New tax law has exemptions, aids — and a lot more than taxes

Conforming to federal tax law concerning the Paycheck Protection Program and unemployment benefits is only the beginning for the 2021 omnibus tax law, which covers a lot of territory that isn’t just about taxation.

Sponsored by Rep. Paul Marquart (DFL-Dilworth) and Sen. Carla Nelson (R-Rochester), the law is estimated to produce $49.1 billion in revenue in the 2022-23 biennium and provide $4.2 billion in refunds, aids and credits, including $761 million in new tax cuts and credits.

The biggest portion of that $761 million comes from pulling state tax law into conformity with the federal government on tax exempt status for forgiven Paycheck Protection Program loans and unemployment benefits up to $10,200. The Revenue Department is expected to provide guidance to taxpayers on amending their 2020 tax returns.

Here are the chief changes to tax policy as a result of the law, along with several miscellaneous items added in the final days of the June special session. All changes are effective for tax year 2021, except where indicated.

2021 Special Session: SSHF9*/SSSF26/CH14

Individual income and corporate franchise taxes

Among the changes the law makes to Minnesota’s individual income and corporate franchise taxes, it:

• extends the small business investment credit (or “angel credit”) and historic structure rehabilitation credit for one year each, effective July 1, 2021;

• establishes new state tax credits for film production (effective for tax years 2021-24) and charitable contributions to a housing investment account at Minnesota Housing, effective for tax years 2023-28;

• adopts selected federal tax changes enacted by Congress since Dec. 31, 2018, including tax provisions affecting unemployment compensation and the Paycheck Protection Program, effective for tax year 2020;

• clarifies elements of the state’s itemized deduction for casualty losses, effective July 1, 2021;

• establishes a state subtraction for payments from charitable contributions to volunteer drivers;

• allows taxpayers ages 19 to 21 without children to qualify for the Minnesota working family credit;

• modifies the student loan credit calculation to reduce the marriage penalty; and

• eliminates the state addition for section 179 carryovers for property placed into service prior to tax year 2020. (Art. 1, Secs. 1-17)

Partnership audits

The law modifies Minnesota’s reporting and payment requirements generated by federal audits and assessments in response to federal changes enacted in 2015. Those changes provide for conducting audits at the partnership level, rather than the partner level.

It also requires state reporting of federal adjustments from a partnership-level audit and allows assessments to be paid at the entity level. All changes are effective when effective for federal purposes. (Art. 2, Secs. 1-15)

Pass-through entity tax

The law establishes a fully refundable pass-through entity tax that allows electing pass-through businesses to pay state income tax at the entity level and deduct this tax for federal income tax purposes. Under federal law, taxes on pass-through income are subject to a cap on state and local income taxes of $10,000. (Art. 3, Secs. 1-8)

Sales and use taxes

Effective July 1, 2021, unless indicated otherwise, this section of the law makes several changes to the requirement of certain vendors to remit June accelerated sales tax liabilities, and provides exemptions for:

• the extra price paid to sit in a “preferred viewing location” for season tickets to a college sporting event;

• fundraising sales made by school-associated student groups;

• supplies and materials used in and equipment incorporated into construction or remodeling of public safety facilities and other various capital projects owned by a local government; and

• materials used in the reconstruction of properties destroyed or damaged by fire in Melrose (the exemption expiring July 1, 2023) and Alexandria, expiring Feb. 28, 2023. (Art. 4, Secs. 1-11, 13-15 and Art. 11, Sec. 46)

Vapor and tobacco taxes

The law makes conforming changes concerning the cigarette and tobacco products tax and regulations surrounding the distribution of tobacco products. The changes, effective Jan. 1, 2022, include:

• clarifying administrative requirements imposed on retailers and out-of-state retailers making sales into Minnesota;

• clarifying the definition of “nicotine solution products” to include other commonly used terms for nicotine solution product devices; and

• amending provisions that regulate distribution of tobacco products to align with changes made in the cigarette and tobacco taxes chapter regarding retailers and out-of-state retailers making sales into Minnesota. (Art. 5, Secs. 1-11)

Property taxes

Changes related to property taxes include:

• authorizing the creation of fire protection and emergency medical services special taxing districts, effective July 1, 2021;

• exempting from property taxes approximately 35 parcels owned by the Leech Lake Band of Ojibwe in Cass County, effective with assessment year 2021 and providing a refund of any state general taxes paid in 2020 and 2021;

• expanding the list of qualifying relatives for the agricultural relative homestead, effective for property taxes payable in 2022 and thereafter;

• moving the homestead application deadline to Dec. 31, effective with assessments in 2021;

• clarifying provisions of the Sustainable Forest Incentive Act;

• setting the first-tier valuation limit for 4d low-income rental housing property at $100,000 for assessment years 2022 and 2023;

• increasing the commercial-industrial market value excluded from the state general tax to $150,000, beginning with property taxes payable in 2023, and decreasing the state general levy by $20.1 million;

• adding a supplemental statement to the notice of proposed property taxes with the percent change in levy proposed and summary budget information for the county, city and school district, effective for property taxes payable in 2023 and thereafter;

