Course Guide. Basic Sales and Use Tax February 2018

Transcription

1 Course Guide Basic Sales and Use Tax February 2018 This course is an introduction to sales and use taxes in Minnesota. It is designed for business owners, bookkeepers, purchasing agents, and accountants who need a working knowledge of the law and how to meet their obligations.

2 Disclaimer This course guide is for educational purposes only. It is meant to accompany an oral presentation and not to be used as a standalone document. This presentation is based on the facts and circumstances being discussed, and on the laws in effect when it is presented. It does not supersede or alter any provisions of Minnesota laws, administrative rules, court cases, or revenue notices. If you have any questions, contact us at salesuse.edu@state.mn.us, , or (toll-free). Permission of the Minnesota Department of Revenue must be secured before exhibiting, reproducing, distributing or making any other use of any part of this course guide. Produced by the Minnesota Department of Revenue 600 North Robert Street, St. Paul, Minnesota Copyright 2018, Minnesota Department of Revenue, All Rights Reserved ii Course Guide for Basic Sales and Use Tax January 2018

3 Objectives After completing this course, you will be able to: Apply the basic sales and use tax concepts for Minnesota and its local taxing jurisdictions to your business. Recognize the exceptions to the "rule" and the exemptions available. Identify how to use and when to accept an exemption certificate. Distinguish how sales and use tax law applies to different types of businesses and their business activities. Identify the documentation necessary for sales and use tax records and returns. List several resources that answer sales and use tax questions. Agenda Part 1 Part 2 Part 3 Part 4 Part 5 Part 6 Part 7 Part 8 Part 9 Part 10 Housekeeping and Introductions minutes Sales and Use Tax Basics minutes Who Needs to Register? minutes Break minutes Local Taxes minutes When and How to Use Exemption Certificates minutes How Sales and Use Tax Applies to Business Activities minutes Break minutes Managing Your Use Tax Liability minutes Maintaining Your Records... 5 minutes Filing and Payment Instructions... 5 minutes Communicating with the Minnesota Department of Revenue... 5 minutes Financial Consequences of Noncompliance... 5 minutes Course Review minutes TOTAL TIME... 3 hours 30 minutes Course Guide for Basic Sales and Use Tax January 2018 iii

4 Table of Contents Course Guide... i Disclaimer... ii Objectives... iii Agenda... iii Part 1 - Sales and Use Tax Basics... 1 Part 2 - Who Needs to Register?... 8 Part 3 Local Taxes... 9 Part 4 - When and How to Use Exemption Certificates...10 Part 5 - How Sales and Use Tax Applies to Business Activity...13 Part 6 - Managing Your Use Tax Liability...19 Part 7 - Maintaining Your Records...20 Part 8 - Filing and Payment Instructions...21 Part 9 - Communicating with the Department of Revenue...22 Part 10 - Financial Consequences of Noncompliance...24 References...25 iv Course Guide for Basic Sales and Use Tax January 2018

5 Part 1 - Sales and Use Tax Basics Notes: This course was developed as an introduction to sales and use tax laws specific to Minnesota. While the majority of states have sales taxes, what is taxed can vary from state to state. If you feel that you may have tax obligations in other states we ask that you contact the states directly to ask about their laws. We are not able to advise on other state s sales and use tax laws. In this section, we ll discuss some basic definitions and concepts relating to Sales and Use Tax that pertain to all types of businesses. We ll explain how the law applies specifically to various types of businesses in subsequent sections. What is sales tax? Sales tax applies to retail sales of tangible personal property, taxable services, and taxable digital products made in Minnesota. Businesses collect the sales tax due on items and services sold at retail on behalf of the State. Businesses remit sales tax collected when they file their Sales and Use Tax return. Five Categories of Sales In Minnesota, we classify sales into five categories: Real Property, Intangible Property, Services, Tangible Personal Property, and Digital Products. Real Property Intangible Property Services Tangible Personal Property (TPP) Digital Products All sales can be grouped into one of these five categories. As a general rule, Minnesota: taxes broadly on tangible personal property, taxes specifically on services and digital products, and does not tax items that fall under real property or intangible property. What is real property? Real property is generally defined as land or anything attached to land. Examples of real property include buildings, roads, and permanent fencing. Real property is not taxable for sales and use tax purposes. What is intangible property? Intangible property includes stocks, bonds, mutual funds, copyrights, patents, trademarks, and Internet domain names. These are presumed not taxable for sales and use tax purposes. Course Guide for Basic Sales and Use Tax January

