basic sales and use tax january 2020 · course guide for basic sales and use tax | january 2020 1...

Course Guide

Basic Sales and Use Tax January 2020

This course is an introduction to sales and use taxes in Minnesota. It is designed for accountants, bookkeepers, business owners, purchasing agents, and others who need a working knowledge of sales and use tax.

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 [email protected], 651-296-6181, or 1-800-657-3777 (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 55146 ©Copyright 2020, Minnesota Department of Revenue, All Rights Reserved

mailto:[email protected]

ii Course Guide for Basic Sales and Use Tax | January 2020

Course Guide for Basic Sales and Use Tax | January 2020 iii

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 Distinguish how sales and use tax law applies to different types of businesses and their business activities Identify how to use and when to accept an exemption certificate Identify the documentation necessary for sales and use tax records and returns List several resources that answer sales and use tax questions

Agenda

Housekeeping and Introductions 10 minutes Part 1 Sales and Use Tax Basics 50 minutes Part 2 Who Needs to Register? 15 minutes Break 10 minutes Part 3 Local Taxes 15 minutes Part 4 When and How to Use Exemption Certificates 15 minutes Part 5 How Sales and Use Tax Applies to Business Activities 40 minutes Break 10 minutes Part 6 Managing Your Use Tax Liability 10 minutes Part 7 Maintaining Your Records 5 minutes Part 8 Filing and Payment Instructions 5 minutes Part 9 Communicating with the Department of Revenue 5 minutes Part 10 Financial Consequences of Noncompliance 5 minutes Course Review 15 minutes TOTAL TIME 3 hours 30 minutes

iv Course Guide for Basic Sales and Use Tax | January 2020

Table of Contents Disclaimer ...................................................................................................................................................................................... i

Objectives ............................................................................................................................................................................ iii

Agenda ................................................................................................................................................................................ iii

Part 1 - Sales and Use Tax Basics ...................................................................................................................................... 1

Part 2 - Who Needs to Register?......................................................................................................................................... 8

Part 3 – Local Taxes .......................................................................................................................................................... 11

Part 4 - When and How to Use Exemption Certificates .................................................................................................... 12

Part 5 - How Sales and Use Tax Applies to Business Activity .......................................................................................... 15

Part 6 - Managing Your Use Tax Liability .......................................................................................................................... 21

Part 7 - Maintaining Your Records .................................................................................................................................... 22

Part 8 - Filing and Payment Instructions ........................................................................................................................... 23

Part 9 - Communicating with the Department of Revenue ................................................................................................ 24

Part 10 - Financial Consequences of Noncompliance ...................................................................................................... 26

Legal References and Other Resources ........................................................................................................................... 27

Course Guide for Basic Sales and Use Tax | January 2020 1

Part 1 - Sales and Use Tax Basics

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. All sales can be grouped into one of these five categories. Generally, in Minnesota we tax: tangible personal property broadly specific services specific digital products

We do not charge sales tax on real property or intangible property.

What is real property? Real property includes land, buildings, and structures intended to be permanent. It also includes items incorporated into buildings and structures that are intended to be permanent and cannot be removed without causing substantial damage. Examples of real property include commercial and residential buildings, roads, and permanent fencing. Real property is not taxable for sales and use tax purposes.

Notes:

Intangible Property

Digital Products

Tangible Personal Property

(TPP)

Services

Real Property

2 Course Guide for Basic Sales and Use Tax | January 2020

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.

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 or Industry Guide. Admissions to places of amusement (Admissions and Amusement Devices Fact Sheet) Admissions to tanning facilities (Exercise Facilities and Health Clubs Fact Sheet) Temporary lodging, defined as less than 30 days (Hotels and Other Lodging

Establishments Industry Guide) Nonresidential parking service (Parking Service Providers Industry Guide) Memberships to a sports or athletic facility (Admissions and Amusement Devices Fact

Sheet) Delivery of aggregate materials, except when used for road construction (Delivery

Charges Fact Sheet) Laundry, dry cleaning, and alteration services (Laundry and Cleaning Services Fact

Sheet) Motor vehicle washing, waxing, rust proofing, and cleaning services (Motor Vehicle

Industry Guide) Commercial and residential building cleaning and maintenance services (Building

Cleaning and Maintenance Industry Guide) Detective, security, and alarm services (Detective and Security Services Fact Sheet) Pet grooming and kennel services (Pets and Pet Services Industry Guide) Lawn and garden care services (Lawn and Garden Maintenance, Tree and Shrub Services

Fact Sheet) Massages – not medically prescribed (Personal Services Industry Guide) Telecommunication services (Telecommunications, Pay Television, and Related Services

Fact Sheet) 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.

