In addition, HF 5 disallows the DRD for dividends received from debt-financed portfolio stock under IRC  Section 246A, effective for tax years beginning after December 31, 2018. HF 5 limits the amount of net operating loss (NOL) that can be deducted to 80 percent of taxable net income in a single year. Copyright © 1996 – 2021, Ernst & Young LLP. However, small sellers that already collect in the state (because they already have nexus there) don’t qualify for the small seller exception. Your business must file the appropriate Minnesota returns for any year in which it has nexus, a taxable activity or presence in the state. In computing net income, HF 5 requires certain amounts be subtracted from, or added back to, federal taxable income. In addition to the adjustment mentioned previously, HF 5 requires individual addback amounts of foreign-derived intangible income (FDII) deducted under IRC  Section 250 to the extent deducted from net income, effective retroactively for tax years beginning after December 31, 2017. The law also reorganizes the definitions. 26 OTR Tax Notice 2020-05, “COVID-19 Emergency Income and Franchise Tax Nexus,” 4/10/2020. HF 5 also requires the income and factors of unitary foreign corporations and other unitary foreign entities that meet Minnesota's newly defined "disqualified captive insurance company" be included in the net income or the apportionment factors of the unitary business. This provision took effect May 31, 2019. In addition, HF 5 requires the IRC  Section 163(j) 30 percent business interest deduction limitation, to which the state conforms, to be computed on a Minnesota basis using only the items from the members included in the combined report. Decoupling is accomplished by tying Minnesota's AMT reference to the IRC as amended through December 16, 2016. Individual income tax. On May 30, 2019, Minnesota Governor Tim Walz signed the omnibus tax bill (HF 5, 1st Special Session), which changes the state's tax laws. In doing so, it decouples these provisions from the TCJA, which limits IRC  Section 1031 like-kind exchanges to real property. "Persons" must now apply the RIC sourcing rules (i.e., look to the location of the fund shareholder). If we can help you over the phone, please include your phone number. This provision took effect May 31, 2019. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. You must register and collect sales tax in Minnesota if you have a taxable presence or nexus in Minnesota, even if you are an out-of-state retailer or marketplace provider. Provisions of HF 5 amend Minnesota's economic nexus provisions for remote retailers and marketplace providers. Income tax nexus implications of 'Wayfair' While Wayfair will have a significant impact on sales and use tax collection obligations, the decision may also impact nexus positions taxpayers have taken with regard to other taxes, notably income tax.. Policy statements that provide added interpretation, details, or information about Minnesota tax laws or rules. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. However, there are certain limitations with regard to P.L. No. *Form no longer on site, obsolete? Journal of Multistate Taxation and Incentives (Thomson Reuters/Tax & Accounting) Volume 26, Number 4, July 2016. For more information, updates, and resources, see Our Response to COVID-19. 115-97) (TCJA), revising its sales and use tax nexus provisions for remote sellers and marketplace providers, and adopting a "Wayfair" nexus standard for purposes of the MinnesotaCare Tax, among other changes. State: Minnesota Threshold : $100,000/year in gross revenue, or makes sales into Minnesota in more than 200 separate transactions in … Nexus and other filing considerations for Ohio’s Commercial Activity Tax (CAT) remain unchanged. COVID-19 Penalty Relief: You may ask us to cancel or reduce filing or payment penalties if you have a reasonable cause or are negatively affected by the COVID-19 pandemic. Activities that create nexus include but are not limited to: … The company will continue to have nexus with Minnesota. Further, remote sellers and marketplace providers should review the changes to the state's nexus thresholds and adjust their sales and use tax compliance systems accordingly. The Minnesota Tax Court has held that the in-state activities of merchandisers employed by an out-of-state distributor created corporate income tax nexus for the distributor. In addition, HF 5 makes the following changes to Minnesota's individual income tax laws: These changes are effective for tax years beginning after December 31, 2018. Before that date, the threshold is (i) $100,000 in sales from at least 10 transactions or (ii) 100 transactions. For example, if a taxpayer has income tax nexus … Come … HF 5 adopts the IRC as amended through December 16, 2016, for the state sales tax exemption for occasional sales (which, among other requirements, applies to sales occurring in a transaction described in IRC  Section 1031) and the motor vehicle sales tax exemption (which, among other requirements, applies to a purchase or use of a motor vehicle previously registered in Minnesota when the transfer qualifies as a IRC  Section 1031 exchange). Oregon: The Department of Revenue announced that for purposes of Oregon corporate excise Without getting into the minutia of the 60 year history of state sales tax nexus, for this blog I simply suggest that sales tax nexus is created in a foreign state when the seller creates some type of physical connection with that state. 