6 Notes: What is tangible personal property? Tangible personal property (TPP) is best explained by defining each word separately. Tangible - something that can be seen, weighed, measured, felt, touched, or is perceptible to the senses Personal - any item not incorporated into real property Property - something that is owned or leased All sales of tangible personal property (new or used) are taxable in Minnesota unless a specific exemption applies. Examples of taxable TPP include: Building materials Candy, soft drinks, and prepared food Computer software (prewritten) Office equipment and supplies Machinery, equipment, tools, accessories, appliances, furniture, and fixtures Utilities (e.g. electricity, gas, fuel oil, water, coal, etc.) What are services? Nontaxable services include legal and accounting services, snow removal, and haircuts. Taxable services are specifically identified in the statutes. Therefore, if the type of service is not listed, you can presume it is not taxable. Below is a list of taxable services with the corresponding reference - Sales Tax Fact Sheet (F.S.) or Industry Guide. Admissions to places of amusement (F.S. 123) Admissions to tanning facilities (F.S. 124) Temporary lodging, defined as less than 30 days (F.S. 141) Nonresidential parking service (F.S. 166) Memberships to a sports or athletic facility (F.S. 123) Delivery of aggregate materials, except when used for road construction (F.S. 155) Laundry, dry cleaning, and alteration services (F.S. 120) Motor vehicle washing, waxing, rust proofing, and cleaning services (Motor Vehicle Industry Guide) Commercial and residential building cleaning and maintenance services (F.S. 112) Detective, security, and alarm services (F.S. 114) Pet grooming and kennel services (F.S. 122) Lawn and garden care services (F.S. 121A) Massages not medically prescribed (F.S. 162) Telecommunication services (F.S. 119) Within each of these services there are some activities that are not taxed. For more information, see the fact sheets indicated above and/or industry guides provided on our website. What are digital products? Digital products are goods that exist only in digital form, which means you can access them on a computer, tablet, or cellphone, but you cannot actually hold, touch, or feel them. 2 Course Guide for Basic Sales and Use Tax January 2018

7 These digital products are specifically identified in the statutes as taxable: Digital audio works (e.g. downloaded songs, audio books, and ring tones) Digital audiovisual works (e.g. downloaded movies or streaming of news, sports, or entertainment) Digital books (e.g. novels, biographies, and dictionaries) Digital codes (codes that give the purchaser access to digital products) E-greeting cards Online video and electronic games Notes: If the type of digital product is not listed, you can presume it is not taxable. For more information, see F.S. 177, Digital Products. What are some examples of taxable services in your business? Sales and Use Tax is a Transaction Tax Sales and use tax is a transaction tax. You must look at each transaction to determine its taxability. Each line item on an invoice is considered a separate transaction. Sales Tax is a Trust Tax Sales tax is also a trust tax; this means that customers trust the seller to collect, file, and remit sales tax on behalf of the State of Minnesota. By law, all businesses making taxable sales must: Course Guide for Basic Sales and Use Tax January

8 Notes: What is a sale? For sales and use tax purposes, a sale includes these types of transactions: retail sale, lease, rental, sale to wholesaler, providing a service, or bartering. Barter Providing a service Retail Sale Wholesale Lease Rental What is use tax? Use tax applies to taxable purchases of items and/or services made by a business, or individual, for their own use when no sales tax was charged. Use tax is: Use tax is one of the lines included in the sales tax return. You file use tax with the same frequency as your sales tax returns. For more information, see F.S. 146, Use Tax for Businesses. What is the tax rate? The tax rate is the same for both sales and use tax, and the same exemptions apply. The current state general sales tax rate in Minnesota is %. In addition to the state general sales tax rate, you may also owe local sales or use tax. We will cover local taxes in more detail in the Local Taxes section of this course. How do I determine what taxes apply to the sale? Sourcing determines where a sale takes place and which taxes are imposed on the sale. The general sourcing rules have an order. Start with rule 1. If it does not apply, go to rule 2. When rule 2 does not apply, go to rule 3. There are five general sourcing rules but the majority of sales fall into rule 1, 2, or 3. Note: For more information on sourcing rules, see Minnesota Statutes (M.S.) 297A.668 and 297A Course Guide for Basic Sales and Use Tax January 2018

9 Sourcing rules for leases or rentals of TPP For a lease or rental that requires recurring periodic payments, the first payment is sourced according to the general sourcing rules explained earlier. Notes: Any subsequent payments are sourced to the primary property location, which is where the item is normally located. What is the sales price? The sales price is the total of all charges that are the condition of the sale. This includes: retail price of a good or service fabrication labor delivery charges installation labor taxes that are the obligation of the seller tips added to the bill by the seller service charges all other charges that are a condition of the sale Sales price does not include: credit allowed for trade-in term discounts cash discounts taxes legally imposed on a consumer interest charges finance charges from an extension of credit coupons unless reimbursed by a 3 rd party Here s an example that shows the difference in coupons. If a coupon is reimbursed by a third party (e.g. manufacturer s coupon), apply the tax before the coupon is subtracted from the total. If the coupon is the retailer s coupon, subtract the coupon from the sales price, and then apply tax. For more information, see F.S. 167, Coupons, Discounts and Other Forms of Payment. Course Guide for Basic Sales and Use Tax January

