Minnesota Sales and Use Tax & Audit Guide

This guide is for businesses that need straightforward answers on the following Minnesota Sales and Use Tax subjects:

• Should I charge, collect, and remit Minnesota sales tax?
• If I sell online into Minnesota, do I have to charge sales tax?
• If I buy something for my Minnesota business, do I owe use tax?
• I should have collected tax, but I didn’t. What do I do?
• I received a Minnesota sales and use tax audit notice, should I get help?
• How do I appeal my Minnesota sales and use tax assessment?

Who Needs to Collect Minnesota Sales and Use Tax?

Collecting and paying Minnesota sales tax, like many states, turn on whether your business:

1) Has sufficient nexus with Minnesota, and

2) Sells or uses something that is subject to Minnesota sales tax.

How Is Nexus Established in Minnesota?

According to the Minnesota Department of Revenue, sales tax nexus is created in Minnesota if a business has a physical presence in Minnesota, such as:

1. Owning or maintaining a physical location in Minnesota, such as an office, warehouse, or distribution, sales or sample room
2. Has an employee or independent contractor who solicits sales in Minnesota
3. Delivers items into Minnesota using its own trucks or vehicles
4. Keeps inventory, including in a fulfillment center in Minnesota
5. Assembling, installing, servicing, or repairing products in Minnesota.
6. Owning, renting, or leasing real property or tangible personal property in Minnesota, including a computer server or software to solicit orders for taxable items.

Additionally, business that do not have a physical presence in Minnesota, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.

Economic Nexus (Wayfair Law) and Internet Sales in Minnesota

Effective October 1, 2019, Minnesota requires that an out of state business (a.k.a. remote sellers) register with the Minnesota Department of Revenue to collect and remit sales and use tax if the business has a total sales revenue in the state of more than $100,000 from at least 10 transactions or 100 transactions in the preceding twelve calendar months.

Total sales revenue, in Minnesota, includes exempt sales but does not include resale sales or exempt service revenue:

EXAMPLE: If during the period of July 1, 2020, through June 30, 2021, a remote seller's total Minnesota revenue exceeds $100,000, the remote seller needs to obtain a permit and begin collecting the appropriate tax.

For many other issues relating to selling online into Minnesota such as whether you have to register with the secretary of state, if you meet a small seller exception or how to deal with sales made on a marketplace, please click here.

Minnesota Sales Made Through Marketplace Providers

If your business sells on Amazon or a similar marketplace provider, you may not have to collect sales and use tax on those sales. Specifically, if the marketplace provider certifies they are collecting and reporting sales tax, you are off the hook. However, such sales may count towards your total sales threshold, potentially requiring your business to collect tax on sales made directly through your website or other marketplaces.

Which Sales Are Subject to Minnesota Sales Tax?

General Transactions

If you have nexus in Minnesota, you will be required to collect sales tax on items that are subject to Minnesota’s sales tax and pay tax on taxable items purchased and used in Minnesota. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Minnesota sales tax.

While the general rules seem straightforward, the application of Minnesota’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.

Common exemptions from Minnesota sales and use tax:

• Groceries
• Medicines
• Clothing
• Many items used in farming
• Newspapers
• For a more complete list of Minnesota sales tax exemptions, click here.

Services

Generally, services are not subject to Minnesota sales tax. However, the types of services listed here are subject to Minnesota sales tax:

• Admissions
• Building and cleaning maintenance
• Detective, Alarm and Security Services
• Laundry, dry cleaning and alterations services
• Lawn & gardening services
• Lodging and related services
• Massages
• Motor vehicle towing, washing, waxing, rustproofing, and cleaning supplies
• Parking Services
• Pet grooming services
• Telecommunication Services

More information on the taxability of these types of services can be found here.

Software

Minnesota applies sales tax to canned, but not custom software. Minnesota does not impose its sales tax on software as a service.

