United States: Minnesota Enacts Tax Reduction Legislation

On March 21, Minnesota Governor Mark Dayton signed into law a tax bill1 repealing several provisions that had been originally enacted last year in omnibus tax legislation, including the imposition of sales and use tax on the purchase of repair labor, warehousing or storage services and on telecommunications equipment.2 The bill also retroactively repeals the gift tax, increases estate tax exemptions and retroactively conforms the income tax law to federal provisions for the 2013 tax year. The bill reduces income taxes, sales taxes, and estate and gift taxes in the amount of $453 million for the two-year budget period which ends on June 30, 2015.

Sales and Use Tax Provisions

In May 2013, omnibus tax legislation was enacted to expand the sales and use tax to apply to 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.

The 2013 legislation had also required businesses that purchase warehousing or storage services for tangible personal property to impose sales or use tax on these services after March 31, 2014. Under this year's tax bill, these provisions have been repealed effective for sales and purchases made after March 31, 2014.3

Telecommunications Equipment Exemption Reinstated

In 2002, the legislature enacted a sales tax exemption for the purchase of telecommunication equipment including ancillary machinery and equipment along with repair and replacement parts. This special exemption was repealed effective for purchases made after June 30, 2013. Under this year's tax bill, this exemption has been reinstated effective for sales and purchases made after March 31, 2014.4

Upfront Capital Equipment Exemption Delayed

Since 1989, Minnesota has allowed a sales tax exemption to businesses for the purchase of capital equipment and machinery used to manufacture tangible personal property to be sold ultimately at retail.5 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 2013 omnibus tax legislation provided that sales or use tax would no longer be payable on capital equipment purchases made after August 31, 2014. Under the new bill, the effective date of this provision has been delayed until purchases made after June 30, 2015.6

Gift and Estate Tax Provisions

Gift Tax Repealed

Under the 2013 omnibus tax legislation, Minnesota had become the second state to impose a gift tax. A provision of this year's tax bill retroactively repeals the gift tax for taxable gifts made after June 30, 2013 which had been the effective date of the 2013 law which had initially imposed the gift tax.7

Estate Tax Exemption Increased

Minnesota has imposed its estate tax on taxable estates in excess of $1 million. This legislation increases the $1 million exemption to $1.2 million for estates of decedents who die in 2014, to $1.4 million during 2015, to $1.6 million during 2016, to $1.8 million during 2017, and to $2 million during 2018 and subsequent years. The top estate tax rate will be 16 percent.8

Income Tax Provisions

Under the provisions of the bill, Minnesota conforms its individual and corporate income tax laws to federal income tax laws retroactive to the 2013 tax year. Minnesota has now adopted the provisions of the Internal Revenue Code (IRC) as it existed on December 20, 2013 rather than the prior reference to the IRC as it existed on April 14, 2011.9

For IRC Section 179 first year expenses and for bonus depreciation claimed in 2013, Minnesota will continue to require that 80 percent of these amounts be added back into income and then will allow 20 percent of these added back amounts to be deducted during each of the following five years.10

Commentary

In 2013, Minnesota enacted a law that raised approximately $2.1 billion in new taxes. The February 2014 revenue forecast had estimated a $1.2 billion revenue surplus for the current two-year budget period. The 2014 legislature and Governor Dayton heard numerous complaints about the impact of several of these tax increases on the tax climate in Minnesota. As a result, this tax bill repeals the new sales taxes which had been imposed on businesses along with the newly imposed gift tax.

The income tax and sales tax changes had been contained in the initial version of the bill when it was passed by the House on March 6. The Senate made numerous changes to the House version of the bill when the Senate adopted its version on March 21. Shortly afterwards the House accepted the Senate changes and cleared the bill for the governor's signature. While this year's tax bill rolled back numerous provisions enacted last year, the bill did not repeal the higher income tax rate on individuals or the significant corporate income tax changes which were enacted in the 2013 omnibus tax bill.

Footnotes

1 H.F. 1777, enacted on March 21, 2014.

2 Ch. 143 (H.F. 677), enacted on May 23, 2013.

3 See deletion of MINN. STAT. § 297A.61, subd. 3(m)(1),(2) and (3).

4 MINN. STAT. § 297A.68, subd. 35a.

5 MINN. STAT. § 297A.68, subd. 5.

6 H.F. 1777, Art. 2, § 4, amending Laws 2013, Ch. 143, Art. 8, § 26.

7 Repeal of MINN. STAT. § 292.16 et seq.

8 MINN. STAT. §§ 289A.10, subd. 1; 291.03, subd. 1.

9 MINN. STAT. §§ 289A.02, subd. 7; 290.01, subd. 19, 31.

10 MINN. STAT. § 290.01, subd. 19a(7) and (8), subd. 19b(8) and (13), subd. 19c(12) and (13), and subd. 19d(15) and (16).

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