10 Notes: Labor Types We commonly refer to four types of labor. Repair labor restoring an item so that it can be used for its original purpose. Construction labor permanently attaching an item or materials to a building or real property. Fabrication labor making or creating a product or altering an existing product into a new or changed product. Installation labor - setting an item into position, or to connect, adjust, or program it for use. The purpose of the labor determines the taxability. Type of Labor Examples Is it taxable? Repair labor Car repair Equipment repair Calibrating equipment Sharpening tools Construction labor Build an office building Kitchen remodel Fabrication labor Custom sawing Bending sheet metal Installation labor Computer equipment Modular furniture For details, see F.S. 152, Labor Installation, Fabrication, Construction, and Repair. When are repair and maintenance contracts taxable? This section explains the sales tax treatment of optional maintenance and warranty contracts on equipment. The determination as to whether a contract is a maintenance contract or a warranty contract is not necessarily based on the title of the contract. Instead, the determination is made based on the substantive provisions of the contract. For more information, see Revenue Notice (R.N.) Type of Contract Optional maintenance contracts (bundled one nonitemized price) Optional maintenance contracts (unbundled separate itemized prices) Extended warranty contracts Is the contract taxable? Yes. Tax is due when the contracted maintenance is sold. No. The service provider charges sales tax to the customer on the taxable items when the repair is performed. No. The service provider owes tax on the parts provided under the contract. Note: Maintenance contracts on computer software are governed by Minnesota Rule (Rule) and will be covered separately. Optional maintenance contracts A maintenance contract is a contract for service or repair of equipment. These contracts may be sold for one nonitemized price (bundled) or sold for separate, itemized prices (unbundled). Optional maintenance contracts are taxable if they include any taxable items, unless the cost of those items is insignificant. Sales tax is due when the contract is sold, not when the maintenance is performed. 6 Course Guide for Basic Sales and Use Tax January 2018

11 Extended warranty contracts A warranty contract is a contract that acts like insurance against future unexpected costs to repair tangible personal property. Under this type of contract, neither the customer nor the seller knows at the time the contract is signed whether any tangible personal property will be used under the contract. The sale of an extended warranty is not taxable. However, sales or use tax does apply to parts used for contracted repairs. The following examples will tell you when tax is due and who pays it. If the warranty states No cost to the customer for parts The customer is responsible for a percentage of parts and labor The customer pays a deductible for parts or labor Then you must The service provider pays sales or use tax on their cost of the parts. The customer pays sales or use tax on the amount for parts only. The service provider pays sales or use tax on their cost of the parts. The deductible payment is not taxable. Notes: Maintenance agreements for prewritten computer software A maintenance agreement for a prewritten computer software program may or may not be taxable depending on the conditions of the agreement. Details of agreement Taxability of agreement Required by vendor The entire charge is taxable Includes only upgrades or enhancements The entire charge is taxable Optional and includes upgrades, enhancements and 20% of the charge is taxable support services Optional and includes support services only Not taxable For more information, see F.S. 134, Computer Software or Rule Course Guide for Basic Sales and Use Tax January

12 Notes: Part 2 - Who Needs to Register? You must register if you: Make taxable sales in Minnesota Make purchases subject to use tax This includes businesses outside of Minnesota who have nexus in Minnesota. Sellers with nexus in Minnesota who make sales over the Internet must charge sales tax on sales to customers located in Minnesota. What is nexus and what types of activities create it? Nexus is defined as a connection, tie, or a link. For sales and use tax purposes, common situations that create nexus for a business are: Having any portion of your business physically located in Minnesota Performing services in Minnesota Repairing or installing tangible personal property in Minnesota Participating in conventions and/or trade shows in Minnesota Having an agent, sales rep, solicitor, or affiliated company in Minnesota Performing construction work in Minnesota Delivering tangible personal property into Minnesota in your own vehicle Leasing or renting tangible personal property located in Minnesota It is the department s position that a business has sufficient nexus for the following year if it conducts business activity in Minnesota on at least four days during a 12- month period. However, if the taxpayer makes retail sales while in the state, those sales are subject to sales tax (regardless of whether they meet the 4-day rule.) Note: For more information on nexus, see M.S. 297A Course Guide for Basic Sales and Use Tax January 2018