Shipping & Handling

Minnesota takes the position that delivery and shipping charges connected with taxable items or services are taxable. If, however, the delivery charge is for a nontaxable item, it is not subject to sales tax. If both taxable and nontaxable items are sold, the seller can allocate the delivery charge based on the total sales price of the taxable items divided by the sales price for all items or based on the weight.

Specific Industries

While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up. These guides were developed by the Minnesota Comptroller to provide some industry specific guidance.

• Minnesota Sales Tax Guide for Advertising
• Minnesota Sales Tax Guide for Agricultural and Farming Industry
• Minnesota Sales Tax Guide for Aircraft / Aviation
• Minnesota Sales Tax Guide for Auto Car Dealers
• Minnesota Sales Tax Guide for Auto Repair
• Minnesota USE Tax Guide for Businesses
• Minnesota Sales Tax Guide for Building Cleaning and Maintenance
• Minnesota Sales Tax Guide for Equipment Purchases
• Minnesota Sales Tax Guide for Clothing
• Minnesota Sales Tax Guide for Software
• Minnesota Sales Tax Guide for Contractors and Installers
• Minnesota Sales Tax Guide to Delivery Charges
• Minnesota Sales Tax Guide for Digital Products
• Minnesota Sales Tax Guide for Direct Sellers
• Minnesota Sales Tax Guide for Medical Equipment
• Minnesota Sales Tax Guide for Restaurants and Bars
• Minnesota Sales Tag Guide for Prepared Food (Restaurants)
• Minnesota Sales Tax Guide for Food and Groceries
• Minnesota Sales Tax Guide for Hotels and Lodging
• Minnesota Sales Tax Guide for Industrial Production and Manufacturing
• Minnesota Sales Tax Guide for Liquor
• Minnesota Sales Tax Guide to Minneapolis Special Local Sales Tax
• Minnesota Sales Tax Guide for Pet Services
• Minnesota Sales Tax Guide for Professional Services
• Minnesota Sales Tax Guide for Telecommunications

Determining Local Sales and Use Tax Rates in Minnesota

Minnesota’s base or statewide sales tax rate is 6.875%. However, local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can charge a local taxes based on where the customer receives the goods. For more information on Minnesota’s local tax rates, click here.

List of Local Sales and Use Tax Rates in Minnesota

The combined Minnesota state + local sales and use tax rates for the largest 30 cities are listed below. The Minnesota Department of Revenue also administers these Minneapolis special local taxes.

I Should Have Collected Minnesota Sales Tax, But I Didn’t

Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.

If you determine your business has nexus but you have not collected Minnesota sales tax, the primary options are to:

1. Register and pay back taxes, penalties, and interest, or
2. Complete a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).

Here is what you need to know about each option to make the best decision for your business:

Option 1: Register to Pay Back Taxes, Penalties, and Interest

Sometimes the best solution for a business is simply to register with Minnesota and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.

When to consider registration and payment:

• If you established nexus less than 3 years ago.
• The sales tax penalty is LESS than the professional fees charged for the VDA.
• Your business does NOT have a sales tax collected issue.

Beware: registering does not generally eliminate past liabilities

Option 2: Voluntary Disclosure Agreement (VDA)

Minnesota’s lookback period: 3 years.

In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3 years. As a result, the benefit of doing a VDA often turns on:

• Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
• The sales tax penalty savings is MORE than the professional fees charged for the VDA.
• You have a sales tax collected but not remitted issue.

I Received a Minnesota Sales and Use Tax Audit Notice, What Should I Do?

Minnesota regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive a sales and use tax audit notice should consider the following:

• Unless you have experience handling Minnesota sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
• How will you know when to provide documents or when to push back?
• Do you have a thorough understanding of your sales and use tax areas of exposure?
• Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?

If you are unsure of the answer to these questions and you do not have experience handling Minnesota sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.

Please visit our resource pages for more detailed information and to help you evaluate critical decisions during your Minnesota sales and use tax audit.

