Minnesota Enacts Omnibus Tax Package and Retail Delivery Fee Legislation

On May 24, 2023, Minnesota enacted two bills that will have immediate and long-term consequences for taxpayers. The first (H.F. 1938) is comprehensive omnibus tax legislation incorporating several major changes to corporate and individual income tax laws. The second (H.F. 2887) includes funding for the state’s transportation infrastructure. This alert summarizes the most significant tax-related changes in those bills.

H.F. 1938 – Omnibus Tax Legislation 

H.F. 1938 makes several changes to Minnesota’s pass-through entity tax (PTET) election regime for tax years beginning after December 31, 2022. The most important change allows tiered partnerships and partnerships with corporate owners to make the election. Next, for residents of the state who are subject to tax in Minnesota on their worldwide income, the PTET applies to all income earned from an electing partnership, whether sourced to Minnesota or not. The PTET continues to apply to income apportioned to Minnesota for shareholders of an S corporation, even if the shareholder is a Minnesota resident.

The bill also provides that the PTET will expire when the federal limit on the state and local tax deduction expires after 2025. 

Starting in 2024, individuals, estates, and trusts will be subject to a new net investment tax. In general, the tax is 1% of net investment income exceeding $1 million. The term “net investment income” has the same meaning given under Internal Revenue Code Section 1411(c) and includes gross income from interest, dividends, annuities, royalties, and rents; gross income derived from a trade or business in specific circumstances; and net gain attributable to the disposition of property held for investment purposes. For Minnesota residents, the additional 1% tax applies on worldwide net investment income. For a nonresident or part-year Minnesota resident, the tax applies on net investment income apportioned to Minnesota. 

Unless noted, the following corporate income tax updates are effective for tax years beginning after December 31, 2022: 

  • The IRC conformity date is updated to the IRC “as amended through” May 1, 2023, from December 15, 2022. Minnesota will conform to any federal changes effective retroactively to the date they became effective for federal purposes. 
  • The corporate deduction for dividends received (DRD) from another corporation is decreased from 80% to 50% for corporations owned at least 20% and from 70% to 40% for corporations owned less than 20%. 
  • Minnesota previously allowed corporations a subtraction modification equal to 100% of global intangible low-taxed income (GILTI) included in gross income under IRC Section 951A when calculating Minnesota taxable net income. H.F. 1938 repeals the subtraction modification. It defines any amounts included in taxable income pursuant to Section 951A as dividend income and allows corporations a deduction from Minnesota taxable net income, subject to the updated DRD rules.
  • Minnesota’s addition modification for foreign-derived intangible income (FDII) is amended to require the amount of FDII deducted for federal purposes under IRC Section 250 to be added back to Minnesota taxable income.
  • Minnesota previously included an addback requirement for deferred foreign income. The new law updates the definition of deferred foreign income under IRC Section 965 and removes the requirement to add the amount to income subject to Minnesota income tax.
  • The net operating loss deduction allowed in a single tax year is reduced from 80% to 70% of taxable net income.  

H.F. 2887 - Retail Delivery Fee Legislation

Beginning July 1, 2024, a $0.50 fee will be imposed on each qualifying in-state delivery of specific retail items. 

The new fee is imposed on retailers for each transaction totaling at least $100, regardless of the number of items purchased in a single transaction or the number of shipments necessary to deliver the items. It applies to all items defined as clothing under the sales tax statute (excluding cloth and disposable diapers), regardless of whether those items are subject to or exempt from sales tax. It also applies to tangible personal property. The fee does not apply to the pickup of items at a retailer’s place of business, including curbside delivery.

Retailers may collect the delivery fees from buyers if specific requirements are met, including separately itemizing and stating on the invoice that the amount is a “road improvement and food delivery fee.” 

If any items purchased are returned to the retailer, the delivery fee is nonrefundable. (That is quite unlike sales tax, which is generally refunded to the purchaser if items are returned.)  However, if the order is canceled, the delivery fee must be refunded to the purchaser.

Sales tax is calculated on the price of the items purchased excluding the delivery fee. 

The bill provides exemptions for some transactions, including:

  • Deliveries to tax-exempt purchasers. 
  • Deliveries on qualifying motor vehicles. 
  • Deliveries of food and food ingredients or prepared food.  
  • Deliveries from a food and beverage service establishment (regardless of whether the delivery is made by a third party). 
  • Deliveries of drugs and medical devices, accessories and supplies, or baby products.

The bill also exempts from the fee small businesses with retail sales less than $1 million in the previous calendar year or marketplace providers facilitating sales of retailers with sales less than $100,000 in the previous calendar year. If the small business sales thresholds are exceeded, a retailer or marketplace provider has 60 days to begin collecting the delivery fee and remitting it to the commissioner. 

BDO Insights

  • More taxpayers may now be allowed to make the PTET election, and the impact of the election will be larger for partners that are Minnesota residents. However, the election will be short-lived unless the federal cap on state and local taxes is extended beyond 2025. 
  • Minnesota taxpayers may need to model the impact of various changes to the computation of corporate taxable income.   
  • Minnesota is the second state to enact legislation imposing fees on the delivery of some items to buyers located in the state. BDO will continue to monitor this possible trend among U.S. states.