Summary of 2005 Tax Provisions (Note: This document will be updated from time to time. Please check back periodically. Currently updated through 05.10.05.) The following tables summarize selected provisions from 2005 Senate and House tax bills. In addition to items of direct importance to our members, we have included a few items of general interest. Senate File 1209 (Pogemiller, D-Minneapolis) (passed and laid on the table 03/23/05) NOTE: This bill represents the revenue portion of the Senate s Budget Balance Package, which it enacted in late March. The spending portion resides in Senate File 1879, which provides appropriations to keep government operating while making cuts in certain spending. Taken together, Senate File 1209 and Senate File 1879 eliminate the $466 million budget deficit shown by the February 2005 forecast. The revenue bill provides about 55% of the solution, and spending cuts about 45%. Misc. Revenue items include: Sales Tax: Preserves two sales taxes that were scheduled to expire an alcoholic beverages tax and a tax on leases and rentals of motor vehicles. Property Tax: Reduces the amount that the State pays to cities and counties to reimburse them for the cost of market value homestead credits (reductions to the general property tax for property that is occupied as a person's primary place of residence). Miscellaneous: Expects increased future revenues due to increased tax compliance efforts by Dept of Revenue. Senate File 1683 (Pogemiller, D-Minneapolis) (passed and laid on the table 03/31/05) Income Tax 1/8 Refunds for Transit Passes. Amends current law to permit any employer to claim a partial refund of expenses incurred to provide transit passes to employees. Current law permits taxpayers to take a credit against taxes due, which excludes tax-exempt organizations.
Senate File 1683 (Pogemiller, D-Minneapolis) (passed and laid on the table 03/31/05) 1/15 Deduction of Fines & Penalties. Adds new subdivision that says corporations cannot take a business-expense deduction on their state income taxes for (a) fines, penalties, damages or expenses (including settlement amounts) paid to federal, state or local governments in criminal or civil matters; or (b) legal expenses a corporation incurs in connection with a violation of the law. This apparently conforms to federal law, which already disallows such a deduction. 1/16 War on Terrorism Checkoff. Provides for a checkoff on the individual and corporate income tax return, and property tax refund form, that allows taxpayers to donate to a fund that would pay bonuses to veterans of the global war on terrorism. 1/19 Study of Corporate Taxes. Requires the Depts of Finance and Revenue to conduct a study to identify reasons for the decline in corporate tax receipts. [NOTE: Corporate taxes have been rising in recent months, and the Dept of Revenue has begun to increase its audit activity in this area.] Property Tax 4/22 Facility-Specific Property Tax Exemption: Grants a property tax exemption to a 60-unit housing with services addition being built by Catholic Charities (need to confirm identify of provider) in Minneapolis. 4/24 Energy-efficient Commercial Properties: Provides a market value reduction for certain energy-efficient commercial property. To qualify, the property must be constructed in a manner that will achieve a level of energy consumption that is at least 20% lower than the standard set out in the state energy code rules. 4/41-42, 52 Class 4d Property. Reinstates the 4d classification for qualifying low-income rental housing at a rate of 0.55% for taxes payable in 2007 and after. States that the value of property classified as 4d will be determined on the basis of the property s restricted use (i.e. reduced income due to restrictions on the rent that can be charged there). Property owners would apply to the MN Housing Finance Agency for certification. In the case of property qualifying as low-income housing rental property, the property owner may petition for a change in valuation for all parcels of such property located in the same county, as well as for contiguous qualifying... property overlapping county boundaries. 4/76 Local Option for Valuation of Commercial Industrial Property. Permits the governing body of any municipality with a population over 70,000 (or any municipality in the taconite tax relief area ) to adopt a system of valuing commercialindustrial property that is based on the value of the land, not including improvements. The municipality must make a formal election to do so by December 31, 2005. Selected 2005 Tax Provisions 2
