basic sales and use tax - minnesota department of revenue€¦ · basic sales and use tax...

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Minnesota Business Tax Education September 2019

Basic Sales and Use Tax

Disclaimer

This presentation is for educational purposes only. It is meant to accompany an oral presentation and not to be used as a standalone document.

This presentation is based on the facts and circumstances being discussed, and on the laws in effect when it is presented. It does not supersede or alter any provisions of Minnesota laws, administrative rules, court cases, or revenue notices.

If you have any questions, contact us at [email protected] , 651‐296‐6181, or 1‐800‐657‐3777 (toll‐free).

Minnesota Business Tax Education ProgramProviding education opportunities about Minnesota tax laws.

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Course Objectives

After completing this course you will be able to: Apply the basic sales and use tax concepts for Minnesota and its local taxing

jurisdictions to your business Recognize the exceptions to the rule and the exemptions available Distinguish how sales and use tax law applies to different types of businesses

and their business activities Identify how to use and when to accept an exemption certificate Identify the documentation necessary for sales and use tax records and

returns List several resources that answer your sales and use tax questions

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Part 1

Sales and Use Tax Basics


Sales and Use Tax Laws are not the same in every state.

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Five categories of sales

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Intangible

Property

Digital

Products

Tangible Personal

Property

(TPP)

Services

Real

Property

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What are some examples of taxable services in your business?

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Sales tax = transaction tax

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Trust tax

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1. Collect

2. File

3. Remit

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What is a sale?

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Sale

Barter

Providing a service

LeaseWholesale

Retail

Rental


What is use tax?

Complement to sales tax

Self‐assessed

Paid directly to the state

Applies to taxable purchases when sales tax was not charged

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What is the tax rate?

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6.875%

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Sourcing determines where the sale takes place and which taxes are imposed on the sale.

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1. Seller’s Address If the purchaser receives the product at the seller’s location

2. Delivery Address If the purchaser receives the product or service at a location other than the seller’s location

3. Billing AddressBased on the address that the seller has in their records for the customer

Minnesota Statutes 297A.668 and 297A.669


How do I determine what taxes apply to the sale?

Sourcing rules for leases or rentals of TPP

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1st PaymentGeneral Sourcing Rules

(where transfer of property occurs)

Subsequent Payments

Primary Property Location

(address provided to

lessor by lessee)


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SalesPrice

Fabrication labor

Taxes that are obligation of

seller

Service charges

Tips added to bill by seller

Installation labor

Delivery charges

Retail price of good or service

ALL charges that are a condition

of sale

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Sales price does not include:

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Interest charges

Taxes legally imposed on consumer

Term discounts

Cash discounts

Finance charges from extension

of credit

Coupons, unless

reimbursed by a 3rd party

Credit allowed for trade‐in

Manufacturer’s Coupon Retailer’s Coupon

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Light bulb

Tax on $2.50

Subtotal

Less coupon

Total Due

$ 2.50

+ .17 (6.875%)

$ 2.67

‐ .50

$ 2.17

Light bulb

Less coupon

Selling price

Tax on $2.00

Total Due

$ 2.50

‐ .50

$ 2.00

+ .14 (6.875%)

$ 2.14

Retailer’s coupon – seller reduces price by coupon before taxing Manufacturer’s coupon – apply tax before coupon is subtracted

(seller is reimbursed by the manufacturer for the amount of the coupon)

50 cents off 50 cents off

Type of Labor Examples Is it taxable?

Repair labor Car repair Equipment repair Calibrating equipment Sharpening tools

Construction labor Build an office building Kitchen remodel

Fabrication labor Custom sawing Bending sheet metal

Installation labor Computer equipment Modular furniture


When is labor taxed?

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No (if separately stated)

Yes

Yes

No

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When are repair and maintenance contracts taxed?

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Type of Contract Is the contract taxable?

Optional maintenance contracts

(bundled – one nonitemized price)

Optional maintenance contracts

(unbundled – separate itemized prices)

Extended warranty contracts

Yes. Tax is due when the contracted

maintenance is sold.

No. The service provider charges sales

tax to the customer on the taxable

items when the repair is performed.No. The service provider owes tax on

the parts provided under the contract.


When are maintenance agreements for prewritten computer software programs taxed?

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Details of agreement Taxability of agreement

Required by vendor

Includes only upgrades or enhancements

Optional and includes upgrades, enhancements and support services

Optional and includes support services only

The entire charge is taxable

The entire charge is taxable

20% of the charge is taxable

Not taxable

Part 2

Who Needs to Register?

