Refundable

Historically, the research credit was non-refundable in nature. In 2010, as a means to encourage activities that would qualify for the credit, the research credit was converted into a refundable credit.11 This change resulted in a significant expansion in the number of companies that claimed the credit. As a response, the legislation restores the research credit to a non-refundable credit effective for tax years beginning after December 31, 2012. Unused credit amounts can be carried forward for 15 years. The law was changed to allow unused credit amounts to be used to offset the tax liability of any member of the unitary group.12

Minimum Fee Increased

Since 1990, Minnesota has imposed a minimum fee on C corporations, S corporations and partnerships based on the sum of the entity's Minnesota property, payroll and sales.13 For taxable years beginning after December 31, 2012, the fee amounts and the bracket amounts are adjusted to reflect what these amounts would have been if they had been adjusted each year for inflation. The maximum fee amount has been increased from $5,000 per entity to $9,340 per entity. In the future, these amounts will be adjusted for inflation on an annual basis.14

REIT Dividends Received Deduction Eliminated

For taxable years beginning after December 31, 2012, a corporation will no longer be able to claim the 80 percent dividends received deduction on a dividend that is received from a real estate investment trust (REIT).15

Sales and Use Tax

Business Services Taxed

Earlier this year, Governor Dayton had proposed to impose the sales tax on most services that are purchased by individuals and businesses. He later withdrew that plan in the face of criticism that he received about how costly these tax changes would be to businesses that are headquartered in Minnesota.

In a surprising turn, the legislation expands the sales and use tax to include services purchased by businesses after June 30, 2013 to repair and maintain the following items:

  • Commercial and industrial machinery and equipment;
  • Electronic and precision equipment;
  • Computer hardware;
  • Office equipment;
  • Scientific instruments; and
  • Medical equipment.16

Businesses that purchase warehousing or storage services for tangible personal property will be required to pay sales or use tax on these services after March 31, 2014.17 Exemptions are provided for warehousing or storage services purchased to store agricultural products, refrigerated storage, and services purchased to store electronic data. As a result, fees paid to store petroleum products will be subject to sales and use tax along with fees paid to store agricultural inputs such as fertilizer and chemicals.

Telecommunications Equipment Exemption Repealed

In 2002, Minnesota enacted a sales tax exemption for the purchase of telecommunication equipment including ancillary machinery and equipment along with repair and replacement parts.18 This special exemption has now been repealed effective for purchases made after June 30, 2013.19

Digital Goods Taxed

For purchases made after June 30, 2013, sales and use tax will be imposed on the purchase of digital books, digital movies, digital music and audio works, digital greeting cards, online video or electronic games that are transferred electronically to a customer.20 The purchase of a digital code providing the purchaser with the right to obtain a digital product will also be subject to tax. These digital products are subject to tax if the purchaser has the right to use the product on a temporary or permanent basis, and even if the purchaser is required to make continued payments for the right to use the product.21

Upfront Capital Equipment Exemption Procedure Adopted

Since 1989, Minnesota has allowed a sales and use tax exemption to businesses for the purchase of capital equipment and machinery used to manufacture tangible personal property to be sold ultimately at retail.22 However, businesses have been required to first pay the sales or use tax and then apply for a refund. Businesses have long advocated for an upfront exemption from tax on these purchases. In response to these requests, the legislation provides that sales or use tax will no longer be payable on capital equipment purchases made after August 31, 2014.

Data Center Exemption Revised

In 2011, Minnesota enacted a sales tax exemption for the purchase of enterprise information technology equipment and computer software for use in a qualified data center.23 To encourage more activity in this area, the enacted legislation reduces the requirements to qualify as a data center from consisting of 30,000 square feet to 25,000 square feet and from being required to make a $50 million investment over a 24-month period to a $30 million investment over a 48-month period. The law has also been expanded to include a qualified refurbished data center under the exemption. These changes become effective for purchases made after June 30, 2013.

Multiple Points of Use Exemption Revised

For purchases made after June 30, 2013, a business that purchases computer software delivered electronically or a digital good or service that will be concurrently available for use in more than one taxing jurisdiction will be allowed to provide a multiple points of use exemption certificate to the seller.24 The purchaser must use a reasonable but consistent and uniform method to apportion the tax liability. The law requires that the multiple points of use exemption certificate be given to the seller at the time of purchase but also provides that it will be treated similarly to other exemption certificates.

