Sky by Zaphad

This information brief explains how nursing facilities in Minnesota are reimbursed. It includes information on how nursing facilities are reimbursed for residents on Medical Assistance (MA), the types of payments nursing facilities receive, rate equalization, the alternative payment system, rebasing, and the nursing facility moratorium and rebalancing.

Nursing Facility Regulation

The Minnesota Department of Human Services (DHS) is responsible for administering the MA reimbursement system for nursing facilities and for establishing the reimbursement rates for each facility. The Minnesota Department of Health (MDH) is responsible for compliance monitoring and quality of care in nursing facilities. Both DHS and MDH are responsible for encouraging quality improvement.

All nursing facilities in Minnesota must be licensed by MDH. Qualifications for licensure are listed in Minnesota Statutes, chapter 144A. These include meeting minimum health, sanitation, safety, and comfort standards. MDH is also the state agency charged with certifying that nursing facilities meet federal standards for participation in the MA program and the federal Medicare program.

Types of Payments Nursing Facilities Receive

Nursing facilities receive payments for operating costs, external fixed costs, and property costs. The operating payment rate includes the following:

• costs for nursing, social services activities, dietary, housekeeping, laundry, building maintenance, and administration
• salaries and wages of persons performing these services
• fringe benefits and payroll taxes
• other related costs such as costs for supplies, food, utilities, and consultants

External fixed payment rate includes the following:

• costs related to the nursing facility surcharge (an annual charge on licensed nursing home beds set in statute) licensure fees
• long-term care consultation fees
• family advisory council fee
• scholarships
• planned closure rate adjustments
• single-bed room incentives
• property taxes and property insurance
• Public Employee Retirement Act costs

Property payment rate includes interest expense and return on equity.

Rate Equalization Law

MA rates and private pay rates do not vary within a facility. This is due to Minnesota’s rate equalization law, which prohibits nursing facilities that participate in the MA program from charging private pay residents more than MA residents. Nursing facilities are however allowed to charge private pay residents a higher rate for a single room and for special services that are not included in the daily rate if MA residents are charged separately at the same rate for the same services in addition to the daily rate paid by DHS.
While nursing facilities are allowed to charge private pay residents less than an MA resident, in actual practice, private pay rates are set at the level of the MA rate. This is because federal and state rules prohibit nursing facilities from charging MA residents more than private pay residents for similar services. In cases where the rate charged to private pay residents is less than the MA rate, the MA rate is made equal to the private pay rate. MA reimbursement policy is therefore relevant to private payers as well as to MA recipients, since a change in MA per-diem reimbursement paid to nursing facilities leads to a corresponding change in the per diem charged to private payers.

The Alternative Payment System

The Alternative Payment System (APS), sometimes referred to as the contract system, was authorized by the legislature in 1995. The goal of the APS was to determine whether a reimbursement system based upon contracts between individual facilities and DHS could reduce nursing facility regulation and give nursing facilities more fiscal flexibility, while promoting consumer satisfaction and good health care outcomes.

Since October 1, 2006, all nursing facilities participating in MA have been reimbursed under the APS. APS was developed as an alternative to an existing cost-based system (sometimes referred to as Rule 50). Under the cost-based system, reimbursement to facilities was based on their reported costs, and at times, certain statutory, geographically based limits applied to the rate of increase in operating costs. Under APS, facilities are exempt from certain statutory requirements of the cost-based system and are reimbursed at the level of their payment rate in effect just prior to entering into an APS contract with the commissioner. These contractual payment rates are adjusted annually for inflation, subject to limitations specified in law. Effective July 1, 1999, through September 30, 2013, the automatic inflation adjustment is applied only to the property-related rate; inflation adjustments for operating costs must be authorized by the legislature and have been at times. However, the 2011 Legislature suspended the automatic inflation of property payment rates for rate years beginning October 1, 2011, and October 1, 2012.

The initial reimbursement rate under the APS was the total per-diem payment rate the facility was receiving under the cost-based system at the time the contract was signed. This initial rate varied with resident case-mix and incorporated reimbursement for care-related, other operating, external fixed, and property costs. Initial property-related payment rates have been adjusted for inflation each October 1 by the consumer price index for urban consumers (CPI-U).

Value-Based Reimbursement System

The value-based reimbursement system calculates operating payment rates for nursing facilities using the statistical and cost report filed by each nursing facility for the report period ending one year prior to the rate year. Similar to the APS, these reimbursement rates would vary with resident case-mix and incorporate reimbursement for care-related, other operating, external fixed, and property costs. This reimbursement system was to be phased in over eight years, but the 2011 Legislature suspended the phase-in.

Case-Mix Classifications and Nursing Costs

Reimbursement rates are facility- and resident-specific. Rates vary with the facility’s historical costs, with the amount of care needed by a resident (as measured by a case-mix classification), and reflect any statutory facility-specific rate adjustments authorized by the legislature. Nursing facilities receive higher levels of reimbursement for residents who need more care and lower levels of reimbursement for residents who need less care. This creates an incentive for nursing facilities to admit individuals who most need nursing facility care.

Nursing facilities are reimbursed by MA on a resident-per-day basis. The nursing home reimbursement levels are adjusted under the Resource Utilization Groups (RUG) case-mix system to reflect the varying care needs of residents. Effective January 1, 2012, the RUG system will be used to classify nursing facility residents into 48 groups based on information collected using the federally required Minimum Data Set assessment. There will also be penalty and default groups for a total of 50 RUG levels. The RUG case-mix reimbursement system for nursing homes is described in Minnesota Statutes, sections 144.0724 and 256B.438.

All applicants to nursing facilities are assessed upon admission and at least every 90 days thereafter and assigned to a case-mix classification based on the level of their dependence in activities of daily living (ADL), the severity of their cognitive and/or behavior management needs, and the complexity of their nursing needs. Each case-mix classification is assigned a case-mix weight, with the lowest level of care receiving the lowest weight and the highest level of care receiving the highest weight. Reimbursement for care-related costs for each classification is proportional to the case-mix weight; per-diem reimbursement for nursing care is therefore lowest for the case-mix classification needing the lowest level of care and highest for the case-mix classification needing the highest level of care. Rates are the same for all noncare-related components across all RUG groups within a facility’s rate set.

Rebasing

The 2007 Legislature required DHS to rebase nursing facility rates. Rebasing allows nursing facilities to have new or currently unreimbursed expenditures recognized in the facility payment rate, subject to certain statutory limits. A facility’s total care-related per diem will be limited to 120 percent of the median for the facility’s peer1 and facility type2
group and 105 percent of the peer group median for other operating costs. Rebasing for operating cost payment rates began October 1, 2008, and was designed to be phased in over eight years, through the rate year beginning October 1, 2015. During the phase-in period, nursing facilities were to receive a blended rate—based partially on the APS reimbursement system and partially on the new value-based reimbursement system. Also during the phase-in period, facilities were to be held harmless—a facility could not receive an operating cost payment rate that was less than what the facility would have received without rebasing. Property rates will be rebased beginning October 1, 2014.
The 2008 Legislature set a rebasing floor for the rate year beginning October 1, 2008, of 1 percent, funded by setting a limit on the maximum increase a facility can receive under rebasing.

The phase-in of rebased rates was suspended for October 1, 2009, through September 30, 2013, but the legislature retained (and did not delay) the phase-in formula currently in law, so that rebasing was supposed resume October 1, 2013, with 65 percent of the payment rate reflecting rebased costs. Through unallotment, Gov. Tim Pawlenty suspended the phase-in of rebasing for fiscal year 2010. This had the effect of eliminating an increase of 1 percent (from 13 percent to 14 percent) in the proportion of a nursing facility’s payment rate that uses rebased costs. The 2010 Legislature voided this allotment reduction and eliminated the phase-in of rebasing for fiscal year 2010. The 2011 Legislature prohibited all further steps phasing in rebased operating payment rates. This is projected to save the state $133 million in fiscal years 2014 and 2015. The savings result from cancelling scheduled rate increases.

Geographic Location and Nursing Facility Rates

Under the old cost-based system, there were reimbursement limits based on three geographic, county-based groups—metro, rural, and deep rural. These limits continue to affect reimbursement rates under the APS system since the initial contracts with nursing facilities were based on their reimbursement rates under the cost-based system. Under the new value-based system, facilities are classified into three newly defined peer groups by county, with a limit placed on the total care-related per diem determined for each peer group. These peer groups are similar to, but not identical to, the old geographic groups. When the new peer groups were created, there was concern among legislators and others that the groupings would create rate disparities3 between nursing facilities in various regions of the state. It is unclear what effect the peer groupings will have on rates at this time.

Nursing Facility Moratorium and Rebalancing

Currently, there is a moratorium on the licensure and MA certification of new nursing home beds and construction projects that exceed $1.4 million. However, there are certain exceptions to the moratorium including for facilities built to address an extreme hardship situation in a particular county, to license or certify beds in a new facility constructed to replace a facility, or to license or certify beds that are moved from one location to another within the state. In addition, the Commissioner of Health may grant construction project exceptions to the nursing facility moratorium if legislation authorizes and funds those projects. The legislature has also, at times, authorized statutory exceptions to the moratorium.

