Senate Counsel, Research
and Fiscal Analysis
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Tom Bottern
Director
   Senate   
State of Minnesota
 
 
 
 
 
S.F. No. 552 - Income and Franchise, Property, and Sales and Use Tax Modifications (Governor's Tax Budget Proposal)
 
Author: Senator Rod Skoe
 
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
Eric S. Silvia, Senate Counsel (651/296-1771)
 
Date: February 28, 2013



 

ARTICLE 1 - INCOME AND FRANCHISE TAXES

Section 1.  [Foreign operation corporations; return requirement]  Removes the foreign operating corporation (FOC) return requirement.  The definition of “foreign operating corporation” is repealed in a later section.  Effective for taxable years beginning after December 31, 2012.

Section 2.  [Part-year resident definition]   Adds a definition of “part-year resident.” A part-year resident is an individual domiciled outside the state who maintains an abode in the state and spends an aggregate of more than 60 days in the state during the period the individual was domiciled outside the state.  The definition does not apply to members of the armed forces or their spouses or Wisconsin residents covered by the reciprocity provisions in section 290.081.  A day spent in Minnesota by a taxpayer to receive medical treatment, or for the medical treatment of the taxpayer’s spouse, child, or parent, is not treated as a day spent in the state for purposes of the 60-day aggregate.  “Medical treatment” means the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.  Effective for taxable years beginning after December 31, 2012.

Section 3.  [Subtractions from federal taxable income]  Changes a cross-reference to reflect renumbering due to removal of the FOC provision in section 4.  Effective for taxable years beginning after December 31, 2012.

Section 4.  [Corporations; additions to federal taxable income]  Removes add-backs to corporate franchise taxable income.  Under current law, corporations are required to add back the difference between FOC deemed dividends, and:

  • interest and intangible expenses, losses, and costs paid, accrued by a member of the taxpayer’s unitary group or for the benefit of a corporation that is a member of the taxpayer’s unitary group that qualifies as a FOC;
  • interest income and income generated from tangible property received or accrued by a FOC that is a member of the taxpayer’s unitary group;
  • dividends attributable to the income of a FOC that is a member of the taxpayer’s unitary group (the amount added under current law is the dividends paid deduction of a real estate investment trust (REIT) for amounts paid or accrued by the REIT to the FOC); and
  • income of a FOC that is a member of the taxpayer’s unitary group (the amount added under current law is the gains derived from the sale of real or personal property located in the U.S.).

Effective for taxable years beginning after December 31, 2012. 

Section 5.  [Corporations; foreign royalty subtraction]  Under current law, corporate franchise taxpayers subtract 80 percent of royalties, fees, or other income received from a FOC or foreign corporation that is part of the same unitary business as the receiving corporation.  This section eliminates the subtraction, so that foreign royalty income is taxed in the same way as other corporate income.  Effective for taxable years beginning after December 31, 2012.

Section 6.  [Computation, corporations]  Reduces the corporate franchise tax rate from 9.8 percent to 8.4 percent.  Effective for taxable years beginning after December 31, 2012.

Section 7.  [Schedules of rates for individuals, estates, and trusts]  Modifies the income tax thresholds for existing rates and adds a new rate and income threshold.  Effective for taxable years beginning after December 31, 2012.           

    For married joint filers:

  • 5.35 % on the first $35,480;
  • 7.05 % on the amount over $35,480, but not over $140,960;
  • 7.85 % on the amount over $140,960, but not over $250,000; and
  • 9.85 % on the amount over $250,000. 

For single filers:

  • 5.35 % on the first $24,270;
  • 7.05 % on the amount over $24,270, but not over $79,730;
  • 7.85 % on the amount over $79,730, but not over $150,000; and
  • 9.85 % on the amount over $150,000. 

For head of household filers:

  • 5.35 % on the first $29,880;
  • 7.05 % on the amount over $29,880, but not over $120,070;
  • 7.85 % on the amount over $120,070, but not over $200,000; and
  • 9.85 % on the amount over $200,000.

Section 8. [Inflation adjustment of brackets]  Updates the base year for purposes of the inflation adjustment of income brackets.  Effective for taxable years beginning after December 31, 2013.