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Who needs to register?

Effective through September 30, 2019, you must register if you:

Make taxable sales into Minnesota

All businesses with a physical presence in Minnesota

Remote sellers who exceed the Small Seller Exception

100 or more retail sales shipped to Minnesota

10 or more retail sales shipped to Minnesota that total more than $100,000

Make purchases subject to use tax 22


Effective October 1, 2019, you must register if you:

Make taxable sales into Minnesota

All businesses with a physical presence in Minnesota

Remote sellers who exceed the Small Seller Exception during the last 12‐month period

200 or more retail sales shipped to Minnesota

retail sales shipped to Minnesota that total more than $100,000

Make purchases subject to use tax23


Businesses with a physical presence must register.

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Leasing or renting TPP

Tradeshowor convention

Performing services

Business location

Repairing or installing TPPNEXUS

Performing construction

work

Affiliated company

Agent or sales rep

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Remote sellers must register even if they only make sales into Minnesota through the use of:

Note: For additional information, see our Remote Sellers FAQs. 25

Telephone

Mail order

Internet

REMOTE SELLER


Does a remote seller who sells through a Marketplace Provider need to register to collect sales tax?

You only sell through a Marketplace

If the Marketplace collects on your behalf, you do not need to register.

If the Marketplace does not collect sales tax on your behalf, you must register and collect the tax unless you meet the Small Seller Exception.

You sell through a Marketplace, your own website, and through other sources

If all retail sales into Minnesota combined exceed the Small Seller Exception, you must collect and remit tax for all sales not reported by the Marketplace.


You may apply for a Minnesota Tax ID Number through the:

Minnesota Department of Revenue’s Business Center

Register online

Register by phone

Mail a completed paper registration form

Streamlined Sales Tax Registration System (SSTRS)

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Part 3

Local Taxes

Local Taxes

Local taxes are added to the state general sales tax rate to compute the total tax rate.

City tax

County tax

Special local tax(es)

Motor vehicle $20 excise tax

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Note: Some cities and counties impose a $20 excise tax on sales of motor vehicles rather than a sales tax. See Fact Sheets 164, 164M, and 164S relating to local sales and use taxes.

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Local Taxes

1. Select the Businesses tab.

2. Expand the list of Business Taxes and Fees section.

3. Select Sales and Use Tax.

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Local Taxes

Select Local Sales Tax Information.

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Local Taxes

Tools to Find Tax Rates Sales Tax Rate Calculator

Sales Tax Rate Map

Sales Tax Rate Map FAQs

Sales Tax Rate Spreadsheet

Rates and Boundaries Data

Local Sales Tax Rate Guide

Twin Cities Area Local Tax Rate Guide

Twin Cities Area Local Tax Rate Map

Select Calculate a Sales Tax Rate from the Top Tasks menu.

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Local Taxes

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Local Taxes

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ZIP + 4 Option

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Local Taxes

Address Option

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Local Taxes

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Map Option

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Local Taxes

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Local Taxes

Sales Tax Rate Spreadsheet

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Local Taxes

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Part 4

When and How to Use Exemption Certificates

There are three ways for a sale to be exempt from sales and use taxes:

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1. Product‐based exemption(Do not need exemption certificate –exempt by statute)

2. Entity‐based exemption(Need exemption certificate unless exempt by statute)

3. Use‐based exemption(Always need an exemption certificate)


Food (grocery items) for human consumption (F.S. 102A)

Clothing for general use (F.S. 105)

Prescription and over‐the‐counter drugs for humans (F.S. 117)

Publications sold by subscription

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Product‐based exemptions

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Federal government agencies

Tribal governments

State and local governments (exceptions apply)

Exempt organizations (organized for charitable, educational, or religious purposes)

Note: The sales tax exemption for entity‐based organizations does not apply to prepared food, candy, soft drinks or alcoholic beverages; the purchases, lease or rental of most motor vehicles; lodging; or waste collection and disposal services unless purchased directly by the federal government. 43

Entity‐based exemptions


Advertising materials shipped out of state

Inventory purchased for resale

Items consumed in performing a taxable service

Items used or consumed in agricultural production

Materials used or consumed in the manufacturing process

Note: See applicable fact sheets for specific details on the exemptions.

