Minnesota Sales Tax Compliance
Minnesota sales tax compliance is often more complex than business owners expect. Those who own brick-and-mortar stores, sell online to Minnesota customers, or do interstate business often have to collect and remit sales tax. The Minnesota Department of Revenue (DOR) closely tracks and enforces these sales tax requirements.
Keep reading to learn more about how Minnesota sales tax works, who’s obligated to collect it, how to remit payments, and what happens if you fall behind. For more personalized guidance on Minnesota business tax requirements, call BestTaxPro™ at 763-477-4205.
Key Takeaways
- Registration requirements – Most businesses selling taxable goods or services in Minnesota must register for sales tax, even if they aren’t located in Minnesota.
- Filing requirements – Businesses must file sales tax returns monthly, quarterly, or annually, depending on their monthly sales.
- Remote sellers – Out-of-state businesses must register if they have either 200 or more retail sales shipped to Minnesota or more than $100,000 in retail sales shipped to Minnesota.
- Falling behind – Businesses that don’t make required sales tax payments may face penalties, interest, and aggressive enforcement efforts by the Minnesota DOR.
- Payment arrangements – Businesses that can’t pay their sales tax debts can avoid tax collection actions by the DOR if they find other ways to settle their tax debts, such as setting up a payment plan.
Overview of Minnesota Sales Tax
Minnesota sales tax applies to retail sales, the rental of most items, and a variety of services. Business owners required to collect and remit Minnesota sales tax include:
- Retailers with brick-and-mortar stores in Minnesota;
- Service providers offering taxable services anywhere in the state; and
- Online sellers that ship orders to Minnesota customers.
Minnesota, like other states, views sales tax as a trust fund tax. This means that the money collected from customers never actually belongs to the business. Instead, it’s meant to be held in trust for the government until it is remitted to the Minnesota DOR.
Minnesota DOR
The MN Department of Revenue is responsible for registering businesses for sales tax permits, processing sales tax returns and payments, auditing businesses for sales tax compliance, assessing penalties and interest, and collecting unpaid sales taxes via enforced collection actions.
Nexus Rules for Remote Sellers
Only certain out-of-state retailers must collect Minnesota sales tax. A business is considered to have an “economic nexus” in Minnesota if it has either 200+ sales or more than $100,000 in sales in the state each year.
Registering for a Minnesota Sales Tax Permit
Sales tax payments are handled by the Department of Revenue’s e-Service portal. If you registered by phone or mail, you must have your Minnesota Tax ID number and your temporary password to create an account. You can then set up your account with your chosen username.
If you register online, you’re automatically signed up for e-Services. Although you don’t need to sign in until your due date to file a return, the DOR recommends signing in to e-Services ahead of time to ensure that you have time to resolve any login issues and avoid late fees.
The e-Services serves as the headquarters for your business’s tax payment and registration needs. You’ll also log on to e-Services to update your business information, change your filing frequency, add locations, or close your sales tax account if your business shuts down.
Filing Frequency and Due Dates
Your monthly sales and use tax liability determines your sales tax filing frequency:
- Annual: Due by February 5 after the tax year: Applies to businesses with less than $100 in sales tax per month on average.
- Quarterly: Due by April 20, July 20, October 20, and January 20. Applies to businesses reporting an average tax due of $100 to $500 per month.
- Monthly: Due by the 20th of the following month: Applies to businesses owing more than $500 in sales tax per month.
When the due date falls on a weekend, the due date moves to the following business day. You must file a return even if there is no sales tax due.
How to File and Pay
Most businesses are required to file returns and pay their MN sales tax bills online. Some businesses don’t have to pay online and can also pay via cash, check, or money order. Businesses that are required to pay online yet choose to pay via another method will be charged a penalty.
Filing online involves reporting your gross sales, deducting exempt and non-taxable sales, calculating state and local sales tax, and paying what you owe.
When you pay online, you can pay via direct payment from a domestic bank account, an ACH credit payment, a credit or debit card, or a bank wire. Note that each of these payment methods has its own timeline and fee.
For example, payments from bank accounts typically take three to seven days to credit. Credit and debit card payments incur fees of 2.15% and 1.25%, respectively. Keep these extra fees and delays in mind when deciding when and how to pay.
Minnesota Sales Tax Rates
The statewide sales tax rate is 6.875%. Local sales tax rates vary across the state. For instance, Minneapolis adds a 0.15% local rate, 1% area rate, 0.5% city rate, and 0.5% county transit rate, resulting in a final combined sales tax rate of 9.025%. In St. Paul, the combined sales tax rate is 9.875%. There are also special local taxes that are added in some jurisdictions, so business owners should regularly verify that they are using the correct local sales tax calculations.
Special or Reduced Rates
Certain items aren’t subject to sales taxes. These items include:
- Baby products
- Agricultural items used in the production process
- Caskets, urns for remains, and burial vaults
- Cigarettes
- Clothing
- Feminine hygiene products
- Groceries for human consumption
- Medical equipment for home use
- School meals
- Unsweetened water
Alternatively, some transactions are taxed at special rates or subject to specific local taxes, such as lodging and accommodations, entertainment, and alcoholic beverages.