86-272 “No State, ... 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such ... Economic Presence = Nexus 25 •Lanco v. Division •Tax Commissioner v. HF 5 makes clear that income from a controlled foreign corporation included in a domestic corporation's net income under IRC  Section 951 (i.e., subpart F income) is dividend income. The authors argue that where a taxpayer does not have the requisite physical presence in a foreign state, HF 5 updates the state's date of conformity to the IRC as amended through December 31, 2018 (from December 16, 2016). Non-Minnesota businesses that do business in Minnesota or own property in here may be subject to taxation by the state if they have sufficient “nexus“ or connection with Minnesota to justify imposition of Minnesota tax laws. Note: In the examples above, if the out-of-state company is not required to collect Minnesota sales or use tax, its customers are required to remit use tax directly to … In addition to Minnesota, Indiana, and Ohio, New Jersey, Mississippi, Pennsylvania, North Dakota, and the District of Columbia have also issued guidance waiving business tax nexus associated with remote work during the COVID-19 pandemic. Any corporation with income from the transaction of business in, into or from New Mexico or from property or employment in the state has nexus. Accordingly, such income is subject to Minnesota's dividend received deduction (DRD). We last updated the Business Activity Questionnaire for Determining MinnesotaCare Tax Nexus in March 2019, and the latest form we have available is for tax year 2018. MinnesotaCare tax Under prior law, the 2% MinnesotaCare tax imposed on gross revenues received by hospitals, health care providers or wholesale drug distributors was scheduled to sunset for gross revenues received after Dec. 31, 2019. Determining Corporate Income Tax Nexus. If you are unsure about nexus, complete Form C101, Minnesota Business Activity Questionnaire to establish if your business needs to file a Corporation Franchise, Partnership, or S Corporation Tax return in Minnesota. 27 Ind. 2 The law amends various individual income tax provisions to change the reference from FTI to FAGI. If we sent you a letter, please include the Letter ID number from the top right corner. Effective for tax years beginning after December 31, 2018, HF 5 changes the starting point for calculating individual net income from federal taxable income (FTI) to federal adjusted gross income (FAGI)1 with modifications as provided in Minn. Stat. 34 Notably, it also extends Minnesota nexus … The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. We will review your answers, contact you if we have questions or need more information, and notify you if your business needs to file a Minnesota return. In more than half of those states, the small seller exception matches the one in South Dakota, which the Supreme Court praised. 1 For individual income tax purposes, "adjusted gross income" (AGI) and FAGI is defined to mean AGI as defined in IRC  Section 62, including any elections made by a taxpayer under the IRC in determining FAGI for federal income tax purposes. A similar change applies to trusts and estates. Minnesota Enacts Marketplace and Affiliate Nexus Legislation. Unsure if you have nexus? In light of the growing reach of states asserting economic nexus for income tax purposes, a taxpayer that lacks physical presence in a state, but exceeds the economic nexus threshold, should nonetheless consider whether P.L. HF 5 makes various changes to the MinnesotaCare Tax. Minnesota's statute does indicate that it is possible for tax nexus to exist. If you have requested a response, we will reply within three business days. The department will not seek to establish nexus for business income tax or sales and use tax solely because an employee is temporarily working from home due to the COVID-19 pandemic. Effective Date: October 1, 2018; October 1, 2019 for new thresholds Threshold: $100,000 and 10 sales or 100 transactions; $100,000 or 200 or more retail sales – effective October 1, 2019 Measurement Date: The 12-month period ending on the last day of the most recently completed calendar quarter is This change is effective retroactively to the same time the change became effective for federal income tax