Section 9.  [Credit for taxes paid to another state]  Modifies the eligibility requirements for taxpayers to receive a Minnesota income tax credit for taxes paid to another state to reflect the new proposed definition of “part-year resident.”  If a taxpayer is a resident or part-year resident of Minnesota and is subject to income tax in another state of domicile, the taxpayer would not be eligible for credit of taxes paid to another state if that state does not allow a similar credit.  Effective for taxable years beginning after December 31, 2012.

Section 10.  [Homestead property tax rebate]  Provides a refundable tax credit of $500, or 100 percent of qualified property tax, whichever is less.  Defines “qualified property tax” as the amount of property tax payable as defined in the property tax refund chapter (290A), but removes the requirement that taxpayers must own and occupy the property on January 2 of the year that taxes are payable.  Taxpayers must provide a copy of the property tax statement or other information required by the Commissioner of Revenue.  Appropriates funds to pay the claim from the general fund.  Effective for taxable years beginning after December 31, 2012. 

Section 11.  [Alternative minimum taxable income]  Changes a cross-reference to reflect renumbering due to removal of the foreign operating corporation (FOC) provisions in section 4, for purposes of calculating alternative minimum tax.  Effective for taxable years beginning after December 31, 2012.

Section 12.  [Operating loss deduction; defined and limited]  Removes reference to the corporate franchise tax subtraction for foreign royalties, fees, or other income received from a FOC or a foreign corporation that is part of the same unitary business as the receiving corporation for purposes of calculating net operating loss.  Effective for taxable years beginning after December 31, 2012.

Section 13.  [Scope of allocation rules]  Adds language to determine allocation of income for part-year residents.  For part-year residents, income is assigned or allocated under the provisions in current law, except that a pro-rata share of income is also assigned to the state.  The pro-rata share is the ratio of the number of days the part-year resident was physically present in Minnesota to the number of days the individual maintained a Minnesota abode while domiciled in another state.  Effective for taxable years beginning after December 31, 2012.

Section 14.  [Unitary business principle]  Removes the provisions that allow FOC income and apportionment factors to be excluded from the unitary group and treat FOC income as a deemed dividend to the controlled foreign corporation.  Requires domestic filers to include income and apportionment factors of a FOC for purposes of determining net income.  Requires that all sales of the unitary business must be included on the combined report of a corporation or other entity that is a member of the unitary business.  Effective for taxable years beginning after December 31, 2012.

Section 15 [Determination of sales factor]  Removes foreign royalties and fees that qualify for the corporate franchise tax subtraction from the calculation of the sales factor in the apportionment formula.  Effective for taxable years beginning after December 31, 2012.

Section 16.  [Dividends received deduction]  Provides that the dividend deduction allowed to corporations does not apply to REIT dividends.  Effective for taxable years beginning after December 31, 2012. 

Section 17.  [Property tax refund; property taxes payable]  Provides that the $500 property tax refund authorized in this article is not considered a deduction or credit for purposes of calculating property taxes payable in determining the property tax refund.  Effective beginning with refunds based on property taxes payable in 2013.

Section 18.  [Occupation tax; deductions]  Changes a cross-reference in the minerals taxes chapter (298) to reflect renumbering due to removal of the foreign FOC subtraction in section 4.  Effective for taxable years beginning after December 31, 2012.

Section 19.  [Repealer]  Repeals the definition of “foreign operating corporation,” which is no longer needed since the provisions pertaining to FOCs are removed throughout this article.  Repeals the reference to FOC income for purposes of calculating corporate alternative minimum tax.  Effective for taxable years beginning after December 31, 2012.

ARTICLE 2 - PROPERTY TAXES

Section 1. [State General Levy]

  • Commercial-Industrial Property - Sets the levy amount for CI property at $798,561,534 for taxes payable in 2014 and 2015.  Beginning with taxes payable in 2016, the levy amount for CI property increases each year by half the rate of inflation.
  • Seasonal Residential Recreational Property - Sets the levy amount for SRR property at $42,029,554 for taxes payable in 2014.  Beginning in taxes payable in 2015, the levy amount for SRR property increases each year by the full rate of inflation.

Rate of inflation means the rate of increase, if any, in the implicit price deflator for government consumption for state and local governments.

Section 2.  [State general levy apportionment] Removes the 95/5 apportionment of the state general levy between commercial-industrial property and seasonal residential recreational property. 

 Section 3. [City revenue need] Changes the definition of  "city revenue need" to mean the sum of a city’s public safety and street needs factor, a city’s pre-1970 housing need factor and the city’s exempt parcels need factor.

