Minnesota First to Enact Online Marketplace Tax

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 Gov. Mark Dayton (DFL) blasted Republicans for jamming tax breaks and a “poison pill” provision into a revenue and tax reform bill May 30, but said he would allow the measures to become law.

Dayton said he would permit the tax bill, House File 1, to become law without his signature, but suggested lawmakers remedy several problems during a special legislative session. H.F. 1, part of Minnesota’s $46 billion 2018-19 biennial budget, features $650 million in tax relief over two years and imposes first-in-the-nation sales tax collection duties on electronic marketplace providers.

Dayton vigorously objected to last-minute tax provisions added to H.F. 1 by Republican lawmakers, who control both the House and Senate. Dayton was particularly irked by poison-pill language that would eliminate all funding for the Department of Revenue during the biennium if the tax measure isn’t enacted.

“I consider this provision, snuck into the state government bill without my knowledge, to be a reprehensible sneak attack, which shatters whatever trust we achieved during the session,” Dayton wrote in a letter to the Legislature.

Marketplace Providers ‘Agents’

H.F. 1 breaks new ground nationally with language imposing sales and use tax collection duties on marketplace providers including Amazon Inc., eBay Inc. and Etsy Inc. Such online retailers sell their own goods and services, but also provide their platforms to millions of other sellers. In 2015, Amazon revealed it has more than 2 million sellers worldwide, accounting for 40 percent of its sales volume.

“Basically we are saying, you’re an agent,” said Pat Dalton, a House legislative analyst. “If you are allowing somebody to sell on your site here in Minnesota, and you have a physical presence in Minnesota, you are an agent for them in Minnesota.”

H.F. 1 expands 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 state revenue department 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 through sales on marketplace platforms.

H.F. 1 creates two possible effective dates. The marketplace provider requirements would become effective on July 1, 2019, or sooner if the U.S. Supreme Court modifies its 1992 ruling in Quill Corp. v. North Dakota, which limited the ability of states to collect sales tax to those taxpayers with an in-state physical presence. Several states are pushing litigation now they hope will reach the highest court.

At least five states have mulled plans this year to tax marketplace providers to capture sales made through third parties on their platforms. Minnesota, however, is the only state to enact such provisions.

Seniors, Students

H.F. 1 features several tax relief mechanisms benefiting senior citizens, students and middle-income families. Provisions in the bill would:

  •  phase out income taxation on Social Security income,
  •  create a credit for contributions to 529 college savings programs,
  •  create a subtraction for contributions to first-time homebuyer accounts,
  •  create a subtraction for college graduates paying off student loans,
  •  increase the dependent care tax credit and
  •  extend the working family tax credit.

The law also includes provisions to help the Major League Soccer club Minnesota United build a privately financed, $150 million stadium in St. Paul.

Benefits to Special Interests?

Dayton called on lawmakers to remedy three portions of H.F. 1 that he characterized as special legislation benefiting wealthy taxpayers, big businesses and special interests:

  • Tobacco. Dayton objected to the elimination of the “inflator” on cigarette taxes and a tax break on premium cigars.
  • Property Taxes. Dayton said he favors tax relief on commercial/industrial property through an exclusion on the first $100,000 in value. But he criticized lawmakers for granting a long-term freeze on the levy amount, creating a $1 billion tax giveaway to businesses over 10 years.
  • Estate Taxes. Dayton objected to a $1 million hike in the estate tax exemption. Minnesota already has a $2 million exemption on most estates and a $5 million exemption for farmers and family-owned businesses. He said the higher exemption would cost Minnesota nearly $35 million in the 2018-19 biennium and $74.5 million for the next biennium.

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

A summary of H.F. 1 is at http://src.bna.com/po0.

Dayton's letter to the Legislature is at http://src.bna.com/po1.

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