13 Part 3 Local Taxes Notes: Many cities and counties have additional local sales taxes. These local taxes are added to the state general sales tax rate to compute the total tax rate. City tax County tax Special local tax(es) Motor vehicle $20 excise tax By law, the Department of Revenue must administer all local general sales and use taxes. See our website or F.S. 164, 164M, and 164S for in depth information on when to charge local sales and use taxes and the applicable rates. In addition to fact sheets, we also provide a variety of other local tax information on our website including: General Notices How to start a local tax Local tax fact sheets Local Tax ZIP codes Sales and Use tax rate calculator Rate Charts Tax Type Codes Tax Rate combinations The Department also has an interactive tool on our website that provides the state and local general sales and use tax rates that apply to sales made to specific locations in Minnesota. What is the name of this interactive tool? Note: You must enter the 9-digit ZIP code of the location of the sale and the date of the sale in order for it to work properly. If you do not know the 9-digit ZIP code, you can enter the complete address, which will access the database and return a 9-digit ZIP code along with the applicable tax rates for the effective period. Course Guide for Basic Sales and Use Tax January

14 Notes: Part 4 - When and How to Use Exemption Certificates Do I need an exemption certificate? All sales of tangible personal property and taxable services are taxable unless: The item is exempt by Minnesota Statutes, or The purchaser provides the seller with a completed Form ST3, Certificate of Exemption. Product-based Exemptions The product-based exemptions are items specifically identified in the statutes as exempt and do not require the purchaser to supply the seller with an exemption certificate. Please keep in mind that within each broad category of goods, there are taxable and nontaxable items. Common examples of product-based exemptions are: Food (grocery items) for human consumption (F.S. 102A) Clothing for general use (F.S. 105) Prescription and over-the-counter drugs for humans (F.S. 117A) Publications sold by subscription (at least four publications per year) Entity-based Exemptions Entity-based exemptions are available to a variety of agencies and organizations. While some entities are exempt by statute and are not required to supply the seller with an exemption certificate, most need to complete an exemption certificate and give it to their supplier indicating the reason they are not taxable. Examples include: Type of Entity Examples Exemption certificate required? Federal government agencies U.S. Department of Labor U.S. Department of Justice No, they may use a purchase order, payment voucher, or work order Tribal governments State government agencies Local government agencies Exempt organizations Red Lake Band of Chippewa Indians Prairie Island Sioux MN Department of Commerce MN Department of Revenue City of St. Paul Hennepin County I.S.D. 535 Long Lake Township Churches, synagogues and mosques Scouts and youth groups No, they may use a purchase order, payment voucher, work order, or exemption letter from the MN Dept. of Revenue. No, they may use a purchase order if it contains all the equivalent information. Yes Yes 10 Course Guide for Basic Sales and Use Tax January 2018

15 Use-based Exemptions If a business buys items that will be put to a nontaxable use, the transactions must be supported by completed exemption certificates to show why they are not taxable. Examples of use-based exemptions include: Advertising materials shipped out of state Inventory purchased for resale Items consumed in performing a taxable service Items used or consumed in agricultural production Materials used or consumed in the manufacturing process Notes: If the purchaser does not give the seller a completed exemption certificate, the seller must collect sales tax. Authorization letters and permits Businesses claiming these exemptions must complete an exemption certificate: Direct Pay Exempt Status (nonprofit exemption) Motor Carrier Direct Pay Resource Recovery Facility Different Types of Exemption Certificates The Department of Revenue accepts the following: Certificate of Exemption, Form ST3 Certificate of Exemption, Form F0003 (Streamlined Sales Tax form) Uniform Sales and Use Tax Certificate (Multistate Tax Commission form) Other states exemption certificates, if all required elements are included Self-prepared exemption certificate, if all required elements are included Complete Exemption Certificates Required elements for a complete exemption certificate: Purchaser s Responsibilities The purchaser is required to: Know if they qualify to claim an exemption Complete an exemption certificate Give it to the seller at the time of purchase Pay any use tax, penalty, and/or interest if used incorrectly Course Guide for Basic Sales and Use Tax January

16 Notes: Seller s Responsibilities You should review all exemption certificates and verify: All required fields are complete. That the certificate is signed Exemption certificate tips: Do not accept an exemption certificate that is not complete. Never accept a tax ID number alone. Never accept a copy of the purchaser's sales tax confirmation letter or permit instead of an exemption certificate. Keep completed exemption certificates as part of your business records. Do not unlawfully solicit exemption certificates 12 Course Guide for Basic Sales and Use Tax January 2018

