Insights: Article

Minnesota Legislative Changes Impact Financial Institutions

By Allison Gregory

June 07, 2017

A new Minnesota tax law will treat more income of Minnesota bank affiliates as financial institution income subject to the Minnesota Corporate Franchise Tax. The Tax Omnibus Bill recently signed by Governor Mark Dayton will tax “non-corporate entities that are majority owned by a financial institution or that derive more than one-half of their financial statement income from leasing” as financial institutions themselves. This is expected to increase taxes collected from these institutions.

This bill also simplifies the rules for determining whether an individual is a Minnesota resident, establishes a new tax-advantaged savings account for first time homebuyers, and increases the Minnesota estate tax exemption. These changes may encourage bank deposit growth and reduce the Minnesota estate tax burden on bank owners.

Financial Institution Income
The bill alters how the state of Minnesota defines a financial institution. The state is casting a wider net of what is considered a financial institution for Minnesota Corporate Franchise Tax purposes effective for tax years beginning after December 31, 2016. The inclusion of non-corporate investment and leasing entities will effectively apply the special apportionment rules of financial institutions to non-bank subsidiaries and affiliates. The new definition of a financial institution reverses the April, 2017, Minnesota Tax Court decision of Associated Bank v. Commissioner. This broader definition will serve to raise tax dollars collected by the state.

Residency
Minnesota treats a taxpayer as a resident if either:

  • Minnesota is the taxpayer’s domicile, or
  • The taxpayer maintains a place of abode in Minnesota and spends, in the aggregate, more than one-half of the tax year (183 days) in Minnesota.

While the second test can be a clear bright-line rule, substantiating the first test allows room for interpretation based on the flexible definition of “domicile.”

The Minnesota Department of Revenue has used a list of 26 factors when determining domicile prior to the passing of the bill.  This list includes factors such as where a person works, maintains their home, has a driver’s license and votes. Other factors included location of a person’s bank accounts and financial advisors. No single factor nor specific combination of factors is considered determinative.

The bill eliminates the following factors from the Department of Revenue’s list of residency factors:

  • The location of a taxpayer’s financial institution
  • Where the taxpayer opens or maintains a financial  account
  • Where the taxpayer’s financial advisor, attorney and certified public accountant are located

Consequently, if Minnesota community bank customers intend to change their state domiciles, they would not need to close their bank accounts (nor fire their CPAs) to bolster the argument for their intended domicile.

Homebuyer Savings Accounts
The bill creates a new type of savings account designed to help Minnesota community banks and banks authorized to do business in Minnesota encourage savings for first time home purchasers. A “first time” home purchaser is defined as one who does not own or has not owned a residence in the last three years.

Banks may now establish specific savings accounts that provide state-tax-exempt interest when the funds are used for a down payment or closing costs on a first home. Iowa enacted a similar provision last month.

Minnesota Estate Tax Exemption
The bill made several changes to Minnesota’s estate tax. These changes are effective for decedents dying after December 31, 2016. The Minnesota estate tax exemption will gradually increase from $1.8 million under present law to $3 million by year 2020:

2017

$2,100,000

2018

$2,400,000

2019

$2,700,000

2020 and later

$3,000,000


Governor Dayton has indicated he may want to revisit this provision of the bill. Watch for future updates.

Takeaways
The Tax Omnibus Bill includes $650 million in tax relief, much of which will benefit the banking community, their customers and the local businesses they support. However, there are many facets to this bill which may prove to be benefits and pitfalls for banks and other financial institutions. 

Should you have questions concerning Minnesota’s new tax legislation or other state tax issues, please contact your Eide Bailly tax professional.

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