Penalties and Interest for Late Payments
The state also imposes penalties for failing to file within 30 days of receiving a Demand to File letter and filing or paying late more than three times in a 25-month period.
The late filing penalty is 5%. If you pay late, you incur a 5% penalty for the amount not paid by the due date. You’ll incur an additional 5% for each additional month or partial month that the tax is not paid. The penalty maxes out at 15% of the balance due.
There’s a 5% or $100 penalty for extended delinquency, whichever is greater. Those who repeatedly file or pay late may receive a penalty of 25% for the tax not timely paid.
The MN DOR also charges interest for unpaid taxes and penalties. The interest is applied from the tax’s due date until it’s paid in full. The interest rate varies, but typically ranges from 4% to 8%.
Consequences of Unpaid MN Sales Tax
The Department of Revenue is strict about enforcing sales tax requirements and payment schedules, due to sales tax being a trust fund tax. If your business stops filing or paying on time, the DOR system will identify the delinquency and send notices reminding you of your business’s obligation to file and pay.
Should your business fail to catch up voluntarily, the state will then take action to place a lien on business assets, levy funds from business bank accounts, intercept tax refunds, and seize funds from accounts receivable.
If the DOR can’t recover what they’re owed from the business itself, they may move to identify an individual to be liable for the debt. Parties commonly viewed as liable include officers and directors, managers, treasurers, accountants, and supervisors.
Once the DOR assesses personal liability, the DOR takes enforcement collection actions against the individual. This means their personal assets and wages are at risk. This process is similar, but slightly different from how the IRS uses the Trust Fund Recovery Penalty to assess personal liability for unpaid withholding taxes.
Payment Plans and Relief Options
If you aren’t able to pay what you owe in full, you have options. One of the most common options is to request a payment agreement (payment plan). Businesses requesting a payment plan must contact the DOR by phone, email, or letter. Once an agreement is set up, your business must stay in compliance to avoid revocation of their sales tax permit. The DOR may also choose to file a lien against business property until the tax debt is paid in full.
Claiming financial hardship is another option for some businesses. The DOR may stop collection efforts if a business can’t make payments without facing significant financial hardship. Financial hardship for a business might include not paying workers because the business can’t honor previously issued payroll checks.
The DOR also has a compromise option, which is similar to the IRS’s offer in compromise. A compromise allows Minnesota businesses to settle tax debts for less than the full amount.
The DOR only accepts a compromise offer if the amount offered is the most the DOR can reasonably expect to collect from the business. This program requires the completion of Form C58B, Business Financial Statement, and extensive financial documentation, including information on sources of income, liabilities, business expenses, and assets.
Applying for tax relief can be confusing and time-consuming, due to the variety of options available and each program’s stringent requirements. Working with a Minnesota tax professional can help you find the right resolution for your needs and submit all required information.
Sales Tax Audits in Minnesota
The Department of Revenue regularly audits sales tax returns to ensure that a business is collecting sales tax on all taxable transactions, collecting the right amount of tax, remitting tax payments on time and in the correct way, and complying with all other sales tax laws.
The DOR retains the right to audit a return within 3.5 years of it being due or filed, whichever is later. If you haven’t filed a return, there is no time limit for an audit.
Sales tax audits can be triggered in a variety of ways. The DOR may audit due to filing inconsistencies, fluctuations in reported sales, sales information that falls far outside industry norms, unfiled returns, and random selection.
During an audit, plan on providing access to all financial records for the time period in question. The DOR may request access to point-of-sale reports, sales invoices and receipts, bank statements, exemption certificates, and purchase records.
How you handle an audit can significantly influence its outcome. Business owners may unintentionally give the auditor information on noncompliance in years that fall outside the scope of the audit, resulting in further investigation and more penalties. Working with a tax professional during an audit can help you mitigate this risk.
Voluntary Disclosure Program
If you haven’t been contacted by the Department of Revenue and your account isn’t currently under review, you may want to look into the Voluntary Disclosure Program. This program allows taxpayers who have unreported tax liabilities to report and pay those liabilities in accordance with Minnesota tax laws. Taxpayers accepted to the program may receive relief from some or all penalties, as well as a limited look-back period.
Even if you don’t qualify for a formal Voluntary Disclosure Agreement, you may want to look into it. The Department of Revenue can offer some of the same incentives for coming forward of your own accord, even if they can’t offer you a Voluntary Disclosure Agreement.
Get Help with Minnesota Sales Tax
Minnesota sales tax issues can escalate quickly, particularly if you’re trying to catch up on old sales tax liabilities. Based in Rockford, BestTaxPro™ takes an in-depth look at your financial documentation and current sales tax situation to determine what the best path forward is. Take action now to keep the problem from escalating and protect your business’s operations. Call us at 763-477-4205 or reach out online to schedule a confidential consultation now.