Senate File 1683 (Pogemiller, D-Minneapolis) (passed and laid on the table 03/31/05) 4/78 Study of Fees. Requires state agencies that impose fees on individuals or businesses to report to the Dept of Revenue by January 15, 2006, on the amount and type of fees, and any increases since January 1, 2003. In turn, the Dept of Revenue must compile a report and forward it to the Legislature. Local Development 5/10; 6/12 General Obligation Revenue Bonds: Article 5 provision amends current law governing the issuance of general obligation revenue bonds; modifies definition of qualifying housing development project (one that provides housing either for the elderly of for individuals or families below a certain income level) to permit the project to be owned either by the governmental unit alone or by a limited partnership or other entity in which the authority is the sole general partner provided certain conditions are met. Article 6 provision allows bonds sold to finance housing for the elderly to mature in 35 years from the estimated date of completion of the project, rather than 30 years. 5/19 Mixed-Income Occupancy Projects. Authorizes the use of tax increment financing for housing developments containing both owner-occupied and residential rental units for mixed income residents. 5/34 Tax Increment Financing. Authorizes the City of Ramsey to create a housing tax increment financing district to finance the construction of housing in the Town Center development for low and moderate income people, including disabled persons and persons over age 55. Miscellaneous 8/13 Early payment; e-file property tax refund claims. Authorizes the commissioner of revenue to pay a property tax refunds up to 30 days earlier than permitted under present law for claims submitted electronically. Present law provides for payment of property tax refunds as follows: For renters and homeowners of a manufactured home or park trailers - after August 1 and before August 15 or 60 days after filing the claim, whichever is later; For homeowners - after September 15 and before September 30. Effective the day following final enactment. 8/17-21, 25 Wholesale Cigarette Tax: Imposes a tax on the sale of cigarettes by distributors and sub-jobbers. Aims to improve cigarette tax compliance by requiring out of state retailers selling product into MN to register with the state. 8/24 Misrepresentation of Employee Status: Prohibits employers from misrepresenting the nature of its employment Selected 2005 Tax Provisions 3
Senate File 1683 (Pogemiller, D-Minneapolis) (passed and laid on the table 03/31/05) relationship with its employees to any governmental unit, to other employers, or to its employees. Prohibits employers from requesting any employee to sign an agreement that results in misclassification. Items Proposed by the Department of Revenue 10/6-7 Institutions of Purely Public Charity. In determining whether rental housing property qualifies for property tax exemption, the following are not gifts or donations to the owner of the property: (i) rent assistance provided by the government to or on behalf of tenants; and (ii) financing assistance or tax credits to the owner on the condition tha specific units be set aside for people with certain income characteristics. However, the items described in (i) and (ii) may be considered when making other determinations related to property tax exemption, including whether recipients of housing or services are required to pay for the housing or services in whole or in part. 10/42 Electronic Filing of Certificates of Rent Paid: Authorizes the Dept of Revenue to require owners or managing agents to submit through electronic means a copy of each certificate of rent paid by April 15 of the year following the year in which the rent was paid. Applies only to an owner or managing agent that is required to issue certificates to renters of fewer than 100 units. Senate File 2206 (Pogemiller, D-Minneapolis) (passed and laid on the table 05/06/05) NOTE: This bill raises state revenues $1.4 billion to fund the overall spending target established by the Senate. Art. 1 Income Tax Provisions: Temporarily creates a new income tax bracket of 10.65%, applicable at $250,000 and above for married couples filing jointly and surviving spouses, $166,665 and above for unmarried individuals, and $208,330 and above for unmarried individuals qualifying as head of household. This new bracket terminates in the first taxable year beginning after the commissioner of finance has determined that there will be a positive unrestricted budgeting general fund balance at the close of the biennium that is sufficient to fund budget reserves and meet other specified allocations. Selected 2005 Tax Provisions 4
Senate File 2206 (Pogemiller, D-Minneapolis) (passed and laid on the table 05/06/05) Art. 2 Art. 4 Art. 7 Taxes deferred compensation earned while a taxpayer was resident of MN, but subsequently moved out of state. Corporate Taxes: The bill makes various changes to corporate tax structure, including a reduction in the dividend received deduction (allowed when the corporation owns 20% or more of the dividend payor) and changing the definition of foreign operating corporation. Senators describe these changes as closing corporate tax loopholes. Due to the complexity of these issues, Association staff are seeking a summary prepared by legislative staff that we can make available to members, but none is available at this time. Property Taxes: Commercial/Industrial (C/I) Property Tax. Increases the statewide general property tax levy on C/I