Notes:


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. 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

If the type of digital product is not listed, you can presume it is not taxable. For more information, see the Digital Products Fact Sheet. 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:

1.

2.

3.

Notes:


What is a sale? For sales and use tax purposes, a sale includes these types of transactions: retail sale, lease, rental, bartering, providing a service, or a sale from wholesaler to retailer.

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 the Use Tax for Businesses Fact Sheet.

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.669.

Sale Barter

Providing a service

Lease Wholesale Retail

Rental

Notes:

1. Seller’s Address If the purchaser receives the product at the seller’s location

2. Delivery AddressIf the purchaser receives the product or service at a location other than the seller’s location

3. Billing AddressBased on the address that the seller has in their records for the customer


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.

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 3rd 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 the Coupons, Discounts and Other Forms of Payment Fact Sheet.

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 incorporating an item or materials into a building, structure, 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 item must remain TPP after installation, in contrast to TPP in incorporated into real property. 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 the Labor – Installation, Fabrication, Construction, and Repair Fact Sheet.

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 16-03, Optional Warranty and Maintenance Contracts on Equipment.

Type of Contract Is the contract taxable? Optional maintenance contracts (bundled – one nonitemized price)

Yes. Tax is due when the contracted maintenance is sold.

Optional maintenance contracts (unbundled – separate itemized prices)

No. The service provider charges sales tax to the customer on the taxable items when the repair is performed.

Extended warranty contracts No. The service provider owes tax on the parts provided under the contract.

Note: Maintenance contracts on computer software are governed by Minnesota Rule 8130.9910, Computer Software, and will be covered separately.

Notes:


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. 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 Then you must No cost to the customer for parts The service provider pays sales or use tax on

their cost of the parts. The customer is responsible for a percentage of parts and labor

The customer pays sales or use tax on the amount for parts only.

The customer pays a deductible for parts or labor

The service provider pays sales or use tax on their cost of the parts. The deductible payment is not taxable.

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 support services

20% of the charge is taxable

Optional and includes support services only Not taxable For more information, see the Computer Software Fact Sheet or Minnesota Rule 8130.9910, Computer Software.

Notes:


Part 2 - Who Needs to Register?

You must register to collect Minnesota sales tax if you make taxable retail sales into Minnesota. This includes all sellers outside of Minnesota who have a physical presence in Minnesota (see Physical Presence section for details). Based on the 2018 U.S. Supreme Court decision on South Dakota v. Wayfair, Inc., remote sellers must also register to collect Minnesota sales tax if they sell taxable items into Minnesota unless they qualify for the Small Seller Exception (see Remote Sellers section for details). If you do not make taxable sales, but make purchases subject to use tax, you must register to remit use tax.

Physical Presence For sales and use tax purposes, common situations that create a physical presence for a business in the state 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

Remote Sellers A remote seller is a business that sells its products or services to customers in a state, using the Internet, mail order, or telephone, without having a physical presence in that state. Minnesota has a Small Seller Exception, which does not require remote sellers to collect sales tax until their retail sales, during a period of 12 consecutive months, total either:

Note: For more information, see our Remote Sellers FAQs. 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.)

October 1, 2018 – September 30, 2019 Effective October 1, 2019 100 or more retail sales shipped to Minnesota 200 or more retail sales shipped to

Minnesota 10 or more retail sales shipped to Minnesota that total more than $100,000

Retail sales shipped to Minnesota that total more than $100,000

Notes:

https://www.revenue.state.mn.us/remote-seller-faqs


Does a remote seller who sells through a Marketplace Provider need to register to collect sales tax?

A Marketplace Provider is any person, other than the seller, who facilitates a retail sale by: Listing or advertising the seller’s products; and Processing the payments from the customer, either directly or indirectly

through a third party, regardless of whether the Marketplace Provider receives compensation or other consideration in exchange for its services.

If you are a remote seller who: Only makes sales into Minnesota through a Marketplace: ‐ If the Marketplace is collecting and remitting Minnesota sales tax on your

behalf, then you do not need to register and collect Minnesota sales tax. ‐ If the Marketplace is not collecting Minnesota sales tax on your behalf, you

must collect Minnesota sales tax on your taxable sales unless you meet the Small Seller Exception

Sells through a Marketplace, your own website, and/or through other

sources: ‐ If all retail sales into Minnesota combined – including your sales made

through any Marketplace, your own website, and/or through other sources – exceed the Small Seller Exception, then sales tax must be collected and remitted to Minnesota. You must collect and remit sales tax on your taxable sales through your website and other sources.

‐ If the Marketplace is not collecting Minnesota sales tax on your behalf, then you must also collect Minnesota sales tax on your taxable sales made through that Marketplace.