purposes. Sign and mail the questionnaire to the Minnesota Department of Revenue, using the address given on the last page. 86-272. Your business must file the appropriate Minnesota returns for any year in which it has nexus, a taxable activity or presence in the state. Signs of Potential Tax Evasion or Tax Fraud, Form C101, Minnesota Business Activity Questionnaire. Addback is required for the amount of any special deduction under IRC  Sections 250 (i.e., deductions for GILTI or foreign-derived intangible income (FDII)) or 965, to the extent not included in taxable income. In addition, HF 5 increases the percent of the accelerated payment of June sales tax liability for calendar year 2020 and 2021 to 87.5 percent (from 81.4 percent), adjusted down to 84.5 percent in 2022 and thereafter. Generally, an employer that transacts business or derives income from … HF 5 modifies the definition of "alternative minimum taxable income" to include (i) the amount of income deducted under IRC  Section 199A that must be added back to FTI under Minn. Stat. Provisions of the new law make changes to Minnesota's tax laws. Further, retroactively effective for tax years beginning after December 31, 2017, the HF 5 requires trusts and estates to add back to FTI amounts deducted under IRC  Section 199A. Income Tax Nexus in the New Economy: Third-Party Service Providers by Mike Porter, Alexis Morrison-Howe, Jeremy Sharp, and Laura Souchik I. Such entities, however, may deduct NOLs under the state's rules applicable to corporations. Before that date, the threshold is (i) $100,000 in sales from at least 10 transactions or (ii) 100 transactions. All rights reserved. field_block:node:landing_page:field_subtitle. Direct physical connections involve sending employees into the state, having property in the state, or performing services in the state. Minnesota corporations are subject to Minnesota’s corporation franchise tax, which is a tax on corporation income at a flat 9.8% rate, as well as an additional, alternative minimum tax (AMT). Tax News Update    Email this document    Email this document, Minnesota updates IRC conformity date and economic nexus provisions, makes various other changes. Effective October 1, 2019, Minnesota considers businesses who make over $100,000 in gross revenue in the last 12 months or makes sales into Minnesota in more than 200 separate transactions in the previous 12 months to … Introduction Long past are the days when companies could reasonably base nexus determinations on the location of property, This change is retroactively effective for tax years beginning after December 31, 2017. The starting point for computing Minnesota individual income tax will be federal adjusted gross income (FAGI) rather than federal taxable income (FTI). Research estimates of how state House and Senate bills could affect revenues and the Minnesota tax system. The limitation must be aggregated between combined report entities, consistent with the application to a consolidated group for federal income tax purposes. Notably, the law updates the state's date of conformity to the IRC and addresses provisions contained in the TCJA, which was not done in 2018. This provision is retroactively effective for tax years beginning after December 31, 2016. Other States. What’s the threshold for economic nexus law in Minnesota? 86-272 precludes the imposition of state income tax. Notably, effective October 1, 2019, the economic nexus threshold is changed to retail sales totaling more than $100,000 or 200 or more retail sales. The revised law provides additional guidance around collection and remittance requirements for remote retailers and marketplace providers, including who is responsible for collecting the tax, when remote sellers and marketplace providers must begin collecting tax and when they can discontinue collecting the tax. Subtraction is required for (i) deferred foreign income recognized under IRC  Section 965, effective retroactively to the same time the change became effective for federal income tax purposes; and (ii) global intangible low-taxed income (GILTI) under IRC  Section 951A, effective retroactively for tax years beginning after December 31, 2017. This physical connection can be direct or indirect. Changes include updating the state's date of conformity to the Internal Revenue Code of 1986, as amended (IRC), addressing Minnesota's conformity to a variety of the provisions of the Tax Cuts and Jobs Act (P.L. Since tax year 2014, Minnesota has apportioned income using “single sales” apportionment—i.e., the percentage that Minnesota sales comprise of total sales of the corporation is multiplied by total income to determine Minnesota-source income. Minnesota @CCH_UC #CCHUC15 Enactment of P.L. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. To date, seven jurisdictions have announced temporary nexus relief in response to the COVID-19 health crisis: Indiana, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, and Washington, D.C. (and two of these jurisdictions, Mississippi and North Dakota, also announced corporate income tax apportionment relief). Dept. Washington, D.C., will not assert income tax nexus “solely on the basis of employees or property used to allow employees to work from home (e.g., computers, computer equipment, or similar property) temporarily located in the District during the period of the declared public emergency and public health emergency, including any further extensions by the Mayor.” 1 Specifically, the merchandisers' activities exceeded the mere "solicitation of orders" which would be afforded immunity from a state's income tax under Public Law 86-272 (P.L. Rev. Since being granted the authority to tax remote sales, more than 40 states have adopted economic nexus. 33 The legislation continues the imposition of the MinnesotaCare tax at a reduced rate of 1.8% starting in 2020. So at first blush, Wayfair might not appear to have much impact in that area. Similar subtractions apply for Minnesota individual income tax purposes. Nexus is the link between a taxpayer and a state that provides the state the ability to impose its tax laws upon the taxpayer. Depending on the situation, Minnesota may or may not charge sales tax on Internet-based transactions. These changes are effective retroactively for sales and purchases made after December 31, 2017. (The PTE deduction under IRC  Section 199A is allowed in determining FTI, not FAGI.) Minnesota Tax Law Update ... Wayfair Impacts on Corporate Income Tax Nexus States have been asserting economic nexus in the context of corporate income tax for decades. CORPORATE FRANCHISE AND INCOME TAXES . Taxpayers will need to review these changes and determine whether it is necessary to amend returns filed for tax years 2017 and 2018. If you are unsure about nexus, complete Form C101, Minnesota Business Activity Questionnaire to establish if your business needs to file a Corporation Franchise, Partnership, or S Corporation Tax return in Minnesota. Annual summaries of Minnesota tax law changes enacted during each legislative session. 86-272). HF 5 also decouples the Minnesota corporate alternative minimum tax (AMT) from the federal AMT, which was repealed by the TCJA. It’s a complicated concept, but in broad terms, nexus can be created by a taxpayer’s physical presence; a factor presence (sales, property, or payroll of a certain percentage or amount); or a substantial economic presence in the state. This provision is effective for tax years beginning after December 31, 2017. Liability for New Mexico corporate income tax often depends on whether your corporation has nexus in New Mexico. A similar change applies for Minnesota individual income tax purposes. Because individuals will now use FAGI, the legislation incorporates a new itemized deduction statute (Section 290.0122). This change is effective May 31, 2019 (the day following final enactment), except adopted federal changes are effective retroactively to the same time they became effective for federal income tax purposes. Section 290.0131(16); (ii) the amount of the deduction allowed under IRC  Section 199A not included in the addback amount; and (3) the amount of FDII deducted, to the extent not included in federal alternative minimum taxable income. Page 1 of 63 2014 AICPA, Inc. The laws, regulations and policies of each state should be verified for application to specific UNIQUE CONSIDERATIONS FOR STATE INDIVIDUAL TAX RETURNS Introduction This guide provides practitioners some of the information they should consider when preparing individual state income tax returns. In computing net income, HF 5 requires certain amounts be subtracted from, or added back to, federal taxable income. EY US Tax News Update Master Agreement | EY Privacy Statement, Adopt federal standard deduction amounts (with separate Minnesota limitations) and federal itemized deductions with certain exceptions, Provide a special limited adjustment for 2018, allowing individual income taxpayers to take the standard deduction or make an election to itemize deductions, regardless of the method used for federal income tax purposes, Modify individual income tax rate brackets and tax rates, Modify the historic structure credit and small business investment tax credit, Authorize the imposition of various local sales and use taxes, lodging taxes, food and beverage taxes, and other local taxes, Provide various cities with special tax increment financing authority, Modify provisions for reporting a federal change to provide that a change or correction includes any case in which a taxpayer reaches a closing agreement or compromise with the IRS. In addition, exempt entities calculating unrelated business taxable income under IRC  Section 152 must add back the amount of any NOL deduction claimed under IRC  Section 172.