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Use‐based exemptions


Businesses claiming these exemptions must complete an exemption certificate:

Direct Pay

Exempt Status (nonprofit exemption)

Motor Carrier Direct Pay

Resource Recovery Facility

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Authorization letters and permits

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Authorized exemption certificates:

Certificate of Exemption, Form ST3 (Minnesota Department of Revenue form)

Certificate of Exemption, Form F0003 (Streamlined Sales Tax form)

Uniform Sales and Use Tax Certificate (Multistate Tax Commission form)

Other state’s exemption certificates (if all required elements are included)

Self‐prepared exemption certificate (if all required elements are included) 46


Required elements for a complete exemption certificate: Purchaser's name and address

Purchaser's Minnesota tax ID number

Purchaser’s type of business

Reason for exemption

Purchaser's signature (if a paper certificate is used)

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48Jane Smith

The purchasing agent must retain the contract as supporting documentation.

The seller’s information is not required but it doesn’t hurt to complete these fields.

The red boxes identify the fields that are required for a complete exemption certificate.

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Purchaser’s responsibilities:

Know if you qualify to claim an exemption

Complete an exemption certificate

Give it to the seller at the time of purchase

Pay any use tax, penalty, and/or interest if used incorrectly

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Seller’s responsibilities

Review all exemption certificates

Keep exemption certificates as part of your business records

Do not unlawfully solicit exemption certificates

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Part 5

How Sales and Use Tax Applies to Business Activities

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Government Agencies

Collect sales tax on taxable goods and services sold

Determine taxability of purchases of taxable goods and services based on type of government

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Federal government agencies are not taxable Tribal government are not taxable State agencies are taxable (use direct pay authorization) Cities, counties, and townships are not taxable

(exceptions apply)


Government Agencies

Purchases made by government employees are taxable unless paid for directly by the government agency

Purchases of prepared food, lodging, and motor vehicles are taxable (except by federal government)

Other states or political subdivisions of other states may qualify for an exemption

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Nonprofit Organizations

Examples of nonprofit organizations are:

Charitable (Federal 501(c)(3) organizations)

Religious

Educational

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Nonprofit Organizations

Collect sales tax on taxable goods and services sold, unless the fundraising exemption applies

Do not pay sales or use tax on purchases used to further the nonprofit’s activities

Pay sales tax on the following: Lodging

Motor vehicles

Prepared food

Purchases made by employees unless paid for directly by the nonprofit55


Contractors

A contractor is someone who:

Furnishes materials and labor

Builds, alters, repairs, or improves real property

Is the end user of the materials and equipment

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Contractors

The following purchases are taxable:

Building materials and supplies, unless an exemption applies for the job*

Construction equipment and tools

Business assets and office supplies

* Contractors may purchase certain material exempt only when the material is specifically exempted by statute, or when they receive a valid Purchasing Agent. See F.S. 128, Contractors.

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Contractors

For sales and use tax purposes, real property includes:

Land

Permanent buildings and structures

Improvements and fixtures incorporated into a building or structure given its current use

intended to be of a permanent benefit

cannot be removed without causing substantial damage to the building or structure

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Contractors

Exception: Real property does not include tools, implements, machinery, and equipment attached or installed into real property that qualify for exemption under section 297A.68.

For example, “capital equipment” used in manufacturing to produce a product ultimately sold at retail.

RN 18‐03: Sales Tax – Capital Equipment Revocation of Revenue Notice #96‐08.

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Contractors

Examples of real property include:

Commercial and residential buildings

Drywall, flooring, and roofing materials incorporated into real property

Landscaped lawns and gardens

Roads, bridges, and railroad tracks

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Retailers

Retailers sell TPP to businesses and individuals.

They must collect sales tax on goods they sell.*

Their inventory bought for resale is not taxable.*

Their purchases of business assets and office supplies are taxable.

They are responsible for paying use tax on goods taken out of inventory for their own use.

* The seller must charge tax unless the item is specifically exempt by law or they have a completed exemption certificate on file (if the sale is sourced to Minnesota and the seller is required to register here.) 61


Contractor/Retailer

Primarily a contractor ‐ at least 50 percent of your business purchases are used for construction activities

Primarily a retailer ‐ at least 50 percent of your business purchases are sold at retail

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Contractor/Retailer

If you are primarily a contractor:

Pay tax on all your purchases.

Charge sales tax on the actual sales price (including your mark‐up).

Deduct the cost of the materials on which you already paid tax when you file your sales and use tax return.

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Note: The $50 purchase amount from the contractor’s original invoice is not recorded on your return. This is an example only. Report total taxable sales on the return.