Note: For more information, see our Update for Marketplace Providers web page.

How do I register for a Minnesota ID Number? You may apply for a Minnesota Tax ID Number through the: Minnesota Department of Revenue’s Business Center

‐ Register online ‐ Register by phone ‐ Mail a completed paper registration form

Streamlined Sales Tax Registration System (SSTRS) Streamlined Sales Tax Registration System As a seller, you may also use the Streamlined Sales Tax Registration System (SSTRS) to establish a sales tax account with all SSUTA member and associate member states in a single registration.

Notes:

https://www.revenue.state.mn.us/update-marketplace-providers

https://www.revenue.state.mn.us/businesses

http://www.streamlinedsalestax.org/index.php?page=technology-registration


You may register your own business through the SSTRS or choose a Certified Service Provider (CSP) to do it for you. The CSP may register your business in multiple states as well as file the sales tax return and remit general state and local taxes on your behalf. However, your business may be responsible to pay use tax on its own purchases since not all CSPs file use tax for their clients. The CSP will not file special taxes. The following businesses are CSPs:

AccurateTax Avalara Exactor (subsidiary of Intuit)

Sovos Tax Cloud Taxify by Sovos

Taxometry

Notes:

https://www.accuratetax.com/

https://www1.avalara.com/us/en/index.html

https://quickbooks.intuit.com/sales-tax/

https://sovos.com/?utm_source=PRweb&utm_medium=PressRelease&utm_campaign=ISOcert

https://taxcloud.net/

http://www.taxometry.com/

https://taxify.co/

https://taxify.co/


Part 3 – Local Taxes

Many cities and counties have additional local sales taxes. 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

If you are required to collect Minnesota sales tax, you must also collect any applicable local taxes even if you don’t have a physical presence in a local taxing area. By law, the Department of Revenue must administer all local general sales and use taxes. See our website or the Local Sales and Use Taxes Fact Sheet, Special Local Taxes Fact Sheet, and Minneapolis Special Local Taxes Fact Sheet for in depth information on when to charge local sales and use taxes and the applicable rates. The Department has two interactive tools on our website that provide the state and local general sales and use tax rates that apply to sales made to specific locations in Minnesota. What are the names of these interactive tools?

Note: You must enter the 9-digit ZIP code of the location of the sale and the date of the sale in order for the calculator 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. In addition, we also provide a variety of other local tax information on our website including: Rate Charts Tax Type Codes (Tax Lines) Starting a Local Sales Tax Tools to find tax rates

‐ Sales Tax Rate Calculator ‐ Sales Tax Rate Map ‐ Sales Tax Rate Map FAQs ‐ Sales Tax Rate Spreadsheet ‐ Rates and Boundaries Data ‐ Local Sales Tax Rate Guide ‐ Twin Cities Area Local Tax Rate Guide ‐ Twin Cities Area Local Tax Rate Map

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 Clothing for general use Prescription and over-the-counter drugs for humans 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 Red Lake Band of Chippewa Indians

Prairie Island Sioux

No, they may use a purchase order, payment voucher, work order, or exemption letter from the MN Dept. of Revenue.

State government agencies

MN Department of Commerce MN Department of Revenue

No, they may use a purchase order if it contains all the equivalent information.

Local government agencies

City of St. Paul Hennepin County I.S.D. 535 Long Lake Township

Yes

Exempt organizations

Churches, synagogues and mosques

Scouts and youth groups

Yes

Notes:


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

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

Note: Minnesota state agencies may use a purchase order if all the equivalent information required on the ST3 is contained on the P.O.

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

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.

Notes:


Part 5 - How Sales and Use Tax Applies to Business Activity

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 the Sales to Governments Fact Sheet, Tribal Governments and Members Fact Sheet, 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.

Notes:


Nonprofit organizations: Collect sales tax on taxable goods and services sold, unless the fundraising

exemption, or other specific 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 the Nonprofit Organizations Industry Guide.

Contractors A contractor is someone who: Furnishes materials and labor Builds, 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

* Contractors may purchase certain material exempt only when the material is specifically exempted by statute, or when they receive a valid Purchasing Agent. For more information, see the Contractors Fact Sheet. 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 See Revenue Notice 18-04, Sales and Use Tax - Improvements to Real Property - Revocation and Replacement of Revenue Notice # 04-04 for additional information. 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. The most common example of this is “capital equipment” used in manufacturing to produce a product ultimately sold at retail. See Revenue Notice 18-03: Sales Tax – Capital Equipment Revocation of Revenue Notice #96-08. 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

Notes:


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. * 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 is required to register 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 the Contractors Fact Sheet.