There is an incentive for nursing facilities to create single-bed rooms as a result of bed closures. Facilities that create single-bed rooms as a result of bed closures receive an increase in their operating payment rate. Nursing facilities are prohibited from discharging residents for purposes of establishing single-bed rooms.

Finally, nursing facilities may place beds on layaway status in order to have those beds treated as being delicensed for as long as they remain on layaway. Placing beds on layaway status allows a facility to change its single-bed election for use in calculating capacity days and to receive a property payment rate increase equal to the incremental increase in the facility’s rental per diem resulting from the recalculation of the facility’s rental per diem applying only the changes resulting from the layaway of beds. Nursing facilities are prohibited from discharging residents for purposes of placing beds on layaway status. In a situation where some type of disaster leads to a nursing facility evacuation, nursing facilities may place or remove beds from layaway status and certain timing requirements are waived. This allows facilities to avoid having to pay the bed surcharge and license fee while a facility is evacuated.

Nursing Home License Surcharge

Since July 1, 1993, certain nursing facilities have had to pay a license surcharge. Each nonstate-operated nursing facility licensed by MDH must pay to the state an annual surcharge of $2,815 per licensed bed. Payments must be made to the state in monthly installments and must be equal to the annual surcharge divided by 12. However, it is important to note that nursing facilities receive an amount to offset this surcharge as part of their external fixed cost reimbursement.

Recent Legislative Changes

The value-based nursing facility reimbursement system that was enacted in 2005 includes a quality add-on that allows nursing facilities to receive a higher payment rate based on their quality score. DHS determines a quality score for each nursing facility using quality measures established in statute. The payment rate for the quality add-on is a variable amount based on each facility’s quality score. In addition, DHS and MDH have an online Nursing Home Report Card that shows how each Minnesota nursing facility scored on each of the quality measures.

The 2008 Legislature increased nursing facility operating payment rates by 1 percent effective October 1, 2008, and also temporarily increased the rate by an additional 1 percent; the temporary increase only applied from October 1, 2008, to September 30, 2009.

The 2009 Legislature created nursing facility level of care criteria that will make it more difficult for people to be assessed as needing nursing facility or alternative care once the new criteria are implemented.

The 2011 Legislature made several changes to nursing facility policy and rates, including:

• laying out new criteria and a new process for MDH and DHS to authorize hardship exceptions to the nursing facility moratorium and determine payment rates for new facilities and facilities that are allowed to add beds;
• authorizing consolidation projects for two or more nursing facilities in which one or more is closed and the remaining facility or facilities are upgraded;
• making changes to the equitable cost-sharing for publicly owned nursing facilities program to conform to the conditions under which federal approval was granted;
• reducing MA payments for nursing facility leave days and increasing the occupancy rate needed to be eligible;
• eliminating the planned closure rate adjustment program;
• authorizing the transition to the 48-group RUG-IV case mix classification model;
• increasing operating payment rates by up to 2.45 percent, effective October 1, 2011, for nursing facilities with rates below the 18th percentile of operating payment rates with a RUG weight of 1.00; and
• requiring DHS to provide recommendations to the legislature on how to develop a pilot project to test a model of care between nursing facility care and assisted living.

Nursing Facility Statistics

As of September 30, 2010, there were 380 MA-certified and state-licensed nursing facilities in Minnesota with a total of 31,804 active beds. The average statewide occupancy rate for nursing facilities was 90.9 percent. The average number of MA recipients served in nursing facilities during fiscal year 2010 was 16,694.

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, Nursing Facility Reimbursement, written by legislative analyst Danyell Punelli.

1 Facilities are classified in statute into three groups by county. The groups consist of:

• Group one: Facilities in Anoka, Benton, Carlton, Carver, Chisago, Dakota, Dodge, Goodhue, Hennepin, Isanti, Mille Lacs, Morrison, Olmsted, Ramsey, Rice, Scott, Sherburne, St. Louis, Stearns, Steele, Wabasha, Washington, Winona, or Wright counties;
• Group two: Facilities in Aitkin, Beltrami, Blue Earth, Brown, Cass, Clay, Cook, Crow Wing, Faribault, Fillmore, Freeborn, Houston, Hubbard, Itasca, Kanabec, Koochiching, Lake, Lake of the Woods, Le Sueur, Martin, McLeod, Meeker, Mower, Nicollet, Norman, Pine, Roseau, Sibley, Todd, Wadena, Waseca, Watonwan, or Wilkin counties; and
• Group three: Facilities in all other counties.

2 Facilities are classified in statute into two groups, called “facility type groups,” which consist of: (1) facilities that are hospital-attached, or are licensed under Minnesota Rules, parts 9570.2000 to 9570.3400; and (2) all other facilities.

3 For more information on this topic, see the DHS report, Nursing Facility Rate Disparities, March 2010 (http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_FILE&RevisionSelectionMethod=LatestReleased&noSaveAs=1&Rendition=Primary&allowInterrupt=1&dDocName=dhs16_149196).

The Marriage Penalty in Minnesota’s Income Tax Rates and Brackets

There are many marriage penalties and bonuses under the federal and Minnesota income taxes. A marriage penalty occurs when a married couple pays higher tax than they would if each spouse could file as a single and pay tax on his or her own income. A bonus occurs when they pay lower tax as a married couple than they would if they filed as singles. Penalties and bonuses result from the following:

• the use of combined income for a married couple to calculate their tax
• the progressive rate structure
• the dollar limits on deductions and credits

Minnesota’s income tax produces marriage penalties and bonuses because couples generally pay tax under a progressive rate structure on their joint incomes. As has been widely recognized, when two individuals marry, their combined income tax frequently changes. It may increase, resulting in a marriage “penalty,” or it may drop, yielding a marriage “bonus.” Penalties and bonuses result because both federal and state taxes effectively require the spouses to combine their incomes in calculating tax.1 In the case of Minnesota’s income tax rates, joint filing and reporting of income interacts with the progressive tax rate schedule to produce penalty, while one-earner couples will receive a bonus. The examples in the boxes on this page and the next illustrate how the Minnesota tax, before determination of the marriage credit, can result in marriage penalties for some couples and bonuses for others.

Other Marriage Penalties in Minnesota’s Income Tax System

Nine other features of the Minnesota individual income tax create marriage penalties or bonuses.

The following table lists provisions of the Minnesota income tax that may cause individuals who marry to pay a higher Minnesota income tax. The table also shows the theoretically maximum  marriage penalty and bonus for each of the provisions.6 The provisions are listed in the order in which they occur in computation of the income tax—i.e., deduction from federal tax income first, application of the rates, and finally tax credits.

A number of features of the federal income tax create marriage penalties or bonuses that carry over to the Minnesota individual income tax.

Marriage penalties and bonuses under the Minnesota income tax also result from the close links between the state tax and the federal income tax. Calculation of Minnesota taxable income begins with federal taxable income. Taxpayers take the amount of federal taxable income from  their federal return and then make a few modifications to determine Minnesota taxable income to which the tax rates apply. As a result, many deductions and exclusions under federal law determine the amount of state taxable income. For example, itemized and standard deductions, deduction of capital losses, and retirement savings deductions (e.g., 401(k) plans, IRAs, and so forth) are determined by federal law for state purposes.

The legislature has opted to conform to federal income tax provisions for a number of reasons. Perhaps the most important of these is simplicity and ease of compliance and administration for both taxpayers and the Revenue Department. Since most individuals must comply with the federal tax, adopting its provisions greatly simplifies compliance with the Minnesota tax. Adopting an approach that deviates from federal law on these basic tax base calculations could have a high cost in additional resources for individuals to comply with the law. This was one of the major complaints about the pre-1985 Minnesota tax, which differed substantially from federal law; the pre-1985 law included using individual filing rather than joint filing by married couples, the major source of penalties and bonuses.

The federal government enacted several marriage penalty relief provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The act does the following:

• Increases the standard deduction for married joint filers to be twice as large as the deduction allowed for single filers. Subsequent federal legislation (the Jobs Growth and Tax Relief Reconciliation Act (JGTRRA) of 2003 and the Working Families Tax Relief Act (WFTRA) of 2004) accelerated this increase to take effect in 2003.
• Increases the size of the 15-percent bracket for married joint filers to be twice the size of the bracket for single filers. (Scheduled to take full effect for tax year 2008.)
• Increases the income level at which the earned income credit begins to phase out for married joint filers. (Scheduled to take full effect for tax year 2008.)