• The Audit Overview & Selection Process
• The General Audit Process
• Statute of Limitations Extensions & Issues
• Managing the Sales Tax Auditor

Minnesota Sales Tax Audit Process

The Minnesota sales and use tax audit process usually follows the process laid out in this flowchart. See the detailed guidance for each stage of the process in the sections below.

What to Expect After You Receive a Minnesota Sales and Use Tax Audit Notice (Minnesota Routine Audit Letter)

Many audits begin with a call out of the blue from a Minnesota Department of Revenue sales tax auditor. Shortly after the call, your business will receive an audit notice which confirms that you were lucky enough to be chosen for a Minnesota sales and use tax audit. To prepare for the audit, it is likely a good idea to start by getting a state and local tax professional involved.

What to Expect From A Minnesota Sales Tax Auditor

• Auditor will conduct pre audit research.
• Auditor will often schedule and perform an entrance conference.
• Records will be requested (many of which the auditor is not entitled to and does not need).

What to Expect During The Audit

Once the necessary records are received, the auditor will:

• Conduct the audit by comparing your Minnesota sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your Minnesota sales tax return(s).

NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.

• Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
• Conduct a use tax audit – the auditor will request a detail of certain documents / accounts to make sure use tax was properly paid on applicable purchases. Common areas audited include:
  • Advertising Expense
  • Auto & Truck Expense
  • Repair and Maintenance
  • Rent (including related party rent)
  • Office Expense
  • Miscellaneous Expense
  • Supplies
  • Equipment

Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to Minnesota. This often leads to shocking results for the unsuspecting taxpayer during an audit.

After the Audit – Understand and Defend Your Businesses Rights

Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the Minnesota sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied Minnesota’ sales tax laws.

We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their Minnesota sales tax liability.

The process of challenging a Minnesota sales tax audit assessment is discussed in detail in the following sections.

Minnesota Sales Tax Audit Protest Process Flow Chart

NOTE: If the deadlines are missed, you have a short period of time to pay the tax and seek a refund. If that deadline is also missed, it can be very difficult to get case reopened.

Contesting Audit Findings with the Auditor

After an audit, the auditor will issue a Minnesota Audit Findings Letter (AKA the audit report). This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:

• Auditee has 30 days to contest findings with the auditor.
  • Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
  • Legal interpretations of sales tax law are often not resolvable at this stage.
• If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the Minnesota Department of Revenue.

Appeal / Protest with the Minnesota Department of Revenue

Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done after the Minnesota Comptroller issues the Notification of Audit Results.

• A protest / appeal must be done within 60 days of the Audit Results letter.
• If you miss the 60 days, in some cases you have may have additional time to pay the tax and file a refund claim.
• If both periods are missed, the assessment becomes final and it is very difficult to reopen the audit.

If you have received the Audit Results and have not at least talked to someone experienced in Minnesota State and Local tax, now is the time before these deadlines are missed.

Notice of Decision

If you cannot resolve the Minnesota sales and use tax dispute through the protest / appeal process, the Minnesota Department of Revenue will issue a Decision Letter. The Letter gives you the opportunity to re-protest the assessment within the agency or file in Minnesota’s tax / administrative court, which is called the Minnesota Tax Court. There are important deadlines in this phase of the process as well, such as 60 days to file in Tax Court.

Settling a Minnesota Sales Tax Liability

Along the way, or even after one the critical notices are issued, there is the possibility to settle your Minnesota sales tax case by negotiating with the Minnesota Department of Revenue. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced Minnesota state and local tax lawyer or other professional.

Minnesota Administrative Court

If you cannot resolve the case within the agency or missed your deadlines, you still have one last shot to fight your Minnesota sales tax assessment by going to the Minnesota Tax Court. Although we generally don’t recommend it, you always have the option to skip the agency protest process and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.

If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral administrative law judge. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.

Other Minnesota Sales Tax Resources

• Minnesota Legislative Bulletins
• Minnesota Revenue Notices
• Minnesota Tax Court Sales Tax Decisions
• Minnesota Remote Seller Update