 Section 4. [City aid base] Eliminates the aid minimums for regional centers outside the seven-county metropolitan area and removes obsolete one-time aid appropriations.

 Section 5. [Public safety & streets need factor]  Creates a new section of law defining a city’s public safety and streets need factor as an amount, rounded to the nearest cent, that is equal to the sum of:

  1. $200; plus
  2. $0.15 times the first 1,000 of the city's population; plus
  3. $0.0008 times the next 99,000 of the city's population; plus
  4. $0.0025 times the city's population over 100,000.

Section 6.  [Pre-1970 housing factor need]  Creates a new section of law defining a city’s pre-1970 housing need factor as an amount, rounded to the nearest cent, that is equal to:

  1. 100; times
  2. the percentage of housing units in the city built prior to 1970; times
  3. $1.30.

Section 7.  [Exempt parcels need factor] Creates a new section of law defining a city’s exempt parcels need factor as an amount, rounded to the nearest cent, that is equal to:

  1. 100; times
  2. the percentage of tax-exempt parcels exempt in the city; times
  3. $65.

The number of parcels and tax-exempt parcels in a city is determined by the Commissioner of Revenue based on the 2010 assessments. The factor is capped at $130.  Exempt parcels do not include the following:

  1. city-owned public service enterprise parcels used for municipal light and water plants, telephone systems, municipal liquor stores, airport leaseholds, and fee-based parking lots and structures;
  2. city-owned public service enterprise parcels used for municipal light and water plants, telephone systems, municipal liquor stores, airport leaseholds, and fee-based parking lots and structures;
  3. parcels with a building value less than $5,000.

Section 8. [City formula aid]  Redefines "city formula aid" as the city’s unmet need amount times that year’s funding ratio. Clarifies that the data used to calculate aid is limited to that which is available on January 1 of the year the aid is calculated despite other dates mentioned in other statutes. 

Section 9. [City aid distribution] Requires that each city that received aid in 2013 will receive a $30 per capita aid increase for 2014.  For aids payable in 2015 and thereafter, increases or decreases are capped at $10 per capita.  City aid decreases continue to be capped at $300,000 if the appropriation for the year is equal to or larger than the prior year’s appropriation. 

Section 10.  [Cities; annual appropriation aid]  Increases the annual appropriation for local government aid to cities by $80 million. 

Section 11.  [County program aid]  Increases the amount of annual appropriation for county need aid by $20 million and increases the amount of annual appropriation for county equalization aid by $20 million. 

Section 12.  [Repealer]  Repeals the following city and county aid-related statutes:

  1. Section 477A.011, subd. 2a – special tax district;
  2. Section 477A.011, subd. 27 – revenue base;
  3. Section 477A.011, subd. 29 – adjusted revenue base;
  4. Section 477A.011, subd. 31 – population decline percentage;
  5. Section 477A.011, subd. 32 – commercial industrial percentage;
  6. Section 477A.011, subd. 33 – transformed population;
  7. Section 477A.011, subd. 39 – road accidents factor;
  8. Section 477A.011, subd. 40 – metropolitan area factor;
  9. Section 477A.011, subd. 41 – small city aid base;
  10. Section 477A.011, subd. 42 – city jobs base;
  11. Section 477A.0124, subd. 1 – CY 2004 county program aid;
  12. Section 477A.013, subd. 11 – aid payments in 2011 and 2012;
  13. Section 477A.013, subd. 12 – aid payments in 2013;
  14. Section 477A.0133 – 2009 and 2010 aid reductions; and
  15. Section 477A.0134 – additional 2010 aid and credit reductions.

ARTICLE 3 - SALES AND USE TAXES

Section 1.  [Building materials refunds]  Removes the reference to refunds for capital equipment purchases in the administration and compliance chapter (289A) for purposes of calculating interest on refund claims.  Effective for sales and purchases after June 30, 2015. 

Section 2.  [Sale and purchase; definition]  Modifies the definition of “sale and purchase” in section 297A.61.  Effective for sales and purchases made after December 31, 2013.