Minnesota conformed to the acceleration of the increased standard deduction in JGTRRA 2003 (effective for tax years 2003 and 2004), but delayed one year, to tax year 2006, before conforming to the continued acceleration of the deduction in WFTRA 2004. As a result, the standard deduction allowed married joint filers at the state level in 2005 was smaller than that allowed at the federal level. For 2006 through 2010,7 the increased standard deduction will flow through to Minnesota income tax returns and decrease penalties at the state level. The other two federal changes do not directly affect penalties in Minnesota’s income tax. However, in 2001 Minnesota followed the federal earned income tax credit changes by increasing the income level at which the working family credit begins to phase out to match the increases provided at the federal level under EGTRRA: by $1,000 in tax years 2002 to 2004, $2,000 in 2005 to 2007, and $3,000 in 2008, with the amount adjusted for inflation in following years.8

Minnesota Income Tax Marriage Credit | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Income Tax Marriage Credit, written by legislative analysts Nina Manzi and Joel Michael.

1 A married couple may file separate federal returns with each spouse separately reporting his and her income and deductions. However, doing so nearly always results in a higher total tax liability. Minnesota law requires taxpayers to file using the same filing status that they do for federal purposes. Minn. Stat. § 289A.08, subd. 6.

2 Before tax year 2003 and in tax year 2005, H and W would have faced an additional marriage penalty under the Minnesota income tax as a result of the standard deduction for married joint filers being smaller than that allowed for single filers. As a result, marriage resulted in a combined reduction in the standard deduction compared with filing singly. The federal Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 put the marriage penalty in the standard deduction on a schedule to gradually phase out by tax year 2009. The federal Jobs Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 temporarily accelerated the married joint standard deduction to equal twice the single deduction for tax years 2003 and 2004 only. Minnesota conformed to the EGTRRA 2001 and JGTRRA 2003 changes. The federal Working Families Tax Relief Act of 2004 (WFTRA) further accelerated the schedule so that the married joint standard deduction would equal twice the single deduction for tax years 2005 through 2010. Minnesota did not conform to WFTRA until tax year 2006, so that Minnesota’s income tax included a marriage penalty resulting from the standard deduction in tax years before 2003, and in tax year 2005. The increase in the standard deduction for married joint filers sunsets after tax year 2010; unless Congress extends this provision and Minnesota conforms, married joint filers will once again face an additional marriage penalty due to the difference in the married joint and single standard deduction beginning in tax year 2011.

6 The amounts are theoretical maximums, since it is not clear if any couple has the specific circumstances necessary to realize the maximum penalty or bonus. In some instances, fairly unusual or atypical circumstances may be required to reach the maximum penalty or bonus. Nevertheless, the maximums may be useful to point out the outer limits or parameters for the penalties and bonuses of each provision.

7 Like many other EGTRRA 2001 provisions, the increased standard deduction sunsets after tax year 2010.

8 Laws 2001, 1st spec. sess., ch. 5, art. 10, § 7; the increase in the income level at which both the earned income credit and the working family credit begins to phase out sunsets after tax year 2010.

Marriage Tax Credit by 401k

The marriage credit, enacted by the 1999 Legislature, is designed to reduce the “marriage tax penalty” paid by some married couples without increasing marriage
bonuses. The credit equals the higher income tax paid by a married couple under the married joint income tax brackets, as compared with the tax they would pay if their earned income were taxed separately under the single tax brackets. The maximum credit in tax year 2008 is $332; the credit amounts and other parameters are adjusted annually for inflation and for changes to Minnesota’s tax rates. This information brief explains the marriage credit and some marriage penalties in Minnesota’s income tax system.

The Marriage Credit

Legislators sought to address the marriage penalty issue as part of a package of income tax rate reductions proposed in the 1999 legislative session. Initial legislation proposed increasing the brackets for married joint filers to be twice the width of the brackets for single filers. This approach had been proposed in several bills introduced in both the 1997 and 1998 legislative sessions. While increasing the married joint brackets would have eliminated penalties for the 350,000 Minnesota couples who faced them, it also would have increased marriage bonuses for other filers. The cost depended on the magnitude of the rate reductions proposed; setting the married joint brackets at twice the width of the single brackets at the 5.5 percent, 7.25 percent, and 8.0 percent rates ultimately enacted would have cost an estimated $106 million in tax year 1999. Over half this cost—$58 million—would have provided bonuses, with the remaining $48 million removing penalties.

Budget constraints led lawmakers to seek a less costly way to address the issue, and the discussion focused on a credit that would remove the penalties without increasing bonuses. The marriage penalty credit that developed consisted of a table that provided a credit roughly equal to the penalty faced by couples at different income levels. The credit offsets penalties under the rate and bracket system, but does not provide bonuses. The estimated cost for the credit was $48 million in tax year 1999, $58 million less than the estimate for doubling the brackets.

The credit is based on the earned income of the lesser-earning spouse and the taxable income of the couple. The credit as enacted in 1999 defined “earned income” as wages and self-employment income. Information about these forms of income is readily available to both taxpayers and the Department of Revenue through W-2 forms filed by employers and through  reporting of self-employment income for Social Security tax purposes. Legislation enacted in 2000 expanded the definition of “earned income” to include taxable pension and Social Security income, which are reported separately to each spouse and generally reflect an individual’s earning history.3 Joint taxable income is already calculated as part of the tax return. As a result, it is relatively simple for taxpayers to look up their credit in the tax instructions. The table below shows the credit as it will appear in the 2008 tax booklets.

The credit table is a function of the difference between Minnesota’s three marginal rates and the relationship between the brackets for single and married joint filers. The credit table enacted in 1999 was tied to the marginal tax rates in effect for 1999—5.5 percent, 7.25 percent, and 8.0 percent, with a 1.75-percentage point difference between the first and second rates, and a 0.75-percentage point difference between the second and third rates. The 1999 law directed the Commissioner of Revenue to index the credit annually for inflation, just as the brackets are indexed annually. The 2000 omnibus tax law reduced the marginal tax rates to their current level (5.35 percent, 7.05 percent, and 7.85 percent) and adjusted the table to reflect a changed relationship between the rates. There is now a 1.7-percentage point difference between the first and second rates, and a 0.8-percentage point difference between the second and third rates. The 2000 law also directed the commissioner to adjust the table as needed to reflect the relationship between the tax rates.4 This provision allows the marriage credit to automatically follow along with any future changes to the marginal rates. In 2001, the legislature enacted language proposed by the Department of Revenue replacing the credit table enacted in 1999 with the formula used in calculating the table.5

The marriage credit only addresses penalties imposed under Minnesota’s rate structure. It does not remove bonuses currently paid under that rate structure, nor does it alleviate penalties or bonuses that are “passed through” to the Minnesota income tax because of features of federal law. Instead, it simply provides a credit roughly equal to the penalty couples face because of Minnesota’s progressive rate structure and combined filing requirement.

The marriage credit does not address penalties that exist as a result of the distribution of unearned income between spouses. There is currently no reporting required as to the amount of unearned income on a return that pertains to each spouse. Applying a credit to unearned income would require greater reporting and could also encourage couples to reallocate the ownership of assets to maximize the credit. The types of income used in calculating the marriage credit—wages, self-employment income, taxable pensions, and taxable Social Security benefits—cannot be easily reallocated from one spouse to another. Because it was not the intent of legislators to either provide a complicated solution or one that resulted in the tax system encouraging asset shifting, the credit was limited to earned income.

Minnesota Income Tax Marriage Credit | Marriage Penalty

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Income Tax Marriage Credit, written by legislative analysts Nina Manzi and Joel Michael.

3 Laws 2000, ch. 490, art. 4, § 22.

4Laws 2000, ch. 490, art. 4, §§ 23-24.

5 Laws 2001, 1st spec. sess., ch. 5, art. 7, § 41.

Getting a License

All distributors and subjobbers, including those located outside Minnesota, must be licensed before they can sell or distribute cigarettes in Minnesota.

You’re a cigarette distributor if you:

• acquire untaxed cigarettes for sale to Minnesota subjobbers or retailers;
• ship or transport cigarettes to Minnesota retailers to be sold by those retailers; or
• purchase cigarettes directly from a manufacturer and apply cigarette stamps to at least 50 percent of the cigarettes you sell.

You’re a cigarette subjobber if you:

• acquire stamped cigarettes from a distributor to sell to retailers;
• are a licensed distributor who delivers, sells or distributes stamped cigarettes from a business not covered in your distributor’s license; or
• are a vending-machine operator; principal business is operating, or owning and leasing to operators, machines for the vending of merchandise or service.

To apply for or renew your license, fill out the attached license application, Form CT100. Use a separate application for each license. Licenses are valid for a two-year period beginning January 1 of each even-numbered year and ending December 31 of the following odd-numbered year.

If you’re applying for a license in the second year of the licensing period, pay only half the license fee. Fees are listed on the application.

If you’re a licensed cigarette distributor, you must apply for a separate distributor’s license for each location from which you plan to distribute cigarettes. You may apply for a separate subjobber’s license for each place of business, other than the licensed location for the distributor, from which you sell or distribute stamped cigarettes.

After you Get Your License

Display your license prominently at the location indicated. Your license allows you to conduct business as a distributor or subjobber at the place of business shown on the application. Licenses are not transferable to another person.

Your license may be revoked or suspended if you violate any act applicable to the sales of cigarettes.

Use of Information

All information on this form is required by M.S. 270C.306, including Social Security numbers of officers, partners or members. Social Security numbers are private information and cannot be disclosed to others without consent. All other information is public.