property starting with taxes payable in 2006. Under this change, in 2006 C/I would be frozen at the 2002 rate which will result in an increase in the tax as property values rise. For taxes payable in 2008 and beyond, this proposal would dedicate any revenue generated in the state general levy over the 2002 amount ($592 million) to be deposited in an Education Reserve Account. This article makes three types of changes in the administration and enforcement provisions of the corporate franchise and individual income taxes: Various existing penalties are increased and new penalties are imposed on individuals and businesses that engaged in tax shelter transactions, as defined under federal law and by the Internal Revenue Service (I.R.S.). These penalties are, in most cases, effective immediately and apply to transactions entered into after December 31, 2001. The statute of limitations that applies to the commissioner's authority to recompute tax and refund amounts for taxpayers who have entered into "reportable [tax shelter] transactions" as defined under federal law is increased from 31/2 years to 6 years. A Voluntary Compliance Initiative (VCI) is established. This program will allow individuals and corporations that entered defined tax shelter transactions and arrangements for tax years through 2004 to pay the tax and Selected 2005 Tax Provisions 5
Senate File 2206 (Pogemiller, D-Minneapolis) (passed and laid on the table 05/06/05) avoid imposition of all or some penalties. Participants can elect to participate without right of appeal, pay all taxes due, and avoid any penalties or criminal liability for engaging in a tax shelter. As an alternative, taxpayers can elect to participate in the VCI with right of appeal and contest the liability for the tax. If the state prevails, however, they will be subject to the 20 percent substantial understatement penalty. If the taxpayer prevails, the state will refund the VCI payment made with interest. House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) Taxpayer Satisfaction Survey 1/ various sections Establishes a system of taxpayer satisfaction surveys beginning with taxes payable in 2006. Provides for a survey form to be enclosed with (or part of) each taxpayer's truth-in-taxation statement, allowing taxpayers to respond indicating their satisfaction or dissatisfaction with the preliminary levy that has been certified by the county, and in some cases by the city. Provides that renters also receive a copy of the survey and are allowed to respond. Provides that beginning with taxes payable in 2007, if more than 20 percent of the survey responses indicate taxpayer dissatisfaction, a referendum election will be triggered. If the referendum election is not successful, the taxing authority's levy will be reduced to its levy amount for the previous year. The 20 percent is adjusted upwards in jurisdictions where a single person or entity owns a significant number of parcels in the jurisdiction. Eliminates the requirement for jurisdictions to hold truth-in-taxation hearings, and the requirement for jurisdictions to publish proposed budget and tax information in a newspaper advertisement. Article 2: Property Taxes 2/12, 48-49 Assessor-Education and Related Provisions: Selected 2005 Tax Provisions 6
House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) Training and education of property tax personnel. Requires every assessor to attend and participate in a seminar that focuses on ethics, professional conduct and the need for standardized assessment practices at least once every four years. The seminar is to be developed and given by the commissioner of revenue. Effective the day following final enactment. Report; proposed standardized assessment and classification standards. Requires the commissioner of revenue to issue a report to the chairs of the House and Senate Tax Committees by February 1, 2006. The report is to contain recommendations and proposed requirements for achieving standardized assessment and classification of property. Effective the day following final enactment. Directs the commissioner of revenue to develop a code of conduct and ethics for assessors to ensure public confidence in property assessment. The code must include language that promotes fairness and uniformity and recommends assessment practices that do not promote the perception of a conflict of interest. The code must be completed and recommended to the state Board of Assessors for adoption by January 1, 2006. Code must be presented as part of a course taught by the department. 2/13 Limited market value (LMV). Extends the phase-out schedule of LMV for two years and expands LMV to cover all types of property, including commercial industrial property. For taxes payable in 2006 and 2007, increases in taxable property value are limited to 15 percent, or 25 percent of the difference between the current value and the previous year's limited value. Under the revised phase-out schedule, the last year of limited market value is assessment year 2008 (taxes payable year 2009). 