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Contractor’sPurchase Invoice

Materials $ 50.00

Tax (6.875%) $ 3.44

Total $ 53.44

Amount Reported on theSales and Use Tax Return

Gross Receipts $150

Less: Original Invoice $ 50

General Rate Sales $100

Customer’s Sales Invoice

Materials $150.00

Tax (6.875%) $ 10.31

Total $160.31


Contractor/Retailer

If you are primarily a retailer:

Buy the items exempt for resale.

Pay use tax on your cost of the materials if any of the items are later used in a construction contract.

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Nontaxable Service Providers

Examples include:

Accountants

Attorneys

Banks

Consulting firms

Counselors

Health care providers66

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Nontaxable Service Providers

The majority of services offered by these businesses are not taxable.

Sales of TPP made by a service provider are taxable.

Purchases of business assets and office supplies are taxable.

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Taxable Service Providers

The majority of sales are taxable (see fact sheets for exceptions).

Materials used or consumed in providing the service may qualify for exemption.

Short‐lived detachable tools may qualify for exemption.

Machinery and equipment used in providing the services are taxable.


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Manufacturers

The industrial production process includes:

Design, Research and Development for production of a product

Removal of raw materials from stock to begin production activities

Actual production activities that affect changes to produce the product

Testing and quality control of the product

Placement of the product in finished goods inventory


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Manufacturers

Business assets and office supplies are taxable

Returnable packaging is taxable

Product packaging and other nonreturnable packaging is not taxable*

Raw materials, chemicals and utilities used or consumed in production are not taxable*

Separate detachable tools and special tooling are not taxable*

* The purchaser must provide the seller with a completed exemption certificate for these items.

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Manufacturers

Upfront exemption for capital equipment available (effective July 1, 2015)

Machinery and equipment may qualify as capital equipment if:

used in Minnesota and

essential to the integrated production process

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Agricultural Production

Agricultural production includes:

Agriculture

Aquaculture

Floriculture

Horticulture

Silviculture

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Agricultural Production

Feed, seed, fertilizers, and herbicides are not taxable.

Fuels, electricity, gas, and steam used or consumed in agricultural production are not taxable.

Packaging materials used to package food products are not taxable.

Farm machinery is not taxable.

Returnable containers used to package non‐food items are taxable.

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Sales and Use Tax is a Transaction Tax

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Transaction Tax ‐ Seller

The seller must look at each transaction.

A general contractor rents equipment (without an operator) to a subcontractor.

A wholesaler makes a retail sale to an employee.

A farm implement dealer sells equipment to a contractor.

An accounting firm sells software to a client and installs it on the client’s computers.

A lawn care business provides snow removal services in the winter.75

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Transaction Tax ‐ Purchaser

The purchaser must look at each transaction.

A general contractor buys materials for a tax‐exempt job.

A retail electronics store buys taxable office supplies.

A manufacturer buys utilities to heat their facility.

A farmer buys tires for a tractor.

A building cleaning company buys vacuum cleaners.

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Part 6

Managing your Use Tax

Liability

Managing Your Use Tax Liability

Review your invoices

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What is the basis for use tax?

Use tax is based on:

your purchase price of taxable items or services.

This is true whether you buy items:

for your own business use without paying sales tax,

take them out of inventory and use them in a taxable manner, or

donate them to a charitable organization.

Note: Even if you paid Minnesota sales tax, a local use tax may still apply.79


What should I look for when reviewing invoices?

Review every invoice before you pay it.

Determine if items on the invoice are taxable.

Watch for taxable items purchased with an exemption certificate.

Watch vendor changes (e.g. new computer system).

Never add use tax to a vendor payment; always self‐assess the tax and remit it directly to the Department of Revenue.

Record the amount of use tax accrued on the actual invoice.

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What is a variable rate credit?

Minnesota allows a credit for the amount of sales tax paid to another state

Must be legally due to the other state to receive credit

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1. Calculate the applicable amount of tax due (variable rate X sales price).

2. Enter the amount(s) as variable rate use tax when you file your Minnesota sales and use tax return.

Minnesota sales tax rate 6.875%

Wisconsin state and local sales tax ( 5.500%)

Variable rate tax due to Minnesota 1.375%


Recording your use tax liability

Record this information:

Date of purchase

Invoice number

Vendor’s name and description of item

Taxable amount

Amount of state and local use taxes paid

Keep a copy of the backup documentation.