If all the information, other than your phone number, is not provided, your application may be delayed or denied. If you provide a phone number where you can be reached during the day, the department can save time if questions arise.

Forms

There are separate cigarette forms for Minnesota distributors, nonresident distributors and cigarette importers. Please use the appropriate forms listed below.

License Application and Order Form

CT100 License Application for Cigarette Distributors and Subjobbers

Cigarette Forms

Forms for Minnesota Distributors

CT201 Cigarette Tax Monthly Return
CT201-A Unstamped/Other-State Stamped Cigarettes Received During the Month
CT201-B Credit for Returned Cigarettes
CT201-C Out-of-State Cigarette Sales
CT201-F Monthly Cigarette Fee
CT201-I Cigarette Inventory
CT201-N Cigarette Sales on Native Reservations
CT201-R Cigarette Reconciliation
CT201-S Minnesota Stamped Cigarettes Received During the Month

Forms for Nonresident Distributors

CT401 Cigarette Tax Monthly Return
CT401-B Credit for Returned Cigarettes
CT401-C Minnesota Cigarette Sales
CT401-F Monthly Cigarette Fee
CT401-I Cigarette Inventory
CT401-N Cigarette Sales on Native Reservations
CT401-R Cigarette Reconciliation

Forms for Importers

CT501-A Cigarettes Imported During the Month
CT501-C Unstamped Cigarette Sales to Minnesota Distributors
CT501-D Out-of-State Cigarette Sales
CT501-I Cigarette Inventory
CT501-R Cigarette Reconciliation

Miscellaneous Cigarette Tax Forms

CSB Cigarette Surety Bond
CT109A Distributor Affidavit (Application for credit memo for damaged cigarette tax stamps)
CT211 Cigarette Stamp Order Form
CT601 Cigarette and Tobacco Audit (for Minnesota subjobbers)
CT601-I Cigarette Inventory (for Minnesota subjobbers)

Filing Your Monthly Return

Before You File

You Need a Minnesota ID Number

Your Minnesota tax ID number is the seven-digit number you’re assigned when you register with the Department of Revenue. Generally, this is the same as your sales and use tax or Minnesota employer’s withholding tax number.

You must include your Minnesota tax ID number on your return so that any payments you make are properly credited to your account.

If you don’t have a Minnesota tax ID number, you must apply for one. Apply online at www.revenue.state.mn.us, or call 651-282‑5225 or 1-800-657-3605.

Due Date

All cigarette tax returns and payments are due on the 18th day of the month following the end of the reporting month. You must file a return even if there is no tax liability for that month.

The U.S. postmark date is considered the filing date (postage meter marks are not valid). When the due date falls on a Saturday, Sunday or legal holiday, returns and payments made electronically or postmarked on the next business day are considered timely.

Cigarette Brands Subject to Fee in Lieu of Settlement

There is a fee on cigarettes produced by manufacturers that:

• are not making annual payments to the state of Minnesota under the tobacco settlement agreement from State v. Philip Morris Inc., No. C1-94-8565 (Minnesota District Court, Second Judicial District); or
• have not voluntarily entered into an agreement with the state of Minnesota to make payments under terms similar to those in the above settlement agreement.

Filing Reminders

When Completing Your Return

• Enter your name, address, FEIN, Minnesota tax ID number and tax period on each form.
• Use the attachment sequence numbers when assembling. Numbers are in the top right corner of each form under the form number.

Keep Good Records

You must keep complete and accurate records at each licensed location, including:

• itemized invoices of cigarettes held, purchased, manufactured, brought in or caused to be brought in from outside Minnesota, or shipped or transported to retailers in Minnesota; and
• sales of cigarettes made, except sales to the ultimate consumer.

Your cigarette records must show names and addresses of purchasers, inventory of all stamps affixed and unaffixed, all cigarettes on hand at the close of each period, and any other documents related to the purchase, sale or disposition of cigarettes.
Save all books, records and other documents for at least 3½ years. We may ask to inspect your records or inventory at any time during normal business hours.

Amending Your Return

To file an amended return, check the appropriate box at the top of the form.

Electronic Payment Requirements

If you owe $10,000 or more in tax during the last 12-month period ending June 30, you’re required to make payments electronically the following calendar year.

You must also pay electronically if you’re required to pay any Minnesota business tax electronically, such as sales and withholding tax.

Failure to pay electronically when required will result in a penalty being assessed. The penalty is 5 percent of each payment that should have been remitted electronically, but was remitted by some other means.

Electronic Payment Options

• Go to www.revenue.state.mn.us and log in to e-Services.
• If you don’t have Internet access, call 1-800-570-3329 to pay by phone.

For both methods, you’ll need your user name, password and bank routing and account numbers. When paying electronically, you must use an account not associated with any foreign banks.

ACH credit method and Fed Wire. If you use other electronic payment methods, such as ACH credit method or Fed Wire, be sure to check with your bank or Fed Wire representative to find out when to initiate the payment in order for it to be received on time. Some banks require up to three business days to transfer funds. Additional instructions for making a payment by ACH credit are available on our website or by calling 651-556-3035.

Penalties and Interest

You’ll be billed penalty and interest charges if you don’t pay or file your taxes on time.

Late payment. The penalty for not paying on time is 5 percent of the unpaid tax for each 30 days the payment is late (or any part of 30 days) up to 15 percent.

Late filing. If you also do not file your return on time, a late-filing penalty is added to the late-payment penalty. The late-filing penalty is 5 percent of the unpaid tax.

The maximum penalty for paying and filing late is 20 percent.

Criminal penalties may also apply if you knowingly file a false or fraudulent return, or intentionally don’t file to avoid paying tax.

Interest. You’ll be charged interest on the unpaid tax plus penalty from the date the tax was due until it is paid in full.

License Application for Cigarette Distributors and Subjobbers

April 2007 | AN EDUCATIONAL GUIDE FOR MINNESOTANS | Focusing on How Minnesota Taxes Business | Produced and Originally Published by the Minnesota Center for Public Finance Research

This publication was reproduced with the express consent of the Minnesota Taxpayers Association. This publication may not be reproduced in whole or in part without permission.

Table of Contents

• Introduction
• Questions and Answers
• Overview
• Taxes Designed Specifically for Business
• Types of Legal Organizations of Business
• Taxes That Are Paid by Individuals That Are Also Paid by Business
• Minnesota State and Local Business Taxes by Type
• Policy Background
• Making Costs Visible and Understandable
• Effects on Demand for Services
• Levels of Government
• Synonyms for “Business”
• Costs of Doing Business
• Sound Business Tax Policy
• State & Local Business Taxes Allocated to MN Households as Percent of Income by Income Level
• Ideas for Business Tax Reform

Understanding Business Taxation | Introduction

The Minnesota Taxpayers Association, through its educational and research arm of the Minnesota Center for Public Finance Research (MCPFR), has produced two educational booklets that help explain complex government finance systems in Minnesota. The first one is called Understanding Your Property Taxes and was first published in the fall of 1991 for property taxes payable in 1992, with the latest edition being prepared for taxes payable in 2006.

Our more recent educational booklet is called Understanding Education Finance, first published in January 1997 for the 1996-97 school year. It has recently been updated for the 2005-2006 school year. Both of these educational booklets are available on MCPFR’s website at www.mntax.org/cpfr. Both of these booklets are also written in an easy-to- understand format of questions and answers, with useful appendices containing additional data and information.

Yet, we have felt that our educational series is incomplete. There is a third topic about which we believe there is general and widespread confusion, misunderstanding, and even frustration, and that is the topic of the taxation of business.

Anyone following the historic 2005 legislative session is aware that there is disagreement among legislators and policy makers regarding this topic. There has been a great deal of discussion and disagreement on several questions regarding the taxing of businesses:

• Are businesses paying their “fair share” of taxes?
• Are businesses paying too much in taxes to be competitive with businesses in other states and around the world?
• Are businesses being treated unequally from one business type to another?

Each advocate group for one of these views is armed with a thicket of statistics to back their claims. Even policy makers have trouble making sense of the jumble of charts, graphs, and tables presented by lobbyists across the political spectrum in their testimony before legislative committees. The average citizen tends simply to tune out.

We offer this booklet, Understanding Business Taxation, to help bring some clarity to the debate, add to the knowledge of Minnesotans regarding what good business tax policy principles are, and examine Minnesota’s current business taxes using those principles.

If you are interested in how businesses are and should be taxed, and are confused by current discussions about that, then you are reading the right booklet. We have stayed with our familiar question and answer format from our previously produced educational booklets to make this topic as straightforward and as understandable as possible.

Questions and Answers On Business Taxation | Overview

Q: I guess I’ve never really thought much about it before, but how are businesses taxed in Minnesota now?

A: There are two main ways businesses are taxed in this state. The one probably the most people are aware of is through taxes specifically designed for certain types of businesses, such as the corporate income tax. But the other way is one most people are not aware of, but which accounts for most of the taxes businesses pay, and that is through taxes common to nearly everyone, such as property, sales, and individual income taxes.