Exemption for Businesses Adding Jobs in Greater Minnesota Created

Businesses that are adding jobs in Greater Minnesota (defined as being outside the Twin City metropolitan area) may receive a refund of sales and use taxes paid on the purchase of tangible personal property or services if the property or services are primarily used in Greater Minnesota.25 This provision also applies to the purchase of construction materials and supplies. In order to receive these benefits, the business must apply for certification from the Commissioner of the Department of Employment and Economic Development. The business must have been in operation in a Greater Minnesota city for at least one year and it must agree to add jobs in a Greater Minnesota city. A retail business does not qualify. In order to certify a business as qualifying for this exemption, the Commissioner must determine that the business would not expand its operations in Greater Minnesota without these tax incentives. The certification is effective for a 12-year period. This sales and use tax exemption becomes effective for purchases made after June 30, 2014. The total amount that may be refunded to all businesses in a fiscal year is limited to $7 million.

Click Through and Remote Seller Nexus Adopted

For sales made after June 30, 2013, a retailer will be presumed to have a solicitor in Minnesota if it enters into an agreement with a Minnesota resident where the resident will receive a commission or other similar consideration for referring potential customers to the retailer by a link on a Web site or otherwise.26 A retailer is not subject to this provision if total gross receipts from Minnesota customers were less than $10,000 during the prior year. The retailer may rebut the presumption with proof that the resident is not soliciting on its behalf. In addition, the legislation revises Minnesota's sales tax nexus law to clearly provide that remote sellers will be required to collect and remit sales tax on sales made to customers who are located in Minnesota when a federal remote seller law is enacted.27

Individual Income Tax

Governor Dayton's major tax policy initiative had been to secure an increased income tax rate on high-income individuals. Current Minnesota law provides for three income tax rates with the top tax rate being 7.85 percent.28 The legislation adopted the Governor's proposal and added a fourth income tax rate of 9.85 percent applicable to Minnesota taxable income in excess of $250,000 for joint filers (in excess of $150,000 for single filers).29 In addition, the alternative minimum tax rate is increased from 6.4 percent to 6.75 percent.30

This new tax rate is effective retroactively to tax years beginning after December 31, 2012. No underpayment of estimated tax penalty can be imposed on payments made for periods prior to September 15, 2013 to the extent the underpayment resulted from the increase in the tax rates.31

Gift and Estate Tax

Gift Tax

The legislation reinstitutes a 10 percent gift tax on taxable gifts made after June 30, 2013.32 The law provides a donor with a lifetime credit of $100,000 which would exempt $1 million of taxable gifts. Minnesota will follow the federal definition of a taxable gift.33 As a result, Minnesota will adopt the federal annual exclusion amount of $14,000 per donor per recipient. Gift tax returns will be due by April 15 of the following calendar year.34

To be subject to the gift tax, real or tangible personal property that is gifted must be located in Minnesota.35 Gifts of intangible personal property are taxable if made by a donor who is a Minnesota resident. Taxable gifts made within three years of the donor's death are included in the taxable estate with a credit provided for Minnesota gift tax that was paid on these gifts.36

Estate Tax

The estate tax will now apply to real or tangible personal property located in Minnesota which was owned by a nonresident decedent with an ownership interest in a pass-through entity.37 The law provides that the situs of the property will be determined as if the pass-through entity did not exist and the property was personally owned by the decedent. A pass-through entity includes an S corporation, partnership, single member limited liability company or a trust. This provision is effective for decedents dying after December 31, 2012.38


This bill imposes a major tax increase on high-income individuals and business. Proponents of the bill asserted that business benefits the most from a well-educated workforce and that much of the revenue is dedicated to improving education services. They also argued that high-income individuals were paying a smaller percentage of their income in taxes than middle-income individuals. Opponents of the bill asserted that many high-income individuals are business owners and that these people will leave the state because of the higher income tax rate.

The most volatile revenue source, the corporate income tax, has been significantly increased. Proponents will assert that tax preferences for foreign income have been repealed and that corporate income tax loopholes have been closed. Opponents assert that these provisions were placed into the law to encourage companies to conduct their research operations in Minnesota and to then offer these products for sale worldwide, and without such provisions there will be a desire to move research operations to a more taxpayer-friendly jurisdiction.