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 or industry guides 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

Notes:


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*

* 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 the Capital Equipment Fact Sheet, Utilities Used in Production Fact Sheet, and Industrial Production Fact Sheet.

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 the Agricultural and Farming Industry Guide

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.

Notes:


Part 6 - Managing Your Use Tax Liability

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 6.875 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 the Local Sales and Use Taxes Fact Sheet, Special Local Taxes Fact Sheet, and Minneapolis Special Local Taxes Fact Sheet.

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.

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

Make sure that you: 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

Notes:

vs. Accrual Basis

Record income when sales are made

Report sales tax when sales are made

Report use tax based on the invoice date

Cash Basis

Record income when actually received

Report sales tax when actually received

Report use tax when invoice is paid


Part 8 - Filing and Payment Instructions

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: 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

More than $500 per month (more than $6,000 per year)

20th day of the following month

Quarterly filers

Less than $500 per month (less than $6,000 per year)

20th day of the month following the end of the quarter (April 20, July 20, October 20, and January 20)

Annual filers Less than $100 per month (less than $1,200 per year)

February 5 of the following year

Note: If your business reported more than $250,000 of tax from July 1 to June 30 of the previous year, see our June Accelerated Filer web page for filing requirements.

How do you file electronically? is the online filing system for the Minnesota Department of Revenue.

OIf 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. For more information, watch our e-Services instructional videos.

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 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.

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.

Notes:

https://www.revenue.state.mn.us/june-accelerated-filer

https://www.revenue.state.mn.us/businesses/sut/Pages/Education-Videos.aspx


Part 9 - Communicating with the Department of Revenue

Sales and Use Tax Contact Information Questions relating to Sales and Use Tax Law? Email: [email protected] Questions relating to your Sales and Use Tax account activity? Email: [email protected] Prefer telephone assistance? Call: 651-296-6181 or 1-800-657-3777 (toll-free)

Other Contact Information Business Income Taxes Email: [email protected] Call: 651-556-3075

Withholding Tax Email: [email protected] Call: 651-282-9999 or 1-800-657-3594 (toll-free)

Business Registration Email: [email protected] Call: 651-282-5225 or 1-800-657-3605 (toll-free)

Minnesota Department of Revenue Website revenue.state.mn.us

Social Media Connect with us on social media:

Subscribe to email updates with GovDelivery

Subscribe to our videos on YouTube

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Find employment opportunities on Linked In






http://www.revenue.state.mn.us/


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 651-282-5225 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.


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. 289.60 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 31-60 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


Legal References and Other Resources

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 8130.9910, Computer Software

Sales and Use Tax Publications

Revenue Notices Revenue Notice #16-03, Optional Warranty and Maintenance Contracts on Equipment Revenue Notice #18-03, Sales Tax - Capital Equipment - Revocation of Revenue Notice #96-08 Revenue Notice #18-04, Sales and Use Tax - Improvements to Real Property - Revocation and Replacement of

Revenue Notice #04-04

Minnesota Sales and Use Tax Business Guide

Sales and Use Tax Industry Guides Aircraft Agricultural and Farming Building Cleaning and Maintenance Chiropractors Dentists Food and Bar Establishments Government - Federal and Foreign Diplomats Government - Local Governments Government - State Agencies Hotels and Other Lodging Establishments Libraries Liquor Stores and Liquor Distributors Motor Vehicle Motor Vehicle Repair Nonprofit Organizations Off-Road Vehicle Parking Service Providers Personal Services Pets and Pet Services Photography Professional Services Retailers and Wholesalers Transportation Service Providers Veterinary Practice Video Production


Sales Tax Fact Sheets 102A, Food and Food Ingredients 102B, Candy 102C, Soft Drinks and Other Beverages 102D, Prepared Food 102E, Dietary Supplements 103, Capital Equipment 105, Clothing 108, Logging Equipment 109, Printing Industry 110, Items for use Outside Minnesota 111, Schools-Sales and Purchases 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 123, Admissions and Amusement Devices 124, Exercise Facilities and Health Clubs 126, Meat Processors 128, Contractors 129, Utilities Used in Production 132, Isolated and Occasional Sales 133, Advertising 134, Computer Software 135, Fire Fighting, Police, and Emergency Equipment 138, Financial Institutions 140, Minnesota State Fair-Sales Tax 142, Sales to Governments 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 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

http://www.revenue.state.mn.us/businesses/sut/factsheets/FS123.pdf

http://www.revenue.state.mn.us/businesses/sut/factsheets/FS128.pdf


157, Residential Utilities 158, Vending Machines and Other Coin-Operated Devices 160, Tribal Governments and Members 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 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 177 Digital Products 179, Prepaid Wireless E911 and TAM Fees

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)

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