Q: You mean businesses pay more than just the corporate income tax? What kinds of taxes do businesses pay?

A: Yes, businesses pay many more kinds of taxes than just corporate income taxes. Here is a list of the kinds of taxes businesses pay in Minnesota:

Taxes Designed Specifically for Businesses

Corporate Franchise (or Income) Tax—This tax was combined from the corporate income tax and bank excise tax in 1987, and is designed to tax the Minnesota allocated net income of a business that is incorporated at a rate of 9.8%. (See the text box on the next page for the various legal forms businesses can take for tax purposes.)

Insurance Premiums Tax—for insurance companies’ gross premiums received minus any returned premiums, at rates of 0.5% to 2%

Health Care Provider Surcharges and Provider Taxes—part of the funding for the MinnesotaCare health insurance program for low-income Minnesotans, these surcharges and taxes are on nursing homes, wholesale drug distributors, hospitals, dentists, home health care, clinics, and other health care providers.

Occupation Tax—a tax similar but not identical to the corporate franchise tax imposed on the mine value of ore.

Airflight Property Tax—for air carriers engaged in air commerce, in lieu of a registration tax.

Mining Production Taxes (Local)—charged mining companies by the ton for each ton of taconite or direct reduced iron produced.

Other Mining Taxes—including severed mineral interests, unmined taconite, and aggregate material production taxes.

A Variety of Local Franchise Fees and Licenses for Business— these are generally in the form of a small percentage of a company’s receipts, typically from 1% to 3% (in the case of fees), or a flat amount (in the case of licenses) as part of the cost of the privilege of doing business in a city.

Taxes Paid by Individuals That Are Also Paid by Businesses

General Sales and Use Tax—like everyone else, businesses must pay sales taxes on all their purchases, unless it is for certain types of equipment, or is for materials consumed in a manufacturing process.

Individual Income Tax—businesses organized as “sole proprietors” or in various forms of partnerships and professional associations do not pay the corporate income tax, but instead pay the individual income tax on their income after expenses are deducted. (Again, see the text box on the previous page for the various legal forms businesses can take for tax purposes.)

Excise Taxes—these are like sales taxes but are usually imposed as a flat amount per unit, rather than as a percentage of price (but not always). Examples of these are the gasoline tax, and alcohol and tobacco taxes (on any such purchases businesses make), and mortgage and deed registry taxes.

Property Taxes—these have been mostly local in recent decades, but beginning in 2002, business and cabin properties are now subject to a statewide property tax. Businesses must pay property taxes directly on most properties they own, or indirectly through rent paid in buildings they lease.

Q: That’s a lot of different kinds of taxes! How much do businesses pay in these taxes every year?

A: There is no precise accounting of just how much businesses pay, primarily because for so many of them, business tax payments are mixed in with those paid by individuals, too. Studies have been done, however, that use various sources of information to estimate the portion of all state and local taxes that are paid by businesses.

One such study from the Council on State Taxation in Washington, DC is Total State and Local Business Taxes conducted by the Ernst & Young accounting firm (see citation in Table 1 below). Their latest study gives estimates of how much of the total state and local tax burden businesses pay by state. Table 1 shows their estimates for 2006, the latest year available.

Table 1. Minnesota State and Local Business Taxes, By Type, FY2006

(Dollars in Billions)

Q: Wow! That is a lot more than I thought they would be paying. I’ve heard a lot about businesses paying their fair share of taxes. Why do people say that if businesses are already paying a lot?

A: When people talk about businesses paying their “fair share” of taxes, they are most likely talking about one tax in particular, and that is the corporate income tax. Corporate income tax collections have dropped as a percent of Minnesota’s total state tax collections, from a high of over 10% in the late 1970s to a recent low of just over 4% in 2002. They have since climbed back up to about 7.2% of the state’s total tax collections.

Q: So businesses pay over 40% of all the cost of state and local government?

A: Actually, they pay about 42% of state and local taxes, but businesses also pay many fees to both state and local governments. There isn’t readily available data for the fees, especially local ones, and determining businesses’ portion would be a large and difficult project.

Questions and Answers On Business Taxation | Policy Background

Q: There was a lot of talk about “taxes” versus “fees” in a recent legislative session. What is the difference between the two?

A: The distinction between a tax and a fee is not as clear cut as you might think. Think of the difference as a line, with taxes on one end and fees on the other end, with gradations of each from one end of the line to the other. The exact point at which a tax becomes a fee is somewhat a matter of opinion, but the extremes on either end of the line are more obvious.

At one end of the “tax-fee” line, a tax is something paid to government by all or most people for government services that benefit the population at large. The amount of the tax is set primarily through the political process, to collect an overall amount of money deemed appropriate for the level of services provided, and not tied to the cost of a particular service.

At the other end of the line, a fee is an amount of money paid for a specific service to the one paying the price. The price is typically set to recover the cost of providing that service, or some portion of the cost.

Q: Why is it so important whether or not something is a fee or tax?

A: In practical terms it may not be very important to our day- to-day life whether something is a fee or a tax. But from a public policy point of view, it is more important.

Any functioning government requires money to operate. This is highlighted in a couple of famous quotes about the necessity of taxes:

“I like to pay taxes. With them I buy civilization.”

~Oliver Wendell Holmes, Jr., Associate Justice of the U.S. Supreme Court, 1902-1932 (another version has him saying “Taxes are the price we pay for a civilized society.”)
“Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”

~Franklin D. Roosevelt, 32nd President of the United States, 1933-1945

Both quotes have to do with taxes, but their emphasis is different. The Roosevelt quote emphasizes paying for a privilege that is not necessarily related to a particular cost or price, which is a characteristic of general taxes. “Dues” for “privileges” tend not to be cost-based. The Holmes quote emphasizes buying something with taxes—a more “price conscious” way of discussing taxes that is actually more consistent with fees.

The policy implications of which method governments emphasize to raise taxes are related to the cost/price issue of taxes versus fees in a couple of ways:

1. Making costs visible and understandable
• Taxes—Governments that raise most of their money through general taxes that are not closely tied to the cost of the services may not be as concerned with making the cost of those services visible and understandable to the public. The costs represented by the taxes paid are spread across the population, usually more closely aligned with incomes of taxpayers than any other characteristic. The mechanism of raising money through general taxes makes the price of the services nearly invisible to the typical beneficiary of the many services of government.
• Fees—Governments that raise most of their money through fees, on the other hand, may tend to emphasize the price tag for the services they offer, and promote a clearer understanding to the taxpayer (or “fee payer”) of the cost of the services offered. A government that raises its money primarily through fees that are closely related to the cost of the services makes prices very visible to those receiving the services.
2. Effect on Demand for Services
• Taxes—If the price of government services is perceived by the majority of voters to be cheap or free, it is fairly easy to see that this would result in an increased demand for such services. When a majority of a society values expanding government services and wants the funding of those to be as painless as possible on the majority of voters, revenue will tend to be raised for those services through general taxation, especially based primarily on the ability to pay.
• Fees—If voters are aware that any request for more services will result in a direct increase in the amount they pay to government, it is fairly easy to see that this would tend to encourage more careful consideration on the part of the voters before requesting more services.

Q: What is the right way for governments to raise their money?

A: There is no one “right” way to raise government money. Some services are not easily priced to the individual and must be paid for through general taxation. Other services could be paid for by taxes or fees, with the choice of funding largely a political matter. A combination of taxes and fees, with different kinds of taxes, is typically considered the best approach.

Having said that, there is a consensus among academics who study tax policy that using fees as much as possible in order to make the cost of government services as transparent as possible to voters is the better approach for a self-governing tradition such as we have in this country.

The governments shown in the text box vary across the entire “tax-fee” spectrum in how they raise money. All levels of government use some combination of taxes and fees. The “tax-fee” mix generally reflects preferences of the voting population in the area.

Q: It makes sense that the clearer the price tag is the more careful people will be in requesting more services. How does this “tax-fee” discussion relate to business taxes?

A: It has to do with the nature of business itself. “Business” is basically the selling of goods or services or both (see the text box for some common synonyms for “business”). In order to have something to sell, in the case of goods, or to make people aware of your business, in the case of services, you must spend money either to buy the goods to sell or to advertise your services. Such purchases are known as “the cost of doing business” (see the box on the next page) and include additional purchases, too, such as paying rent for space, utilities, supplies, and wages for anyone you hire to help you in your business. Government acknowledges these costs by allowing businesses to deduct such expenses from their income taxes before reporting any profits that are to be taxed.

Q: You mean I am paying the taxes a business pays when I buy from that business?One final point about the “cost of doing business:” for any business to survive, much less thrive, these costs must be recovered eventually or the business cannot continue to function. These costs are recovered through prices paid by customers for whatever goods or services the business is offering. When you as a customer think of it in these terms, you may begin to realize that you are actually paying part of the costs of the business by purchasing goods or services, including any taxes and fees they pay to government. (Consumers don’t pay all the costs. Economists also believe workers and investors pay part of the costs of businesses, too, through lower wages and lower returns on investments.)