  • Subdivision 3(f) - Adds a clause to include the receipt of custom computer software, whether delivered electronically, by load and leave, or otherwise, in the definition of sale and purchase;
  • Subdivision 3(f) - Adds a clause to include remote access software in the definition of sale and purchase;
  • Subdivision 3(g)(1) - Adds the furnishing for consideration of admission to amusement events, exhibitions (e.g., trade shows; boat shows), and selling events (e.g., flea markets; estate sales), including seat licenses and the rental of box suites to the definition of sale and purchase of services;
  • Subdivision 3(g)(3) - Removes metered parking as an exclusion from taxable parking services (this provision is moved to a new section as a service exemption);
  • Subdivision 3(g)(5) - Adds language to define “road construction” to mean construction of public roads, cartways, and portions of private roads in townships located outside the seven-county metropolitan area (this language is moved here and stricken from another clause in the subdivision);
  • Subdivision 3(g)(6)(i) - Removes the exclusion for services provided by coin-operated facilities operated by a customer from taxable laundry and dry cleaning services (the exclusion is moved to a new section as a service exemption);
  • Subdivision 3(g)(6)(iv) - Removes the exclusions for services of off-duty licensed peace officers and electronic surveillance and monitoring services provided by nonprofit organizations of persons placed in court-ordered home detention  (the exclusions are moved to a new section as a service exemption);
  • Subdivision 3(g)(6)(vi) - Removes the exceptions for services performed as part of a land clearing contract and services performed under a construction contract for the installation of shrubbery, plants, sod, trees, bushes, and similar items (the exemptions are moved to a new section as a service exemption);
  • Subdivision 3(g)(6)(viii) - Removes the exception for veterinary and horse boarding services.  Veterinary services for pets would be a taxable service.  Veterinary services provided to persons for economic reasons, such as livestock, laboratory animals, and service animals, and horse boarding services would not be subject to tax.  Removes language providing that services between an employer and employee, a partnership or association and another partnership or association, and members of an affiliated group or corporations are not taxable (the exemptions are moved to a new section as a service exemption). 
  • Subdivision 3(i) - Adds language to provide that data processing and information services are a taxable sale and purchase.
  • Subdivision 3(l) -  Adds a new paragraph to include as a taxable sale and purchase the furnishing for consideration of specified digital products or other digital products, and the granting of the right for consideration to use specified digital products or other digital products on a temporary or permanent basis, regardless of whether the purchase is required to make continued payments for that right. 

Section 3.  [Sale of services]  Adds language to provide that a sales and purchase includes the furnishing for consideration of any service.  Effective for sales and purchases made after December 31, 2013.  

Section 4.  [Retail sale]  Adds language to the definition of “retail sale” to state that the following constitute a retail sale and are not sales for resale:

  • the sale, lease, or rental of tangible personal property for any purpose other than resale, sublease, or subrent by the purchaser;
  • the sale of a service in the normal course of business, including the sale of custom computer software, information, and data processing services; and
  • the sale of any currently taxable service under section 297A.61, subdivision 3, for any purpose other than resale by the purchaser in the normal course of business.

Effective for sales and purchases made after December 31, 2013. 

Section 5.  [Tangible personal property]  States that specified digital products or other digital products, transferred electronically, are not tangible personal property.  Prewritten computer software delivered electronically is tangible personal property.  Effective for sales and purchases made after December 31, 2013. 

Section 6.  [Delivered electronically]  States that the definition of “delivered electronically” applies to the delivery of computer software, but computer software is not considered to be delivered electronically simply because the purchase has access to the product.  Effective for sales and purchases made after December 31, 2013. 

Section 7.  [Cable television service]  Removes “digital” from the definition of “cable television service.”  Effective for sales and purchases made after December 31, 2013. 

Section 8.  [Direct satellite service]  Adds language to the definition of “direct satellite service” to include the transmission of video, audio, or other programming services transmitted or broadcast by satellite.  The term also includes programming services that require subscriber interaction, such as pay-per-view, DVR, and music services.  Effective for sales and purchases made after December 31, 2013. 

Section 9.  [Prepared food]  Removes the exception for ready-to-eat meat and seafood in an unheated state sold by weight (e.g., deli items) in the definition of “prepared food.”  Effective for sales and purchases made after December 31, 2013. 

Section 10.  [Bundled transaction]  Adds specified digital products and digital goods to the types of products subject to the bundled transactions statute.   Effective for sales and purchases made after December 31, 2013. 

Section 11.  [Ring tones]  Removes the reference to “telecommunication service” from the definition of ring tones and adds language to exclude ring back tones or other digital audio files not stored on a purchaser’s mobile device.  Effective for sales and purchases made after December 31, 2013. 

