Minnesota has had a number of important business tax developments. On May 24, 2023, Minnesota Gov. Tim Walz signed House File 1938, which makes significant changes to tax provisions affecting C corporations and pass-through entities. In addition, a recent decision by the Minnesota Tax Court narrows the scope of immunity for out-of-state businesses that operate digitally.
The new law
C corporations
Along with updating Minnesota’s IRC conformity to May 1, 2023, including the SECURE 2.0 Act of 2022 (SECURE 2.0), the new law also contains many revenue raising provisions affecting corporate taxpayers that are effective for tax years beginning after Dec. 31, 2022, including:
- Reduction of the net operating loss limitation from 80% to 70%.
- Reduction in the dividends received deduction (DRD) percentages. The DRD percentage for dividends received by a corporation owning 20% or more of stock of another corporation is reduced to 50% from 80% under prior law, and the DRD percentage for dividends received by a corporation owning less than 20% of the stock of another corporation is reduced to 40% from 70% under prior law.
- Changes in Minnesota’s treatment of global intangible low-taxed income (GILTI) regime, including:
- Conforming to the federal tax treatment of GILTI income, but not the IRC Section 250 deduction.
- Repealing the GILTI-related income tax subtraction modifications.
- Clarifying that GILTI income will be treated as dividend income for purposes of the Minnesota DRD and sales apportionment factor.
Crowe observation
As these changes apply to the 2023 calendar year, taxpayers will need to consider the impact on 2023 estimated tax payments and financial statements.
Pass-through entity tax (PTET)
Minnesota previously enacted a PTET that was available for entity tax years beginning after Dec. 31, 2020. The new law makes several changes to the Minnesota PTET applicable to tax years beginning after Dec. 31, 2022, including:
- Allowing a partial election into the PTET
- Requiring 100% allocation to Minnesota for resident partners included in the PTET
- Removing the requirement that one qualifying owner must be subject to the federal state and local tax deduction limitation
- Allowing PTET paid to another state to qualify for the Minnesota credit for taxes paid to another state
- Allowing a single-member limited liability company to be eligible for the PTET if the entity is taxed as a partnership or an S corporation
- Requiring partnerships with federal audit adjustments to file an amended Schedule PTE to report those adjustments
Immunity under PL 86-272
The Minnesota Tax Court issued an opinion that limits the immunity from net income tax for out-of-state business under PL 86-272. PL 86-272 generally provides business taxpayers immunity from state net income taxes if the only activity in a given state is the solicitation of sales of tangible personal property or activities that are directly related to the solicitation of such sales.
In Uline, Inc. v. Commissioner of Revenue, the Minnesota Tax Court held that Uline’s sales representatives that collected and reported data used by other departments of the company were not eligible for immunity from net income taxes because their activities were conducted on a biweekly basis and the data collected was used throughout Uline’s organization and was regular and systematic and not de minimis. Uline is an S corporation headquartered in Wisconsin that distributes packaging materials to customers nationwide. The taxpayer did not maintain a physical place of business in Minnesota and had no personnel inside the state aside from sales personnel, the occasional presence of non-sales employees, and an owner working from home in the state.
The Uline case is an example of a recent trend in states looking to expand nexus thresholds or limit the applicability of PL 86-272. After the U.S. Supreme Court’s decision in South Dakota v. Wayfair in 2018, states have tried to apply the expanded sales tax nexus decision to income taxes. In recent years, many states have established factor presence nexus thresholds to further this objective. In 2021, the Multistate Tax Compact issued a revised statement on PL 86-272 to expand the list of unprotected activities that would not be eligible for immunity.
Crowe observation
With the Uline decision, Minnesota appears to be aggressively challenging PL 86-272 immunity, joining California, New York, and Oregon as states that have placed restrictions on the scope of federal law regarding out-of-state business immunity from state net income taxes.
Looking ahead
C corporations and pass-through entities should consult their tax advisers to understand how the new law affects them. In addition, as states continue to narrow the scope of ancillary activities, taxpayers should consult with their tax advisers to revisit the functions of sales personnel to make sure their activities in states where immunity is claimed does not exceed the state’s interpretation of activities that are ancillary to solicitation of sales.