A: That is correct. You are also helping to pay the taxes of the employer you work for, in the sense that, absent any tax bill, the employer could pay you higher wages. If you invest in a company, you help pay its taxes, too, because your return is lowered by any taxes and fees the company pays.

Understanding Business Taxation |Sound Business Tax Policy

Q: It sounds to me like you are saying the best way for the government to raise money is with fees. Is that right?

A: It is true, as mentioned earlier, that tax policy experts and economists generally recommend that fees be used by governments whenever possible. This makes government costs visible to voters (a concern of some tax policy people) and helps ensure that government’s prices are reflective of the benefits costs so as not to stimulate demand for the services (something economists tend to worry about).

It is especially true when assessing businesses for the cost of government services.

Q: Why is that especially true for businesses?

A: Remember the discussion about the consumer, worker, and investor actually paying business taxes as part of the cost of doing business? The more businesses are subject to general taxation, the less relationship there is between the taxes they pay and the cost of the government services provided to them. Since these tax costs are passed on in one form or another, voters end up paying the taxes without realizing it, undermining the visibility and economic efficiency of a government’s revenue raising system.

There is another problem with the general taxation of business: since the nature of business varies so much from one company to another, a generally applied tax can have a much different effect on one type of business versus another.

For example, consider a grocery store versus a computer training company. Since a grocery store buys nearly all of its inventory for resale to customers, it does not pay a lot of sales tax on its purchases. A computer training company, however, has to buy all its computers for use in training. It must pay a sales tax on nearly every purchase. The amount of sales tax paid by each company on its purchases (not collected from customers of the two businesses, but actually paid by the business itself), would be much different, with little or no connection to the amount of services each type of business receives from government.

Another little known fact about taxes that businesses pay is that when they are traced to where they end up—on households based on purchases of goods and services, wages, and investments—lower income households are shown to pay a greater share of their income in hidden business taxes than higher income households. See Table 2 for how the Minnesota Department of Revenue believes taxes paid by business actually affect Minnesota households by income level.

Table 2: State and Local Business Taxes Allocated to Minnesota Households as Percent of Income by Income Level, 2004

Source: MN Department of Revenue Tax Incidence Study, 2007, published 3/2007.

Notice that as incomes increase, the percentage of income households pay in hidden business taxes (the shaded columns) decreases, even though total state tax burdens are relatively flat across all incomes. This is known as a regressive pattern of tax incidence. The pattern shown by the “Total on Individuals” column is known as a progressive pattern, with tax rates rising as income increases.

Q: So should governments only charge fees to businesses and not tax them at all?

A: In theory, yes, but it is widely recognized that it is not always possible to determine specifically which businesses benefit from certain government services and what is the cost of those services. Charging businesses fees for the benefits they receive from government services would be an economically efficient way

Minnesota Center for Public Finance Research

to collect revenue from businesses, and would at the same time minimize the amount of tax revenue hidden from the general public in the cost of doing business.

Q: What kinds of benefits do businesses receive from government services?

A: Before answering this more broadly, it may be helpful to think of some specific examples. Suppose that you are in the business of selling coffee over the Internet. When you receive an order, you package it to mail to the customer’s address. Your package may be carried by a truck to its destination. On what did the truck travel to get to its destination? City streets and major state and national highways, most likely.

Various levels of government have raised significant amounts of money to build and maintain these streets and highways, which together with other public improvements are called “infrastructure.” Funding such transportation infrastructure is a service provided by government that benefits business.

Other services include such things as court systems for enforcing contracts and protecting private property, police and fire services for additional property protection, sewer services for public health and safety, and so forth. Their value to business is more immediately apparent to anyone who has tried to conduct business in parts of the world where these kinds of services are not provided at all, or are not provided very well.

Q: Do we know how much it costs government to provide these types of services to businesses?

A: Not precisely. Just as we do not know precisely what portion of the total tax burden business pays, we aren’t exactly sure just what benefits from government services businesses get, nor how much they cost.

Studies have been done, however, just like in the tax area, that estimate what portion of state and local government spending can reasonably be described as benefiting businesses.

Q: What do the studies show about the cost of government services provided to businesses?

A: One such study by William Testa and William Oakland, published in 1996 as an Economic Perspectives paper of the 7th District Federal Reserve Bank of Chicago1, estimated that in 1992, 13.8%, or $94.1 billion, of state and local government expenditures in the United States directly benefited business, while the remaining 86.2% of the expenditures primarily benefited households. The paper’s estimate for the portion of state and local taxes in the U.S. paid by business was 29%, or $160.5 billion.

In a study the Minnesota Taxpayers Association conducted that replicated Drs. Testa and Oakland’s methodology for 2002 state and local government spending in Minnesota2, the portion of such spending attributable to benefiting business was 13.8%, or $3.6 billion. MTA’s estimate of the portion of state and local taxes paid by businesses was 36.9%, or $8.4 billion.

Q: So in Minnesota, in 2002, businesses paid $8.4 billion in state and local taxes, but only received $3.6 billion in benefits from state and local governments?

A: The numbers cited above are the result of reasonable assumptions made about what spending should be considered to be a benefit to businesses versus households, and reasonable people could disagree. The magnitude of how much more businesses are paying may not be exactly a 1.7 to 1 ratio (the $160.5 in taxes divided by the $94.1 billion in spending for the U.S.) or a 2.3 to 1 ratio (the $8.4 billion in taxes divided by the $3.6 billion in spending in Minnesota). Nevertheless, it seems clear from these studies that regardless of assumptions used that businesses are paying more in taxes to state and local governments than they receive in benefits from them.

Understanding Business Transaction | Ideas for Business Tax Reform

Q: What do you think should be done about the gap between what businesses pay in taxes and what they receive in services from government?

A: The Minnesota Taxpayers Association has, for many years, advocated for a more accountable state and local tax system, one that keeps taxes as visible as possible while recognizing taxes must be based to a certain extent on a person’s ability to pay. Because business taxes are invisible to voters, MTA advocates for assessing businesses on a fee basis to reflect as closely as possible governments’ cost of providing services to business.

Q: Would it be difficult to move to more of a fee basis for taxing business?

A: It is difficult on several levels, including the process of identifying services provided by government that could be converted to a cost-fee basis, but that process is not impossible. The most difficult part, however, is probably the political resistance it would generate.

Q: Why would there be “political resistance” to making business taxes more like fees?

A: To say that it is a policy goal to move toward assessing businesses on a fee basis to align revenue obtained from business as closely as possible with the government costs of providing services to business may not create much resistance at first. Once this goal is re-phrased in common language, however, to say “cut business taxes by 50% to 60% and increase taxes on households by 30% to pay for it”—it is obvious why there would be resistance to that.

The resistance from such a re-statement would not be based on facts, though. Because businesses pass their tax costs on like all other costs, as discussed earlier, households are already paying these taxes—they just don’t know it.

Q: So would it be fair to say that one of your goals is to make the business taxes people are already paying through their purchases more visible to them?

A: That’s right! Another way to say it is to “move those taxes out from under the cover” of business costs by shifting them to households. It will require a lot of educating the public, though, since the concept of their paying hidden taxes now is not very well known. That is one of the reasons for this booklet—to help bring this information to the attention of more people.

Q: What are some specific ideas you have for making business taxes more visible?

A: One of the most obvious ways to make taxes more visible to the public is to exempt all business purchases from the sales tax, while extending the sales tax to nearly every household purchase of both goods and services. Because Minnesota’s current sales tax base is relatively narrow compared to other states (due to the exemption of food, clothing, and most services), the actual sales tax rate could be lowered some, depending on how many current exemptions were eliminated compared to eliminating sales taxes on business inputs.

Another idea talked about quite a bit is to eliminate the corporate franchise tax on profits. Taxing profits does not encourage companies to make profits, but to always look for ways to lower them, either through accounting practices or other means. Such taxes also have no connection with the benefits businesses receive from government. The corporate income tax is also notoriously complex and imposes many compliance costs on both governments and taxpayers.

The small share of state tax revenues that come from this tax could be replaced with a much broader based tax on some measure of government services provided directly to businesses. Because the base would be very broad, and the level of tax needed from business would be lower (to reflect the cost of services provided), the rate could be very low. New Hampshire has such a tax with a rate of only 0.5%.

Q: Do you have other goals regarding business taxation?

A: Something that is always a concern regarding business taxes is competitiveness, that is, how does Minnesota’s taxation of business compare with other states and even nations, since our competitors are no longer simply our neighboring states, but countries around the world.

Q: How competitive are Minnesota’s taxes on business with other states and countries?

A: There is no single measure of competitiveness regarding Minnesota’s business taxes that adequately answers that question. One ranking from the Ernst and Young report cited previously shows that Minnesota ranks 35th highest in the U.S. on the measure of business taxes as a percent of private economic activity. A large part of that activity used in that measure, however, is wage income, and since wages are higher in Minnesota than in many parts of the country, that tends to reduce Minnesota’s rank on that measure. It doesn’t necessarily mean Minnesota is very competitive on business taxes.

