First-of-Kind Online Marketplace Tax Bill OK’d in Minnesota

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

Minnesota taxpayers would be guaranteed tax relief of almost $650 million over the next two years under the revenue provisions of the 2018-19 biennial budget passed by lawmakers during an overtime legislative session May 24.

On the tax administration front, H.F. 1 imposes new tax collection duties on marketplace providers like Amazon Inc. and eBay Inc. with third-party affiliates in Minnesota. The bill is the first of its kind to be enacted in the U.S., and practitioners say this will become the new frontier for states looking to find more tax revenue from online sales.

The bill also would close corporate income tax loopholes affecting some financial institutions and insurance companies.

Nina Manzi, a Minnesota House legislative analyst, said the bill will have to return to the House for a second round of approvals because senators amended H.F. 1, giving some bars authority to remain open until 4 a.m. during the Super Bowl. The issue isn’t expected to interfere with full enactment of H.F. 1. Gov. Mark Dayton (DFL) is expected to sign the bill.

Primary Winners

An analysis by the Minnesota Center for Fiscal Excellence (MCFE) found the omnibus tax bill, House File 1, modifies the tax code to cut general fund collections by $451.5 million. The bill also increases tax credit spending by $196.6 million, providing taxpayers with $648.1 million of total tax relief.

“Primary ‘winners’ for 18-19 are seniors on Social Security ($117.2 million), owners of lower valued business property ($95.5 million), indebted college students and college saving parents ($70 million), counties and cities ($40.5 million in general purpose aids), families with child or dependent care expenses ($35.8 million), and farmers supporting school construction ($35.5 million),” MCFE said in its analysis.

H.F. 1 is a slimmed down version of a $1.15 billion tax-cutting plan passed by the Legislature last week and vetoed by Dayton. The bill passed the House and the Senate during a one-day special session ordered by Dayton. The House approved H.F. 1 by a vote of 102-31. The Senate signaled support by a vote of 44-20.

Online Marketplace

H.F. 1 features a new marketplace provider provision, expanding the definition of a “retailer maintaining a place of business in the state” to include retailers with third-party affiliates operating in the state under the retailer’s authority to facilitate or process sales.

Retailers would be obligated to collect and remit taxes to the commissioner for all facilitated sales unless they fall under an exemption. Retailers with in-state taxable retail sales less than $10,000 annually are exempt if they maintain a place of business solely though sales on marketplace platforms.

A growing number of states are mulling plans to tax marketplace providers to capture sales made through third parties on their platforms—just this year, at least five states have proposed measures to impose collection obligations on marketplace providers.

However, Minnesota would be the first state to enact a law holding them liable for tax on in-state sales facilitated through their platforms. Still, many expect this approach will have mass appeal for states in due time. New York’s bill already died this session, but a similar bill is moving in Texas and Louisiana.

Closing Loopholes

In addition, H.F. 1 makes adjustments to close off three “corporate tax loopholes” identified by Dayton. The following changes are expected to boost collections by nearly $20 million:

  •  a modification of the definition of financial institutions to ensure noncorporate subsidiaries and affiliates are included in determinations of income and apportionment factors of the business;
  •  an acceleration of individual income tax on installment sales of passthrough entities by nonresidents or by residents moving out of state; and
  •  imposition of the corporate franchise tax on certain insurance companies that don’t meet the federal income definition of an insurance company or that are domiciled beyond Minnesota and in a jurisdiction that doesn’t operate retaliatory tax.

Section 179 Conformity

Mark Haveman, executive director of the MCFE, said H.F. 1 is also noteworthy for provisions removed from the final bill.

An earlier version of the omnibus tax bill, he said, would have brought Minnesota into conformity with Section 179 of the Internal Revenue Code, which permits small businesses to take a depreciation deduction for certain assets in one year, rather than multiple years. According to the Tax Foundation, Minnesota is one of 12 states and the District of Columbia that don’t conform with current federal expensing limits.

Haveman said lawmakers also withdrew a provision directing Minnesota’s revenue department to establish a private letter ruling program. He noted that Minnesota is one of only a handful of states that doesn’t provide taxpayers with letter ruling assistance regarding specific transactions.

Relief Measures

The major relief provisions of H.F. 1 include:

  •  phaseout of income taxation on Social Security income,
  •  credit for contributions to 529 college savings programs,
  •  subtraction for contributions to first-time homebuyer accounts,
  •  subtraction for college graduates paying off student loans,
  •  increase in the dependent care tax credit,
  •  extension of the working family tax credit,
  •  increase in the research credit,
  •  nonrefundable credit for sales of assets to beginning farmers,
  •  nonrefundable credit for beginning farmers who take financial management courses,
  •  credit for teachers completing advanced degrees in their fields of licensure, and
  •  adjusted credit for taxes paid to other states.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of H.F. 1 is at http://src.bna.com/peA.

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State