17 Part 5 - How Sales and Use Tax Applies to Business Activity Notes: In this section, we will review several different types of business activities and how Minnesota sales and use tax laws applies to each of them. We will discuss these business activities: Governmental agencies federal, state, and local Non-profit organizations Contractors Retailers Service providers Manufacturers Agricultural producers Government Agencies Collect sales tax on taxable goods and services sold Determine taxability of purchases of taxable goods and services based on type of government: Federal government agencies are not taxable Tribal governments are not taxable State agencies are taxable (use direct pay authorization) Cities, counties, and townships are not taxable (exceptions apply) Purchases made by government employees are taxable unless paid for directly by the government agency Purchases of prepared food, lodging, and motor vehicles are taxable (except by federal government) Other states or political subdivisions of other states may qualify for an exemption For more information, see F.S. 142, Sales to Governments, F.S. 160, Tribal Governments and Members, or one of these industry guides: Government Federal and Foreign Diplomats, Government Local Governments, or Governments State Agencies. Nonprofit Organizations It s possible for an organization to obtain federal nonprofit status but not qualify for sales tax exempt status. Examples of nonprofit organizations that qualify for sales tax exemption include: Charitable (Federal 501(c)(3) organizations) Religious Educational Nonprofit organizations must apply for nonprofit status with the State of Minnesota. Most nonprofit organizations use Form ST16 to apply for Sales and Use Tax exempt status; nursing homes and boarding care homes use Form ST16A. Course Guide for Basic Sales and Use Tax January

18 Notes: Nonprofit organizations: Collect sales tax on taxable goods and services sold, unless the fundraising exemption applies Do not pay sales or use tax on purchases used to further the nonprofit s activities Pay sales tax on the following: Lodging Motor vehicles Prepared food Purchases made by employees unless paid for directly by the nonprofit For more information regarding nonprofit organizations, see F.S. 180, Nonprofit Organizations and Fundraising, or the Nonprofit Organizations Industry Guide. Contractors A contractor is someone who: Supplies labor and materials Constructs, alters, repairs, or improves real property Is the end user of the materials and equipment The following purchases are taxable: Building materials and supplies, unless an exemption applies for the job* Construction equipment and tools Business assets and office supplies * If the job is not exempt by statute, the contractor needs a valid purchasing agent agreement (see F.S. 128, Contractors) in order to buy the building materials exempt. For sales and use tax purposes, real property includes: Land Permanent buildings and structures Improvements and fixtures incorporated into a building or structure given its current use intended to be of a permanent benefit cannot be removed without causing substantial damage to the building or structure Exception: Real property does not include tools, implements, machinery, and equipment attached or installed into real property that qualify for exemption under section 297A.68 (for example capital equipment used in manufacturing to produce a product ultimately sold at retail.) Note: For more information, see R.N , Distinguishing Between Real Property and Tangible Personal Property. Sales of real property or improvements to real property are not taxable in Minnesota. Examples of real property include: Commercial and residential buildings Drywall, flooring, and roofing materials incorporated into real property Landscaped lawns and gardens Roads, bridges, and railroad tracks 14 Course Guide for Basic Sales and Use Tax January 2018

19 Retailers Retailers sell TPP to businesses and individuals. They must collect sales tax on goods they sell.* Their inventory bought for resale is not taxable.* Their purchases of business assets and office supplies are taxable. They are responsible for paying use tax on goods taken out of inventory for their own use. Notes: * The seller must charge tax unless the item is specifically exempt by law or they have a completed exemption certificate on file (if the sale is sourced to Minnesota and the seller has nexus here.) For more information, see the Retailers and Wholesalers Industry Guide. Contractor/Retailer If you do not know how the items will be used when you buy them, you must determine your primary business activity. Primarily a contractor - at least 50 percent of your business purchases are used for construction activities Primarily a retailer - at least 50 percent of your business purchases are sold at retail. If you are primarily a contractor: Pay tax on all your purchases. Charge sales tax on the actual sales price (including your mark-up). Deduct the cost of the materials on which you already paid tax when you file your sales and use tax return. Note: The $50 purchase amount from the contractor s original invoice is not recorded on your return. This is an example only. Report total taxable sales on the return. If you are primarily a retailer: Buy the items exempt for resale. Pay use tax on your cost of the materials if any of the items are later used in a construction contract. For more information on how to report your sales and use tax liability under these circumstances, see F.S. 128, Contractors. Course Guide for Basic Sales and Use Tax January