The Minnesota Taxpayers Association has conducted property tax comparison studies since 1995 that rank property taxes on commercial and industrial parcels for the largest city in each state and a typical small town in each state. Minneapolis’ business property tax rankings have improved over the years compared to the other states’ largest cities, from highest in the country in 1995 to anywhere from 7th highest to 31st highest in the country depending on the type and value of property and its location.

The state and local sales tax collections for Minnesota, some 40% of which is paid by businesses, ranked only 34th highest in the country when measured against personal income in the state, and 22nd highest per person. This is in spite of a state rate of 6.5%, which is the 3rd highest state rate in the nation. The discrepancy is due to our narrow sales tax base mentioned previously, and the fact that Minnesota does not allow a lot of local sales taxes, unlike other states.

Not much information exists comparing Minnesota’s state taxes to those in other countries.

So all in all, Minnesota’s business taxes are competitive in some cases and not competitive in others. It is not an overriding issue for Minnesota businesses in general, but competitiveness must be kept in mind when considering tax reform, and it can usually be improved.

Q: So what would be your ideal business tax?

A: First, it would be more like a fee, set as closely related to the cost of a specific government service as possible. Second, the overall level of business payments to government would be closer to the amount of state and local government spending directed toward business. Third, it would not discriminate among different types of businesses—in other words, it would be “economically neutral.” Fourth, it would have a very low rate and a very broad base, for competitive reasons.

With these general concepts, several variations of a good business tax could be designed. Whether or not such a tax can actually be enacted into law will depend on pressure from the voting public. It is only if voters grasp that they are already paying all business taxes anyway that they will ask that these hidden tax costs be brought into the light.

1 State-Local Business Taxation And The Benefits Principle, William H. Oakland and William A. Testa, Economic Perspectives, Federal Reserve Bank Of Chicago. Available on the Internet at http://www.chicagofed.org/publications/economicperspectives/1996/epjan96a.pdf

2Taxing Business: Taxes Received versus Cost of Services Provided by State and Local Government in Minnesota, Minnesota Taxpayers Association, March 2007, www.mntax.org.

References Cited in This Booklet

Where to Go for More Information

1. T otal State and Local Business T axes, 50-State Estimates for Fiscal Year 2006, prepared in conjunction with the Council on State Taxation by Robert Cline, et. al., Ernst & Young, February 2007, available on their web site: http://www.statetax.org/COSTHome.cfm.
2. State-Local Business Taxation And The Benefits Principle, William H. Oakland and William A. Testa, Economic Per- spectives, Federal Reserve Bank Of Chicago. Available on the Internet at http://www.chicagofed.org/publications/ economicperspectives/1996/epjan96a.pdf
3. T axing Business: T axes Received versus Cost of Services Provided by State and Local Government in Minnesota, Minnesota Taxpayers Association, April 2007, www.mntax.org/research/documents/Businesstax.php.

If you’re receiving phone calls in an attempt to collect a debt that you legitimately do not owe, the following cease and desist letter template may be useful in your attempts and efforts to clear up any confusion and get the annoying debt collectors off from your back.

Remember, if a debt collector fails to comply with your letter or violates any other section of the Fair Debt Collections Act in any way, the court may hold the debt collector liable in the amount up to $1,000.

[Your name]
[Your address]

[Creditor's name]
[Creditor's address]

[Date]

RE: Collection attempts on a debt I do not owe.

Dear [Name of collector]:

On [date of phone call(s)], you or someone from your company contacted me about a debt.  I do not believe that I owe this, and I dispute it.

In accordance with the Fair Debt Collection Practices Act formally known as and codified under 15 USCA §§ 1692(a-p), I am asking for, and you are required to provide me with the following information:

a) Why do I owe the money?
b) How this amount has been calculated in a way I can understand.
c) Copies of the papers where I agreed to pay what you say I owe.
d) (if applicable) a copy of the judgment.
e) The name of the original creditor.
f) Demonstrate that you are licensed in my state, and provide this license number to me.

Additionally, please provide this letter to the company for whom you are collecting so that they have notice of my dispute.

Please inform any credit reporting agencies to which you have reported this debt to, that this debt is currently in dispute.  I will require proof that you have done this.

You are also required to cease and desist from contacting me in this and any related matters unless it is by United States Mail, and only for the purpose of informing me that you are terminating all efforts to collect or that you are taking specific court of legal action.

Sincerely,

[Your signature]_________
[Your printed (typed) name]

Free Download of the Collection Agency Cease and Desist Letter Template

• Cease & Desist Collection Agency Calls RTF
• Cease & Desist Collection Agency Calls DOC

The Act Modifies Emergency Management Powers

The emergency management powers of the governor, the executive council, and other officials are governed by provisions in chapters 9 and 12. The act expands the emergency management powers of the governor and others. Some of the expanded powers may be exercised only when an emergency has been declared, and some powers may be exercised in emergency and nonemergency situations to help train or prepare for future emergencies.

New powers to be exercised in emergencies and nonemergencies. The governor may exercise the following new powers in emergencies and nonemergencies.

• Facilities: The governor may procure facilities2 in accordance with the state’s emergency operations plan and emergency management program.
• Arrangements and agreements with tribal authorities: The governor may enter into mutual aid arrangements or cooperative agreements with tribal authorities. This is in addition to the governor’s existing power to enter into mutual aid arrangements or cooperative agreements with other states and Canadian provinces.
• Occupying public places and facilities, using transportation: Prior law authorized the governor to direct or control the conduct of people in the state and the movement of people and traffic before, during, and after drills and emergencies. The new law specifies that these powers include the authority to control who may enter or leave a stricken or threatened public place, who may occupy a facility, and all forms of public and private transportation.
• State agency activities: The governor may transfer the personnel or duties of state agencies to perform or facilitate emergency response and recovery programs.

New powers to be exercised only during emergencies. The following new powers may be exercised when an emergency has been declared.

• Governor’s orders and rules: Prior law gave orders and rules adopted by the governor during a national security emergency the full force and effect of law; those orders and rules also had to be approved by the executive council and filed with the secretary of state. The act expands this law, to give the full force and effect of law to orders and rules adopted by the governor during a peacetime emergency declared due to a public health emergency; these orders and rules must also be approved by the executive council and filed with the secretary of state.
• Commandeering medical supplies and facilities: The governor, state director of emergency management, or a member of a state or local emergency management organization designated by the governor may commandeer medical supplies3 and facilities4 for emergency management purposes, when necessary to save lives, property, or the environment. These powers may be exercised during a national security emergency declared for any reason, or during a peacetime emergency declared due to a public health emergency.
• Requiring service and commandeering property: Prior law authorized the governor, state director of emergency management, or a member of a state or local emergency management organization designated by the governor to require, during a national security emergency, any person to perform emergency management services, if the person is not a member of the military and is not an officer of the state or a political subdivision. Prior law also authorized the governor, state director, or designated member to commandeer motor vehicles, tools, appliances, and other personal property during a national security emergency. The act expands this law, to allow these powers to also be exercised during a peacetime emergency declared due to a public health emergency.
• Disposition of bodies: During an emergency declared due to a public health emergency, the governor may exercise certain powers to ensure the safe disposition of dead human bodies. This applies only to deaths related to the public health emergency. The governor may ensure the safe disposition of bodies; take control of a dead human body and order an autopsy; and ask that any business or facility authorized to dispose of dead human bodies be allowed to be used during an emergency, if the actions are reasonable, necessary, and safe. Requirements for the identification of bodies are also established.

Minn. Stat. §§ 12.03, subds. 4d, 6a; 12.21, subd. 3; 12.32; 12.34, subd. 1; 12.381.

The Act Confirms a Person’s Right To Refuse Medical Examinations, Testing, and Treatment During an Emergency

The act specifies that during any type of emergency, a person may refuse medical examinations, testing, and treatment. However, if a person refuses any of these services after being directed to submit to them by the commissioner of health, the commissioner may order the person to be isolated or quarantined, in certain circumstances. When possible before examining, testing, or treating a person for a condition related to an emergency, the health care provider must notify the person to be examined, tested, or treated of the right to refuse and the consequences of refusal

Minn. Stat. § 12.39.

The Act Establishes Isolation and Quarantine Standards and Due Process Procedures

The act contains two provisions that refine and clarify the authority of the commissioner of health to isolate and quarantine individuals. One new section defines isolation and quarantine terms and establishes basic standards that the commissioner, or any person acting under the commissioner’s authority, must follow when isolating or quarantining. This section also specifies when a person’s isolation or quarantine must end, confirms the ability of isolated and quarantined persons to refuse medical testing and treatment, and governs who may enter isolation and quarantine areas. Another new section establishes due process procedures for isolated and quarantined persons.

Isolation and quarantine apply to different groups of people. A person may be isolated if the person has been infected with a communicable or potentially communicable disease. A person may be quarantined if the person is otherwise healthy but has likely been exposed to a communicable or potentially communicable disease.