• excluding veterans disability compensation from income used for the homestead credit refund and the renter’s property tax refund, effective beginning with property taxes payable in 2022 and rent paid in 2021;

• authorizing the use of special assessments for energy improvement projects, effective for assessments in 2022 and thereafter;

• requiring a report on the 4d affordable housing program to be completed by Jan. 15, 2022; and

• requiring the Department of Revenue to review the process by which utility and pipeline properties are valued, effective July 1, 2021. (Art. 6, Secs. 1-20)

Aids and credits

Among the law’s changes related to state aids are:

• transferring the portion of county program aid designated to public defender costs to the Board of Public Defense;

• providing additions to the Lake Vermillion-Soudan Underground Mine State Park, effective July 1, 2021;

• creating a new local homeless prevention aid to counties, effective beginning with aids payable in 2023 and thereafter;

• providing supplemental aid to cities losing local government aid in 2022;

• providing a grant to the City of Floodwood in fiscal year 2022; and

• providing grants to counties affected by a pipeline property tax appeal that must be paid by Aug. 15, 2021 (Art. 7, Secs. 1-7).

Local taxes

Among changes in local tax laws, the law:

• creates a definition of “capital project” for which revenues collected from a general local tax may be used, effective July 1, 2021;

• removes the expiration of the Sartell food and beverage tax, effective July 1, 2021; and

• authorizes general local sales taxes for Carlton County, Cloquet, Edina, Fergus Falls, Grand Rapids, Hermantown, Itasca County, Litchfield, Little Falls, Maple Grove, Mille Lacs County, Moorhead, Oakdale, St. Cloud, St. Peter, Staples, Wadena, Waite Park and Warren, all effective upon city compliance with approval and notice requirements for special laws (Art. 8, Secs. 1-21).

Tax increment financing

Effective July 1, 2021, general law surrounding tax increment financing is modified by:

• providing temporary flexibility of the use of unencumbered TIF increment;

• expanding the pooling rules to allow for expenditure of increment on certain housing projects;

• extending the five-year rule to eight years for redevelopment districts certified after Dec. 31, 2017, through June 30, 2020, and providing a corresponding extension of the six-year rule; and

• providing special tax increment financing authority to the cities of Bloomington, Burnsville, Minnetonka, Mountain Lake, Ramsey, Richfield, St. Louis Park, Wayzata and Windom, effective upon local approval and compliance with filing requirements for special laws (Art. 9, Secs. 1-12).

Public finance

The law modifies several municipal finance provisions, including allowing counties to use funds from county transportation sales taxes for buildings and facilities used for transportation or transit maintenance, and allowing municipalities to use street reconstruction bond proceeds to construct bicycle lanes, sidewalks and paths that are incidental to street reconstruction (Art. 10, Secs. 1, 6).

Other provisions

Among other changes, the law:

• prohibits a sitting member of the Legislature from accepting employment or compensation for services from any business that employs or contracts with lobbyists, government relations or government affairs professionals, effective Jan. 3, 2023;

• sets an expiration date for new tax expenditures of no more than eight years beyond adoption, effective beginning with the 2022 legislative session;

• establishes a legislative Tax Expenditure Review Commission;

• codifies an executive order recognizing the legal relationship between Tribal Nations and the state of Minnesota;

• increases the budget reserve amount;

• adds an incentive for the production of oriented strand board at a facility meeting certain qualifications;

• creates a $24 million targeted community capital project grant program for nonprofit organizations and government entities, with priority given to applicants without a history of receiving capital grants from the state, or that represent or serve underserved communities, effective Aug. 1, 2021;

• alters state dental reimbursement policy and requires private nonprofit hospitals to make their lease agreements with local governments public;

• requires contractors with access to federal tax information to undergo background checks;

• requires the Department of Revenue to file a biennial tax incidence report to the Legislature;

• makes changes to the production tax and solid waste management tax;

• makes changes in production taxes related to iron ore;

• authorizes the Seaway Port Authority of Duluth to form a nonprofit corporation;

• provides a $1.4 million grant to the Victoria Theater Arts Center in St. Paul;

• appropriates $250,000 in fiscal year 2022 to Explore Minnesota Tourism for a grant to the Grand Portage Band to focus on tourism to Grand Portage;

• authorizes the commissioners of human services or health to declare a public health disaster if either determines that the state must take action to protect the public health as part of the state’s response to the ongoing COVID-19 infectious disease outbreak;

• creates a working group to make recommendations to the Legislature on how to disburse $250 million in direct financial support to frontline workers;

• provides appropriations to the Department of Revenue, Legislative Coordinating Commission and City of Biwabik;

• authorizes $6 million in grants for meat processing businesses in redevelopment areas in South St. Paul; and

• appropriates $6.2 million to the Department of Transportation in fiscal year 2022 for project development of a land bridge over Interstate 94 in the Rondo area of St. Paul. (Art. 11, Secs. 1-14, 16-24, 26-34, 36-38, 40-45)

HF0009* / SF0026 / CH14