20 Notes: Service Providers The majority of sales made by service providers in Minnesota are not subject to sales tax. However, Minnesota does tax some services. Nontaxable Service Providers Examples include: Accountants Attorneys Banks Consulting firms Counselors Health care providers Nontaxable service providers: The majority of services offered by these businesses are not taxable. Sales of TPP made by a service provider are taxable. Purchases of business assets and office supplies are taxable. For more information, see the Professional Services Industry Guide. Taxable Service Providers Taxable services are specifically identified in the statutes. Examples include building cleaning services, security and alarm services, laundry services, lawn mowing services, motor vehicle towing, and telecommunication services. We have fact sheets available for each of the taxable services that explain: The majority of sales are taxable (see fact sheets for exceptions). Materials used or consumed in providing the service may qualify for exemption. Short-lived detachable tools may qualify for exemption. Machinery and equipment used in providing the services are taxable. For more information, see the Personal Services Industry Guide. Manufacturers Manufacturers are involved in industrial production, which is the process of taking raw materials and creating a product to be sold ultimately at retail. The industrial production process includes: Design, Research and Development for production of a product Removal of raw materials from stock to begin production activities Actual production activities that affect changes to produce the product Testing and quality control of the product Placement of the product in finished goods inventory 16 Course Guide for Basic Sales and Use Tax January 2018

21 Purchases Made by Manufacturers Business assets and office supplies are taxable (see capital equipment section for exceptions) Returnable packaging is taxable Product packaging and other nonreturnable packaging is not taxable* Raw materials, chemicals and utilities used or consumed in production are not taxable* Separate detachable tools and special tooling are not taxable* Notes: * The purchaser must provide the seller with a completed exemption certificate for these items. Capital Equipment Some purchases by manufacturers qualify for the capital equipment exemption. Upfront exemption for capital equipment available (effective July 1, 2015) Machinery and equipment may qualify as capital equipment if: used in Minnesota and essential to the integrated production process To request a refund of taxes paid, you may file an ST11, Sales and Use Tax Refund and Multi Period Amended Return. For more information on exemptions available to manufacturers, see F.S. 103, Capital Equipment, F.S. 129, Utilities Used in Production, and F.S. 145, Industrial Production. Agricultural Producers Agricultural production includes the following activities when they result in a product that will ultimately be sold at retail: Agriculture (the planting, raising, and harvesting crops or rearing, feeding, and managing animals) Aquaculture (cultivating plants and animals in the water) Floriculture (cultivating flowering plants) Horticulture (cultivating fruits, vegetables, and plants) Silviculture (the care and cultivation of forest trees) Purchases made by Ag Producers Feed, seed, fertilizers, and herbicides are not taxable. Fuels, electricity, gas, and steam used or consumed in agricultural production are not taxable. Packaging materials used to package food products are not taxable. Farm machinery is not taxable. Returnable containers used to package non-food items are taxable. For more information, see F.S. 100, Agricultural Production, and F.S. 106, Farm Machinery, and the Agricultural and Farming Industry Guide Course Guide for Basic Sales and Use Tax January

22 Notes: Sales and Use Tax is a Transaction Tax Businesses routinely buy and sell both taxable and nontaxable goods and services. Buyers and sellers have the responsibility to review each transaction to determine the taxability. Transaction Tax - Seller The seller must look at each transaction. A general contractor rents equipment (without an operator) to a subcontractor. A wholesaler makes a retail sale to an employee. A farm implement dealer sells equipment to a contractor. An accounting firm sells software to a client. A lawn care business provides snow removal services in the winter. Transaction Tax - Purchaser The purchaser must look at each transaction. A general contractor buys materials for a tax-exempt job. A retail electronics store buys taxable office supplies. A manufacturer buys utilities to heat their facility. A farmer buys tires for a tractor. A building cleaning company buys vacuum cleaners. 18 Course Guide for Basic Sales and Use Tax January 2018

23 Part 6 - Managing Your Use Tax Liability Notes: Use tax is the complement to sales tax; you pay use tax when you did not pay sales tax on an otherwise taxable item. Based on our research and audit experience, most businesses have a use tax liability. Therefore, it is very important that you understand when to self-assess use tax and how to record and pay your liability. What is the basis for use tax? Use tax is based on your purchase price of taxable items or services. This is true whether you buy items: for your own business use without paying sales tax, take them out of inventory and use them in a taxable manner, or donate them to a charitable organization. Items to Look for When Reviewing Invoices Review every invoice before you pay it. Determine if items on the invoice are taxable. Watch for taxable items purchased with an exemption certificate. Watch vendor changes (e.g. personnel changes or new computer system). Never add use tax to a vendor payment; always self-assess the tax and remit it directly to the Department of Revenue. Record the amount of use tax accrued on the actual invoice. What is the use tax rate? The rate for use tax is identical to the rate for sales tax. Currently, the general rate in Minnesota is percent. In some cases, the applicable rate may be higher as some cities and counties have an additional use tax. (For more information on local taxes, see Part 3 Local Taxes or F.S. 164, 164M and 164S). What is a variable rate credit? Minnesota allows a credit for the amount of sales tax paid to another state Must be legally due to the other state to receive credit Recording your use tax liability Record this information: Keep a copy of the backup documentation. Course Guide for Basic Sales and Use Tax January