2/18, 21 Class 4d Property. Reinstates the 4d classification for qualifying low-income rental housing at a rate of 1% for taxes payable in 2006 and after. Provides that the market value determined by the assessor for class 4d property must be based on the normal approach to value using unrestricted rents, in the same manner as all other apartment property. Property owners would apply to the MN Housing Finance Agency for certification. (Note: the definition of what qualifies as class 4d is more restrictive than the definition used under the 4d classification in effect prior to 2004.) 2 / 24 Apportionment and levy of the state general tax. Provides that the state general tax will be permanently apportioned into a commercial-industrial share at 95 percent and a seasonal recreational share at 5 percent. (This is the approximate breakout of the state general tax for taxes payable in 2002, the first year of the state general tax. The breakout for taxes payable in 2005 is 92.8 percent commercial-industrial versus 7.2 percent seasonal recreational.) Selected 2005 Tax Provisions 7
House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) 2/27, 29-30 Rent constituting property taxes. Redefines "rent constituting property taxes" for the purposes of the property tax refund program as the actual amount of property taxes attributable to the rental unit. In the case of a claimant whose rent is subsidized, "rent constituting property taxes" is defined as 20 percent of the gross rent actually paid. Background: Under current law, "rent constituting property taxes" is defined as 19 percent of gross rent for all renters. Effective for claims based on rent paid in 2005 and following years. 2/31 Early payment; e-file property tax refund claims. Authorizes the commissioner of revenue to pay a property tax refunds up to 30 days earlier than permitted under present law for claims submitted electronically. Present law provides for payment of property tax refunds as follows: For renters and homeowners of a manufactured home or park trailers - after August 1 and before August 15 or 60 days after filing the claim, whichever is later; For homeowners - after September 15 and before September 30. Effective the day following final enactment. 2/32 Rent certificate. Provides that if the owner of a rental unit fails to provide the renter with a certificate of rent constituting property taxes, the commissioner of revenue shall allocate the tax between units on a square footage basis or other appropriate basis that the commissioner determines. Effective for claims based on rent paid in 2005 and following years. 2/37 Nursing home not owned by county. Requires that a county that (i) owns a nursing home funded in whole or in part with county general revenues, and (ii) has within its borders other nursing homes owned by governmental units, must distribute proceeds of its property tax levy to all the government-owned nursing homes within the county, pro-rated by the number of beds in each of the homes. Provides that any additional levy resulting from this section is outside of any levy limit that would otherwise apply. Applies only to a county with a population of 150,000 or more located outside the metropolitan area. Effective for taxes payable in 2007 and thereafter. Local Government Aid 3/13 City formula aid. Reduces the amount of local government aid (LGA) paid to Duluth, Minneapolis and St. Paul, and allows them to replace the amounts lost with a one-half cent sales tax. Effective beginning with aids payable in 2006. [NOTE: We have included this provision because it is highly controversial. Legislators from these cities predict large cuts in city services.] Items Proposed by the Department of Revenue Selected 2005 Tax Provisions 8
House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) 4/6 Institutions of Purely Public Charity. In determining whether rental housing property qualifies for property tax exemption, the following are not gifts or donations to the owner of the property: (i) rent assistance provided by the government to or on behalf of tenants; and (ii) financing assistance or tax credits to the owner on the condition that specific units be set aside for people with certain income characteristics. Effective for taxes payable in 2004 and after. [NOTE: The House bill does not include an additional sentence found in the Senate bill, which reads However, the items described in (i) and (ii) may be considered when making other determinations related to property tax exemption, including whether recipients of housing or services are required to pay for the housing or services in whole or in part. ] Income, Corporate Franchise, and Estate Taxes 5/25-26 Long-term care insurance credit. Allows the long-term care insurance credit on premiums, regardless of whether the taxpayer claimed the premiums as an itemized deduction. Present law does not allow the credit on the premiums to the extent claimed as an itemized deduction, but does allow credit on premiums paid by self-employed individuals who can claim an "above-the-line deduction" for those premiums. This equalizes the treatment of self-employed and all other taxpayers. Effective for tax years beginning after December 31, 2004 5/32-33 Income Apportionment for Companies Operating in More than One State. Subject to certain exceptions, current law provides that a company which must apportion its net income must apportion its income to MN using a formula that takes into account (a) sales made within MN, (b) tangible property used within MN, and (c) payroll paid or incurred in MN. This bill would go to a single factor formula, using sales only, phased in over three years beginning December 31, 2006. 