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Part 7

Maintaining Your Records

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Recordkeeping Basics

Use a recordkeeping system that:

Incorporates Generally Accepted Accounting Principles

Allows you to keep track of the data you need

Does not require an excessive amount of time

Works for you and your business

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Recordkeeping Basics

Make sure that you:

Record each transaction the same

Do not mix personal and business transactions

Do not mix records if you have more than one business

Choose the appropriate accounting method

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Accounting methods

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Cash Basis

Record income when actually received

Report sales tax when actually received

Report use tax when invoice is paid

Accrual Basis

Record income when sales are made

Report sales tax when sales are made

Report use tax based on the invoice date

vs.

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Part 8

Filing and Payment

Instructions

Filing and Payment Instructions

You must do two things to avoid late filing and/or late payment penalties:

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1. File your return electronically by the due date.

(either online or by telephone)

2. Pay your sales and use tax liability electronically or by check on or before the due date.


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Filing Frequency Average Tax Liability Due Date

Monthly filers More than $500 per month (more than $6,000 per year)

20th day of the following month

Quarterly filers Less than $500 per month (less than $6,000 per year)

20th day of the month following the end of the quarter(April 20, July 20, October 20, and January 20)

Annual filers Less than $100 per month (less than $1,200 per year)

February 5 of the following year

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Verification Code

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Verification Code

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95

50000

Enter your gross receipts in the highlighted area.


500002000

500002000

Enter your taxable amounts in the yellow highlighted areas.

1000 14

If you have variable rate purchases, enter the taxable amount and the tax due.

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Common reasons you may need to file an amended return are:

Reported too much or too little tax on your original return

Reported the tax on the wrong tax line

Charged tax incorrectly to a customer and have refunded the tax to the customer

Received a completed exemption certificate from a customer (you reported the tax in a prior period and have since refunded the tax to your customer)

Note: Do not file an amended return for tax paid to a vendor in error.97

Part 9

Communicating with the

Department of Revenue

Communicating with the Department of Revenue

Have a sales and use tax question?

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Sales and Use Tax General Contact Information

Minnesota Revenue website: revenue.state.mn.us

Questions relating to Sales and Use Tax Law?

Email: [email protected]

Questions relating to your Sales and Use Tax account activity?


Prefer telephone assistance?

Phone: 651‐296‐6181 or 1‐800‐657‐3777 (toll free)100


General Contact Information for Other Divisions Business Income Taxes (Corporation Franchise Tax, Partnership Tax,

S Corporation Tax, Estate Tax, Fiduciary Tax)

651‐556‐3075


Withholding Tax

651‐282‐9999 or 1‐800‐657‐3594


Business Registration

651‐282‐5225 or 1‐800‐657‐3605

Email: [email protected] 101


GovDelivery

Choose the updates you want ‐ by tax type and publication type

Choose the frequency of notifications

Sign in directly or use your social media account –

Facebook, Yahoo! or Google

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Sales and Use Tax Videos

e‐Services Instructional Videos

Education Video Series

Inside Scoop: Streamlined Sales Tax

103youtube.com/MNRevenue


Social Media

Keep up with the latest news from the Minnesota Department of Revenue on Twitter, Facebook, and LinkedIn.

twitter.com/MNRevenue

facebook.com/MNRevenue

linkedin.com/company/MNRevenue

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Please notify us if you have changes to any of the following:

Mailing address(es)

Business location(s)

Legal organization

NAICS code

Contact information

Owners and/or officers105

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Did you receive a letter or a bill from us?

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Revenue has a new website! Improved design and

content

Easier navigation

Mobile responsive

Task‐based layout

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The Home button and the key word Search box

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The Top Tasks section displays our most popular web pages.

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The most recent press releases from the Newsroom.

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Part 10

Financial Consequences

of Noncompliance

Financial Consequences of Noncompliance

Note: The maximum combined late file and late payment penalty is 20 percent. Additional civil and criminal penalties may apply.

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Days Late Late Filing Penalty Late Payment Penalty

1‐30 days 5 percent 5 percent

31‐60 days 5 percent 10 percent

60+ days 5 percent 15 percent

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Interest rates used by the Department of Revenue in recent years:

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2019 5%2017 – 2018 4%2010 – 2016 3%


Collection tools available to the Department include:

Levies

License revocation

Liens

Property seizures

Revenue recapture

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Part 11

Course Review

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Course Review

During this class, we discussed …

The basic sales and use tax concepts for Minnesota and its local taxing jurisdictions.

The difference between taxable goods and services and those that are nontaxable or exempt.

The different types of users and how tax applies to different businesses.

How to use and when to accept an exemption certificate.

The documentation necessary for sales and use tax records and returns.

Where to find information to help you answer your questions. 118

basic sales and use tax - minnesota department of revenue€¦ · basic sales and use tax...

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