Section 12.  [Definition of “service”]  Defines “service” as all activities engaged in for a fee, retainer, commission, or other consideration, as distinguished from sales of tangible personal property.  The intended use, or principal or ultimate objective of the parties is not controlling in determining whether an activity is considered a service.  Effective for sales and purchases made after December 31, 2013. 

Section 13.  [Definition of “digital audio works”]  Defines “digital audio works” as works resulting from a fixation of a series of musical, spoken, or other sounds, that are transferred electronically, such as songs, music, readings of books or other written materials, speeches, ring tones, or other sound recordings.  Unless the context provides otherwise, digital audio works also includes the digital code or subscription to a digital code for receiving, accessing, or otherwise obtaining digital audio works.  Digital audio works does not include audio greeting cards sent via email.  Effective for sales and purchases made after December 31, 2013. 

Section 14.  [Definition of “digital audio-visual works”]  Defines “digital audio-visual works” as a series of related images which impart an impression of motion when shown in succession, together with any accompanying sounds, that are transferred electronically, such as movies, music videos, news and entertainment, and live events.  Unless the context provides otherwise, digital audio-visual works also includes the digital code or subscription to a digital code for receiving, accessing, or otherwise obtaining digital audio-visual works.  Digital audio-visual works does not include video greeting cards sent via email.  Effective for sales and purchases made after December 31, 2013. 

Section 15.  [Definition of “digital books”]  Defines “digital books” as any literary work, other than digital audio-visual works or digital audio works, expressed in words, numbers, or other verbal or numerical symbols or indicia as long as the product is generally recognized as a book, whether fiction, nonfiction, or short stories.  The definition does not include periodicals, magazines, newspapers, or other news or information products, chatrooms, or blogs.  Unless the context provides otherwise, digital books also includes the digital code or subscription to a digital code for receiving, accessing, or otherwise obtaining digital books.  Effective for sales and purchases made after December 31, 2013. 

Section 16.  [Definition of “digital code”]  Defines “digital code” to mean a code that provides a purchaser with a right to obtain one or more specified digital products or other digital products.  Digital code may be transferred electronically or on a tangible medium, such as a plastic card, a piece of paper or invoice, or imprinted on another product.  Digital code is not a code that represents a stored monetary value that is deducted from a total as it is used by the purchaser (such as a gift card), and does not entitle the holder of the code to select a digital product of an indicated cash value. The end user of a digital code is any purchaser except that who is contractually authorized to redistribute the digital product that is the subject of the transaction.  Effective for sales and purchases made after December 31, 2013. 

Section 17.  [Definition of “other digital products”]  “Other digital products” are any of the following items, when transferred electronically:  greeting cards; finished artwork available for reproduction, display, or similar purposes; video or electronic games; periodicals; magazines; newspapers; and other news or information products.  Effective for sales and purchases made after December 31, 2013. 

Section 18.  [Definition of “specified digital products”]  “Specified digital products” means digital audio works, digital audio-visual works, and digital books that are transferred electronically to a customer.  Effective for sales and purchases made after December 31, 2013. 

Section 19.  [Definition of “transferred electronically”]  A product is “transferred electronically” when it is obtained by the purchaser by means other than tangible storage media.  A copy of the product does not necessarily have to be physically transferred to the purchaser; it will be considered transferred electronically to the purchaser if the purchaser has access to the product (e.g., 48-hour access to a streaming movie).  Effective for sales and purchases made after December 31, 2013. 

Sections 20 and 21.  [Sales tax rate]  Amends section 297A.62 to reduce the general sales tax rate from 6.5 percent to 5.266 percent and reduce the Constitutionally required legacy fund sales tax rate from .375 percent to .234 percent.  The new combined sales tax rate would be 5.5 percent.  Effective for sales and purchases made after December 31, 2013. 

Section 22.  [Rental motor vehicle sales tax rate]  Increases the rental motor vehicle sales tax rate from 6.2 percent to 9.05 percent.  Effective for sales and purchases made after December 31, 2013. 

Section 23.  [Lottery tickets in lieu tax]  Removes the reference to 297A.62, subdivision 1, for the lottery tickets in lieu sales tax rate and replaces it with 6.5 percent.  This rate remains unchanged from current law.  Effective for sales and purchases made after December 31, 2013. 