5/34-35 Income Tax Checkoffs: Allows tax filers to voluntarily designate that $1 or more shall be paid into a Minnesota Military Families Relief Account, or public safety officer memorial and survivor account. Federal Update 6 / various sections Conformity with federal definition of taxable income. Adopts several provisions from federal income tax law, including: the increased standard deduction for married joint filers for tax years 2005 and 2006, and the tax treatment of health savings accounts, retroactive to when the accounts were first allowed in 2004. Selected 2005 Tax Provisions 9
House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) Sales and Use Taxes 7/17 Sales tax on cigarettes. Exempts the sale of cigarettes from the sales tax. Cigarettes will be subject to a new tax in article 8 that is imposed upon the sale of cigarettes by distributors to retailers and cigarette subjobbers. Effective for sales and purchases made after July 31, 2005. See also Article 8, Section 20. 7/30, 40 Provides for an upfront payment of sales tax on long-term motor vehicles leases. Re-imposes the rental motor vehicle tax that is currently scheduled to expire on December 31, 2005. Special Taxes 8/1 Card club fee. Requires Canterbury Park to pay a fifteen percent franchise fee to the Racing Commission as a condition for operating a card club. This fee would be imposed on the card club's gross revenues (i.e., amounts charged for table rents or the club's percentage of "pots"). The fee would be paid, collected, and administered by the Racing Commission in the same manner as the tax on pari-mutuel betting. Amounts paid are deposited in the state general fund. Significant in the sense that it appears to make this tax bill a vehicle for an amendment that would expand gambling in Minnesota, as, for example, through the Racino proposal to add slot machines at Canterbury Park. 8/7 Liquor gross receipts tax. Replaces the additional 2.5 percent sales tax on alcoholic beverages (which is scheduled to end on December 31, 2005) with a 2.5 percent gross receipts tax on retail liquor sales. 8/20, 30 Replaces the sales tax on cigarettes with a wholesale tax on the sale of cigarettes from distributors to retailers and cigarette subjobbers. Also imposes a floor stocks cigarette tax on all persons selling cigarettes as distributors, retailers, subjobbers, vendors, manufacturers, or manufacturer's representatives who have stamped cigarettes and unaffixed stamps in their possession at 12:01 am on August 1, 2005. The tax is imposed at the rate of 20 cents per pack of 20 cigarettes. The floor stock tax payments are due by September 7, 2005. Tax Shelters 10/ various sections This article makes three types of changes in the administration and enforcement provisions of the corporate franchise and individual income taxes: Selected 2005 Tax Provisions 10
House File 785 (Krinkie, R-Shoreview) (scheduled to be debated on the House floor 05/11/05) Various existing penalties are increased and new penalties are imposed on individuals and businesses that engaged in tax shelter transactions, as defined under federal law and by the Internal Revenue Service (I.R.S.). These penalties are, in most cases, effective immediately and apply to transactions entered into after December 31, 2001. The statute of limitations that applies to the commissioner's authority to recompute tax and refund amounts for taxpayers who have entered into "reportable [tax shelter] transactions" as defined under federal law is increased from 31/2 years to 6 years. A Voluntary Compliance Initiative (VCI) is established. This program will allow individuals and corporations that entered defined tax shelter transactions and arrangements for tax years through 2004 to pay the tax and avoid imposition of all or some penalties. Participants can elect to participate without right of appeal, pay all taxes due, and avoid any penalties or criminal liability for engaging in a tax shelter. As an alternative, taxpayers can elect to participate in the VCI with right of appeal and contest the liability for the tax. If the state prevails, however, they will be subject to the 20 percent substantial understatement penalty. If the taxpayer prevails, the state will refund the VCI payment made with interest. Miscellaneous 11/21, 26, 34 Repeals the political contribution refund program. Effective for political contribution refund claims based on contributions made on or after July 1, 2005. Selected 2005 Tax Provisions 11