What began as a tax reform effort to broaden the sales and use tax base to include clothing and services ended with sales and use tax being imposed on the purchase of specified digital goods and purchases made by business to repair or maintain machinery or equipment or to store or warehouse goods. Ironically, while parts used to repair manufacturing or agricultural machinery or equipment will be exempt, the labor that was purchased to repair that machinery or equipment will now be taxable. While the upfront exemption of capital equipment does help businesses that have been required to outlay sales tax in order to receive a refund, it is essentially a timing difference that does not offset the impact on business of the other sales and use tax and income tax changes.

It is not surprising to see Minnesota repeal its membership in the Multistate Tax Compact out of concern about the potential requirement to allow corporations the ability to elect the equally-weighted three-factor apportionment formula given the litigation in other states, even though it had been thought that Minnesota had acted to eliminate the election many years ago. This move follows several other states that have acted to repeal or substantially alter the Compact in the past year.


1 Ch. 143 (H.F. 677), enacted on May 23, 2013. Note that the revenue estimates throughout this alert are from the Minnesota House and Senate Fiscal Analysis of H.F. 677 that was issued on May 19, 2013.

2 Former MINN. STAT. § 290.01(19d)(10). The repeal of this provision is projected to raise $189 million during the next two-year budget period.

3 Former MINN. STAT. §§ 290.01(6b); 290.17(4)(g). The repeal of this provision is projected to raise $44 million during the next two-year budget period.

4 This provision is projected to raise $12 million during the next two-year budget period.

5 MINN. STAT. § 290.17(4).

6 MINN. STAT. § 290.17(4)(h). This provision is projected to raise $46 million during the next twoyear budget period.

7 Under the approach followed in Appeal of Finnigan Corp., No. 88-SBE-022-A, Cal. State Bd. of Equalization, Jan. 24, 1990, a member of a unitary group has nexus with a state if any of the members of the group have nexus with the state. The alternative approach was taken in Appeal of Joyce, Inc., Cal. State Bd. of Equalization, Dkt. No. 66-SBE-070, Nov. 23, 1966.

8 MINN. STAT. § 290.171.

9 Repeal of Minn. Stat. § 291.171, 290.173, and 290.174, Minnesota Department of Revenue, April 11, 2013.

10 MINN. STAT. § 270C.03(1).

11 MINN. STAT. § 290.068(6a).

12 This change is projected to raise $90 million during the next two-year budget period.

13 MINN. STAT. § 290.0922(1).

14 This change is projected to raise more than $18 million during the next two-year budget period.

15 MINN. STAT. § 290.21(4)(c).

16 MINN. STAT. § 297A.61(3)(m)(1), (2). This was the largest single sales and use tax revenue increase as taxing these services is projected to raise $152 million during the next two-year budget period.

17 MINN. STAT. § 297A.61(3)(m)(3). Taxing these services is projected to raise $95 million over the next two-year budget period.

18 MINN. STAT. § 297A.68(35).

19 The repeal of this exemption is projected to raise $66 million over the next two-year budget period.

20 MINN. STAT. § 297A.61(3)(l), (10), (50)-(56).

21 These provisions are projected to raise more than $8 million during the next two-year budget period.

22 MINN. STAT. § 297A.68(5).

23 MINN. STAT. § 297A.68(42).

24 MINN. STAT. § 297A.668(6a). Note that this provision is generally similar to the multiple points of use exemption provision that was repealed in 2008.

25 MINN. STAT. § 297A.68(49).

26 MINN. STAT. § 297A.66(4a).

27 MINN. STAT. § 297A.66(3).

28 MINN. STAT. § 290.06(2c).

29 This rate increase is the largest single tax increase item in this bill as it is projected to raise $1,118,000,000 over the next two-year budget period.

30 MINN. STAT. § 290.091 (1).

31 H.F. 677, Art. 6, § 33.

32 MINN. STAT. § 292.17. Note that Minnesota's prior gift tax was repealed in 1979. This new gift tax is projected to raise $41 million over the next two-year budget period.

33 MINN. STAT. § 292.16(d).

34 MINN. STAT. § 292.19.

35 MINN. STAT. § 292.17(3).

36 MINN. STAT. §§ 291.005(1)(4); 291.03(1).

37 MINN. STAT. § 291.005(1)(9), (10).

38 This provision is projected to raise more than $12 million during the next two-year budget period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.