24 Notes: Part 7 - Maintaining Your Records Good recordkeeping is essential in business. The records you keep depend entirely on the nature of your business and the amount of detail you need. Recordkeeping Basics Use a recordkeeping system that: Incorporates Generally Accepted Accounting Principles (GAAP) Allows you to keep track of the data you need Does not require an excessive amount of time Works for you and your business Record each transaction the same Do not mix personal and business transactions Do not mix records if you have more than one business Choose the appropriate accounting method Cash Basis vs. Accrual Basis Record income when actually received Report sales tax when actually received Report use tax when invoice is paid Record income when sales are made Report sales tax when sales are made Report use tax based on the invoice date 20 Course Guide for Basic Sales and Use Tax January 2018

25 Part 8 - Filing and Payment Instructions Notes: What must I do to avoid late filing and late payment penalties? You must do two things to avoid late filing and/or late payment penalties: 1. File your return electronically by the due date. (either online or by telephone) 2. Pay your sales and use tax liability electronically or by check on or before the due date. Note: Some taxpayers are required to pay electronically; you will be notified of this requirement by mail. How often do you file? How often you need to file depends on your total tax liability averaged over the course of a year. Filing Frequency Average Tax Liability Due Date? Monthly filers Quarterly filers Annual filers More than $500 per month (more than $6,000 per year) Less than $500 per month (less than $6,000 per year) Less than $100 per month (less than $1,200 per year) How do you file electronically? 20th day of the following month 20th day of the month following the end of the quarter (April 20, July 20, October 20, and January 20) February 5 of the following year is the online filing system for the Minnesota Department of Revenue. If you already have an account, enter your Username and Password, and select Logon. If you do not have an account, select sign up for Minnesota e-services. There are links to retrieve a forgotten password or username. Do I need to file an amended return? Common reasons you may need to file an amended return are: Reported too much or too little tax on your original return Reported the tax on the wrong tax line Course Guide for Basic Sales and Use Tax January

26 Charged tax incorrectly to a customer and have refunded the tax to the customer Received a completed exemption certificate from a customer (you reported the tax in a prior period and have since refunded the tax to your customer) Note: Do not file an amended return for tax paid to a vendor in error. Part 9 - Communicating with the Department of Revenue Sales and Use Tax Contact Information Questions relating to Sales and Use Tax Law? salesuse.tech@state.mn.us Questions relating to your Sales and Use Tax account activity? salesuse.tax@state.mn.us Prefer telephone assistance? Call: or (toll-free) Other Contact Information Business Income Taxes businessincome.tax@state.mn.us Call: Withholding Tax withholding.tax@state.mn.us Call: or (toll-free) Business Registration Business.Registration@state.mn.us Call: or (toll-free) Minnesota Department of Revenue Website revenue.state.mn.us GovDelivery Messages Subscribe to updates on sales and use tax law changes, rules, fact sheets, and other related information. Choose the updates you want - by tax type and publication type Choose the frequency of notifications Social Media Connect with us on social media: Subscribe to our videos on YouTube Follow us on Twitter Follow our Facebook updates 22 Course Guide for Basic Sales and Use Tax January 2018

27 Find employment opportunities on Linked In Course Guide for Basic Sales and Use Tax January

28 You can update your business information on e-services when you file your return or you can visit our website or call our Business Registration phone number at if you have changes. Please notify us if you have changes to any of the following: Mailing address(es) Business location(s) Legal organization NAICS code Contact information Owners and/or officers If you receive a letter or bill from the Department of Revenue, please respond. 24 Course Guide for Basic Sales and Use Tax January 2018

29 Part 10 - Financial Consequences of Noncompliance Penalties There are various civil and criminal penalties that may apply to sales and use tax returns in addition to late file and late payment penalties (see M.S and 289A.63 for more information). Days Late Late Filing Penalty (M.S. 289A.60, Subd. 2) Late Payment Penalty (M.S. 289A.60, Subd. 1) 1-30 days 5 percent 5 percent days 5 percent 10 percent 60+ days 5 percent 15 percent Note: The maximum combined late file and late payment penalty is 20 percent. Interest Rate The interest rate is currently %. The annual interest rate for a calendar year must be determined by October 15 of the previous year. The interest rate is equal to the prime rate charged by banks during the six-month period ending on September 30 of that year, rounded to the nearest full percent (M.S. 270C.40, Subd. 5) Collection Tools The Department of Revenue also commonly uses several collection tools to ensure businesses comply with their sales and use tax obligations. Levies License revocation Liens Property seizures Revenue recapture Course Guide for Basic Sales and Use Tax January