Section 24.  [Solicitor nexus]  Defines “solicitor” for purposes of sales tax nexus.  A retailer is presumed to have a solicitor in the state if the retailer enters into an agreement with a resident to refer, for consideration, potential customers to the seller through any means.  Gross receipts from the sales resulting from that agreement must total at least $10,000 annually.  The presumption may be rebutted by evidence that the resident did not engage in any solicitation in the state on behalf of the retailer during the 12-month period in question.  A “resident” includes an individual as defined under section 290.01, as well as a business that owns tangible personal property in the state or has one or more employees providing services for the business in the state.  Effective for sales and purchases made after December 31, 2013. 

Section 25.  [Drugs; medical devices]  Removes the sales tax exemption for over-the-counter drugs and adds language to state that only prescription drugs would be exempt.  Effective for sales and purchases made after December 31, 2013. 

Section 26.  [Clothing]  Requires that the current law sales tax exemption for clothing applies only to items of clothing sold for $100 or less.  Items over $100 would be taxed on the entire sales price.  Effective for sales and purchases made after December 31, 2013. 

Section 27.  [Materials consumed in industrial production]  Adds the word “tangible” to the sales tax exemption for materials stored, used, or consumed in industrial production of personal property to make clear that the exemption applies to industrial production of tangible personal property.  This change also references new language in section 2, so that the exemption also applies to the production of digital products.  Effective for sales and purchases made after December 31, 2013.

Section 28.  [Capital equipment]  Removes the requirement that sales tax on capital equipment must be collected upfront and then refunded.  Qualifying capital equipment purchases would be exempt upfront from sales tax.  Effective for sales and purchases made after December 31, 2015.

Section 29.  [Veterans groups]  Includes services for specified purposes in the sales tax exemption for veterans groups.  Effective for sales and purchases made after December 31, 2013. 

Sections 30 and 31.  [Fundraising sales and events; nonprofits groups]  Includes services for specified purposes in the sales tax exemption for fundraising sales by or for nonprofit groups, and fundraising events sponsored by nonprofit groups.  Effective for sales and purchases made after December 31, 2013. 

Section 32.  [Service exemptions]  Exempts specified services from sales tax and defines the scope of those services.  The services removed from 297A.61 in section 2 are placed in this section.  The following services would be exempt:

agriculture and forestry support; bank services and brokerage and investment counseling provided to a person other than a natural person; cemetery grounds maintenance; construction labor for real property; education services provided by colleges and similar institutions; funeral and cremation services; health care and medical services; installation of nontaxable products; insurance company commissions for policy sales; mining support; services provided by a government for a fee (except for services specifically enumerated in chapter 297A as a taxable service); public transit services and student transportation; real estate services; certain social assistance services; storage of farm products and refrigerated food storage; veterinary services provided to a person other than a natural person; and waste management services. 

Miscellaneous services that would be exempt are:

services provided by coin-operated facilities operated by a customer; services of off-duty licensed peace officers and electronic surveillance and monitoring services provided by nonprofit organizations of persons placed in court-ordered home detention;  services performed as part of a land clearing contract and services performed under a construction contract for the installation of shrubbery, plants, sod, trees, bushes, and similar items; horse boarding; and services between an employer and employee, a partnership or association and another partnership or association, or members of an affiliated group or corporations. 

Effective for sales and purchases made after December 31, 2013. 

Sections 33, 34, and 35.  [Tax collected; exempt items; eligible persons; application]  Removes the references to refunds for capital equipment purchases in 297A.75, which provides for refunds of sales tax paid on exempt items.  This reference is no longer necessary given that capital equipment purchases would receive an upfront exemption under an earlier section.  Effective for sales and purchases made after December 31, 2015.

Section 36.  [Motor vehicle lease sales tax revenue]  Provides that the current law tax rate of 6.875 percent is used to calculate net revenue.  This is necessary to de-couple the motor vehicle sales tax rate from the reduced rate proposed in an earlier section.  Effective for sales and purchases made after December 31, 2013.

Section 37.  [Revisor’s instruction]  Provides an instruction to remove the sentence “Use of equipment on a time-sharing basis, where access to the equipment is only by means of remote access facilities, is not a taxable leasing of such equipment.”  This sentence must be removed as it conflicts with proposed taxation of remote access software in an earlier section.  Effective for sales and purchases made after December 31, 2013.

Section 38.  [Repealer] Repeals section 289A.40, subd. 6, which governs the time frame under which a refund claim for sales tax paid on capital equipment purchases must be made.  This requirement is no longer needed since capital equipment purchases would be exempt upfront, under an earlier section. 

