How to Navigate the Transitional Period for Minnesota Sales Tax Rate Increase
October 17, 2023 – As reported earlier this year (Major Provisions of the 2023 Minnesota Omnibus Tax Bill), the seven-county metro area of Minneapolis/St. Paul adopted a 1% sales and use tax rate increase as of October 1. But are you prepared for handling sales during the transitional period for collecting and remitting new sales taxes in the state?
While the transitional period laws are not new, it may be worth your time to review what the transitional period means and how it may affect your business, especially construction firms.
What Is a Transitional Tax Period?
There is a transitional period for taxable services when a sales tax rate change affects the billing period for a taxable service that begins before—and ends after—the effective date of the rate change.
But what should be noted is that transitional periods do not affect sales of tangible personal property (goods). Sales or use tax applies on the date the buyer takes possession or title of the goods, whichever happens first, according ot Minnesota statute.
For rate increases, the new rate applies to the first billing period that starts on or after the effective date of the change.
A rate increase also includes when a sales tax exemption expires, or a new law makes a service taxable.
Who May Be Affected By the Transitional Period?
While any business that sells taxable services may be be affected, construction contractors, may be particularly affected along with businesses that are selling maintenance agreements. These types of sales or businesses should review their invoices to understand if sales tax was correctly applied to these services, if they are affected by a transitional period.
How Should Contractors Handle Transitional Sales?
According to Minnesota statutes, tangible personal property or services purchased in relation to a preexisting bid or contract are exempt from the tax or a tax rate increase for six months from the effective date of the law change. The exemption is for the change in tax on goods or services, covered under the qualifying contract, if purchased during the transitional period. However, this does not apply when an exemption ends.
To qualify for this exemption the preexisting bids and contracts must meet certain criteria.
For construction contracts
- The construction contract must have documentation of a bona fide written lump-sum or fixed price construction contract in force from before the effective date of the tax change.
- The contract must not provide allocation of future taxes.
- For each contract, the contractor must give the seller documentation of the contract for which an exemption is claimed.
For construction bids
- The building materials or services must be used pursuant to an obligation of a bid or bids, the bid or bids must be submitted and accepted before the effective date of the tax change.
- The bid or bids must not be able to be withdrawn, modified, or changed without forfeiting a bond.
- For each qualifying bid, the contractor must give the seller documentation of the bid for which an exemption is claimed.
All deliveries must be made before the 6-month exemption period expires.
If you want to review specifics of the Minnesota Sales Tax Transitional Period, you can visit https://www.revenue.state.mn.us/sales-during-transitional-periods-transitional-sales.
If you have any questions, you can reach out to a Redpath sales tax expert by clicking here.
Teri Grahn, CMI
Teri Grahn, senior manager is the sales and use tax service area leader and is a certified member of the Institute for Professionals in Taxation. She educates and assists commercial entities with multi-state sales and use tax procedures and compliance, and works with clients to review internal records and practices and educates their staff on processes. She also helps clients navigate the unknowns of entering new states and jurisdictions by researching specific products and services, system and invoice set up to remain compliant with future transactions. Teri also supports clients through sales and use tax audits by investigating assessments and answering questions throughout the process. Teri works with clients in various industries including manufacturing and distribution, construction and real estate, and technology. Prior to joining Redpath and Company in 2003, Teri performed sales and use tax audits for the Minnesota Department of Revenue for 9 years.
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