30 References Minnesota Statutes M.S. 270C.40, subd. 5, Annual Interest Rate M.S. 289A.60, Civil Penalties M.S. 289A.63, Criminal Penalties M.S. 297A.66, Jurisdiction to Require Collection and Remittance of Tax by Retailer M.S. 297A.668, Sourcing of Sale; Situs in this State M.S. 297A.669, Telecommunications and Related Services Sourcing Minnesota Rules Rule , Computer Software Revenue Notices R.N , Distinguishing Between Real Property and Tangible Personal Property R.N , Optional Warranty and Maintenance Contracts on Equipment Sales Tax Fact Sheets 100, Agricultural Production 102A, Food and Food Ingredients 102B, Candy 102C, Soft Drinks and Other Beverages 102D, Prepared Food 102E, Dietary Supplements 103, Capital Equipment 105, Clothing 106, Farm Machinery 108, Logging Equipment 109, Printing Industry 110, Items for use Outside Minnesota 111, Schools-Sales and Purchases 112, Building Cleaning and Maintenance 114, Detective and Security Services 115, Food Stamps 116, Petroleum Products 117A, Drugs 117B, Durable Medical Equipment 117C, Mobility Enhancing Equipment 117D, Prosthetic Devices 117E, Health Product Exemption 117F, Grooming and Hygiene Products 118, Hospital and Nursing Home Meals 119, Telecommunications, Pay Television, and Related Services 120, Laundry and Cleaning Services 121A, Lawn and Garden Maintenance, Tree and Shrub Services 121B, Landscaping Construction Contracts 121C, Nursery and Greenhouse Production 122, Pets and Pet Grooming, Boarding and Care Services 123, Admissions and Amusement Devices 26 Course Guide for Basic Sales and Use Tax January 2018

31 124, Exercise Facilities and Health Clubs 126, Meat Processors 128, Contractors 129, Utilities Used in Production 130, Aquaculture Production Equipment 132, Isolated and Occasional Sales 133, Advertising 134, Computer Software 135, Fire Fighting, Police, and Emergency Equipment 137, Restaurants and Bars 138, Financial Institutions 139, Libraries 140, Minnesota State Fair-Sales Tax 141, Hotels and Lodging Facilities 142, Sales to Governments 144, Veterinary Practice 145, Industrial Production 146, Use Tax for Businesses 147, Mining - Metals, Minerals, Ores, and Taconite 148, Selling Event Exhibitors and Operators 150, Manufactured Homes, Park Trailers and Modular Homes 151, Chiropractors 152, Labor Installation, Fabrication, Construction, and Repair 153, Loggers and Log Home Builders and Sellers 154, Arts and Crafts 155, Delivery Charges 156, Use Tax for Individuals 157, Residential Utilities 158, Vending Machines and Other Coin-Operated Devices 160, Tribal Governments and Members 162, Massages 163, TV Commercials 164, Local Sales and Use Taxes 164M, Minneapolis Special Local Taxes 164S, Special Local Taxes 165, Funeral Homes, Mortuaries, Crematories and Cemeteries 166, Parking Services 167, Coupons, Discounts and Other Forms of Payment 168, Direct Selling Companies 169, Photography and Video Production 172, Health Care Facilities 173, Direct Mail and Fulfillment Services 175, Dentists 176, Local Governments- Cities, Counties, and Townships 177 Digital Products 179, Prepaid Wireless E911 and TAM Fees 180, Nonprofit - Organizations and Fundraising Course Guide for Basic Sales and Use Tax January

32 Sales and Use Tax Industry Guides Aircraft Agricultural and Farming Chiropractors Dentists Food and Bar Establishments Government - Federal and Foreign Diplomats Government - Local Governments Government - State Agencies Hotels and Other Lodging Establishments Liquor Stores and Liquor Distributors Motor Vehicle Motor Vehicle Repair Nonprofit Organizations Off-Road Vehicle Personal Services Photography Professional Services Retailers and Wholesalers Transportation Service Providers Video Production Sales and Use Tax Forms Form ST3, Certificate of Exemption Form ST11, Sales and Use Tax Refund Request and Multiple Period Amended Return Form ST16, Application for Nonprofit Exempt Status-Sales Tax Form ST16A, Application for Sales Tax Exemption for Nursing Homes and Boarding Care Homes Form F0003, Certificate of Exemption (Streamlined Sales Tax form) Uniform Sales and Use Tax Certificate (Multistate Tax Commission form) 28 Course Guide for Basic Sales and Use Tax January 2018