Repeals the following sales tax exemptions:

  • Super Bowl admissions;
  • publications and publication materials;
  • advertising materials;
  • copies of court reporter documents;
  • telecommunications, cable television, and direct satellite machinery equipment;
  • tickets or admissions nonprofit organization events;
  • school tickets or admissions; and
  • YMCA, YWCA, and JCC memberships.

Repeals section 297A.96, which provides that charges for admission to a nonprofit organization event are not subject to local sales taxes.  This section is no longer needed since the nonprofit event admissions exemption is also repealed.  

Repeals Minnesota Rules, part 8130.0500, which provides that making a computer available on a time-sharing basis for use by customers securing access by remote facilities is a non-taxable service.

All repealed provisions are effective for sales and purchases made after December 31, 2013.

ARTICLE 4 -MISCELLANEOUS

Section 1.  [Fee imposed]  Amends section 256.9658, which directs certain cigarette and tobacco products fee revenues to the health impact fund.  This section de-couples the rates provided in the tobacco products statute (changed in a later section in this article) from the fee revenue going to the health impact fund, so that the current 35 percent fee is maintained and the health impact fund remains unchanged with regard to tobacco products fee revenue.  Effective July 1, 2013.

Section 2.  [Commissioner’s power and duties]  Adds language to allow the Commissioner of Revenue to disallow the tax effects of transactions that lack economic substance.  Effective for taxable years beginning after December 31, 2012.

Section 3.  [Assessment; presumption]  Requires a taxpayer to prove with clear and convincing evidence that a transaction had economic substance, if the Commissioner of Revenue determines the transaction lacked economic substance.  Effective for taxable years beginning after December 31, 2012.

Section 4.  [Economic substance]  Adopts the federal economic substance doctrine to require that a transaction is treated as having economic substance only if:  (1) the transaction changes in a meaningful way the taxpayer’s economic position (apart from tax effects) and; (2) the taxpayer has a substantial purpose for entering into the transaction (apart from tax effects).  The potential for profit in a transaction shall only be taken into account if the present value of the reasonably expected pretax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction was made.  Financial accounting benefits achieved through reduction of state, federal or local taxes may not be used as a purpose for entering into a transaction.  This section applies to individual taxpayers for transactions entered into with a trade or business or for activity done for the purpose of  producing income.  Effective for taxable years beginning after December 31, 2012.

Section 5.  [Noneconomic substance transaction penalty]  Imposes a 20 percent penalty on disclosed noneconomic substance transactions and a 40 percent penalty on nondisclosed noneconomic substance transactions.  The penalties apply to any income or item that is attributable to a disallowed noneconomic substance transaction.   Effective for taxable years beginning after December 31, 2012.

Section 6.  [Rates; cigarettes]  Increases the excise tax rates on cigarettes from 24 to 71 mills per cigarette for cigarettes weighing no more than three pounds per thousand, and from 48 to 142 mills per cigarette for cigarettes weighing more than three pounds per thousand.  Effectively, the rate increases from 48 cents per standard pack of 20 cigarettes to $1.42 per pack.  Effective July 1, 2013.      

Section 7.  [Rates; tobacco products]  Increases the tobacco products tax from 35 percent of the wholesale sales price to 55 percent of the wholesale sales price.  Effective July 1, 2013.

Section 8.  [Use tax; tobacco products]  Increases the use tax on tobacco products from 35 percent of the wholesale cost  to 55 percent of the wholesale cost.  Effective July 1, 2013.     

Section 9.  [Imposition; cigarette sales tax]  Allows the Commissioner of Revenue to proportionally adjust the cigarette sales tax rate as a result of the rate change under subdivision 1 for purchases made July 1, 2013, through December 31, 2013, and any future changes.  Effective July 1, 2013.           

Section 10. [Floor stocks tax]  Imposes a floor stocks tax of 94 cents per 20-cigarette pack, and $1.88 on higher weight packs, for those engaged in the business of selling cigarettes as distributors, retailers, subjobbers, vendors, manufacturers, or manufacturer’s representatives on stamped cigarettes or unaffixed stamps in their possession as of July 1, 2013.  Requires the entities subject to the tax to file a return with the Commissioner of Revenue by July 10, 2013, and the tax owed is due and payable by August 7, 2013.   Effective July 1, 2013. 

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