Application. The new isolation and quarantine provisions apply to people who have or may have certain communicable or potentially communicable diseases believed to be caused by bioterrorism or a new, novel, or previously controlled or eradicated agent or toxin. However, they do not apply to people with communicable diseases that are directly transmitted from person to person.5

Isolation and quarantine standards. When the commissioner or another person acting under the commissioner’s authority isolates or quarantines a person or group, the commissioner or other person must comply with certain basic standards. These standards include using the least restrictive means to isolate or quarantine, keeping isolated people separate from quarantined people, regularly monitoring their health status, moving quarantined individuals into isolation if they become infectious, immediately releasing individuals if they will not transmit a communicable or potentially communicable disease to others, addressing the physical needs of isolated and quarantined individuals, and isolating and quarantining people in safe, hygienic places.

Right to refuse examination, testing, and treatment. Any isolated or quarantined person may refuse medical treatment, testing, and examination. If a person refuses to be examined, tested, or treated as ordered by the commissioner or another person, the person may be subject to continued isolation or quarantine.

Entering an isolation or quarantine area. Only persons authorized by the commissioner or a person acting under the commissioner’s authority may enter an isolation or quarantine area.

The commissioner must allow a family member of an isolated or quarantined person to enter, if the family member signs a consent form. A person entering an isolation or quarantine area may be isolated or quarantined, if by entering the area the person poses a public health danger.

Procedures for isolating or quarantining a person. There are two procedures under which a person may be initially isolated or quarantined: court order and temporary hold.

• Court order: The commissioner or a local public health board may obtain a court order to isolate or quarantine a person for up to 21 days. In seeking this type of order, the commissioner does not need to give notice of the application to the person to be isolated or quarantined.
• Temporary hold: The commissioner may isolate or quarantine a person for up to 48 hours using a temporary hold issued by the commissioner, without obtaining a court order. If the commissioner uses a temporary hold, the commissioner must apply for a court order within 24 hours, and the court must decide whether to grant or deny the court order within 24 hours. If the court order is granted, the person may be isolated or quarantined for up to 21 days. If the order is denied, the person must be released.

A person who is isolated or quarantined may request and obtain a court hearing in some specific situations.

• An isolated or quarantined person may, at any time while under isolation or quarantine, request a court hearing to challenge it. This hearing must take place within 72 hours of the request.
• The commissioner or a local public health board must ask for a court hearing if the commissioner or board wants to continue a person’s isolation or quarantine beyond the initial 21-day period. After this hearing, the court may order a person’s isolation or quarantine to continue for up to 30 days, or may order the person to be released. For each additional 30-day period for which the person will be held, another court hearing must be held, and another court order must be obtained. If the court denies a request for continued isolation or quarantine, the person must be released.
• An isolated or quarantined person may request a court hearing to ask for changes to his or her treatment while isolated or quarantined or changes to the circumstances of isolation or quarantine. This hearing must be held within seven days of its request. The court may order changes to a person’s treatment or circumstances of isolation or quarantine if the court decides that the person’s isolation or quarantine does not comply with the standards described above.

Release from isolation or quarantine. A person must be released from isolation or quarantine when the court order expires. In addition, the commissioner may release a person at any time if the commissioner determines isolation or quarantine is not needed to protect the public.

Minn. Stat. §§ 144.419; 144.4195.

The Act Requires a Study and Report to the Legislature

At the end of the 2002 legislative session, many significant issues were not resolved. Legislators determined that a certain number of these issues needed to be examined further before taking action on them. Accordingly, the act directed the commissioner of health to study these issues and report on them to the legislature by January 15, 2003. Subjects that were addressed included:

• Immunity for health care providers and others acting during a public health emergency
• Emergency measures regarding dangerous facilities and materials, controlling medical facilities and supplies, and limiting public gatherings and transportation
• Steps to detect and prevent the spread of disease
• Due process protections to apply to isolated and quarantined people
• Steps to ensure people comply with emergency measures, and with measures to detect and prevent the spread of disease
• Ways to preserve the effectiveness of certain antibiotics to fight diseases
• The impact of the commissioner’s recommendations on the constitutional and other rights of the public

In developing recommendations on these issues, the commissioner consulted with several government agencies and private groups. Before submitting recommendations to the legislature, the commissioner published the recommendations in the State Register and gave the public at least 30 days to comment on them. The 2004 Legislature did not act on any of the recommendations. The report can be found at www.health.state.mn.us/oep/docs/2003_02_20_emergencyPowers.pdf.

Laws 2002, ch. 402, § 20.

MN Emergency Health Powers Act | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Emergency Health Powers Act, written by legislative analyst Anna Bonelli.

2 Facility means any real property or any motor vehicle or other means of transportation. It does not include a private residence, so the governor does not have authority to procure private homes.

3 Medical supplies means any medication, durable medical equipment, instruments, or other material that a health care provider deems not essential to the continued operation of the provider’s practice or facility. It does not include medication, durable medical equipment, or other material that is an individual’s personal property being used by that individual or that an individual has borrowed, leased, or rented for treatment or care; these types of supplies cannot be commandeered.

4 See footnote 2 for a definition of facility.

5 A disease is directly transmitted if it is sexually transmitted, bloodborne, or transmitted through direct or intimate skin contact.

The Act Authorizes the Governor to Declare a Public Health Emergency

Provisions in Minnesota Statutes, chapter 12, specify when the governor may declare a national security emergency or a peacetime emergency. The governor has discretion in deciding when to declare a national security or peacetime emergency. During an emergency, the governor may exercise additional emergency management powers. The act expands the situations in which the governor may declare a national security or peacetime emergency, to allow either type to be declared when a public health emergency exists.

• A national security emergency may be declared when a public health emergency occurs in Minnesota that is caused by enemy sabotage or other hostile action.
• A peacetime emergency may be declared when a public health emergency endangers life and property, and local government resources are not adequate to handle the situation.

Definition of public health emergency. For an emergency to be declared due to a public health emergency, there must be an illness or health condition present in Minnesota, or an imminent threat of an illness or health condition, that meets two specific criteria.

1. There must be evidence that the illness or health condition is caused either by:
• bioterrorism;1 or
• a new, novel, or previously controlled or eradicated airborne, infectious agent or airborne, biological toxin; and
2. There must be a high probability that the illness or health condition will cause at least one of the following:
• a large number of deaths
• a large number of serious or long-term disabilities
• widespread exposure to an airborne agent that poses a significant risk of substantial future harm to a large number of people

Determining whether these criteria are met will require the governor to exercise judgment. For instance, the governor must determine what constitutes a large number of deaths or disabilities, what level of exposure constitutes a significant risk, and what substantial future harm means.

Requirements regarding consultation and notice. Before the governor declares an emergency due to a public health emergency, the governor or the state director of emergency management must consult with the commissioner of public safety, the state director of homeland security, the commissioner of health, other experts, and, if the emergency occurs on Indian lands, the appropriate tribal authorities. However, the governor may declare an emergency without consultation if the situation requires it. When an emergency is declared due to a public health emergency, the governor and commissioner of health must notify legislative leaders, relevant committee chairs, and minority members on relevant legislative committees.

Convening the legislature. The act ensures that the legislature is in session when an emergency is declared due to a public health emergency. Prior existing law required the governor to call the legislature into session when the governor wanted to exercise emergency powers during a national security emergency. The act expands the governor’s duty to convene the legislature so it applies to a peacetime emergency declared due to a public health emergency. Accordingly, if the governor wants to use the emergency powers conferred by chapter 12 during a peacetime emergency declared due to a public health emergency and the legislature is not in session, the governor must call the legislature into session. If the legislature is not called into session, the governor cannot exercise his or her emergency powers.

Termination and renewal of a public health emergency. The act provides that an emergency declared due to a public health emergency automatically terminates 30 days after it is declared. In addition, the legislature may terminate this emergency any time after it is declared. For the legislature to terminate an emergency, a majority in each body must vote to do so. The governor has authority to renew an emergency declared due to a public health emergency for 30-day periods. Termination of an emergency by the legislature overrides a renewal by the governor.

Minn. Stat. §§ 12.03, subds. 1c, 9a; 12.31, subds. 1, 2; 12.311; 12.312.

MN Emergency Health Powers Act | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Emergency Health Powers Act, written by legislative analyst Anna Bonelli.

1 Bioterrorism is defined in part to mean the use of a microorganism, virus, infectious substance, or biological product to cause death, disease, or biological malfunction in a living organism. The agent must be intentionally used to influence the conduct of government or coerce a civilian population.

Emergency by Jason Rojas

This information brief summarizes the Minnesota Emergency Health Powers Act, enacted in May 2002. The act expands the circumstances under which the governor may declare a national security emergency or peacetime emergency, increases the emergency management powers available to the governor and other officials, establishes standards and due process procedures for people being isolated or quarantined, and requires a study of other issues not resolved by the legislature.

Overview

In May 2002 the Minnesota Emergency Health Powers Act was enacted, giving the governor, commissioner of health, and other officials tools to respond to a public health emergency in this state. (Laws 2002, ch. 402, codified mainly in Minnesota Statutes, chapter 12) Initial versions of the act were based on a proposal by the Minnesota Department of Health (MDH). The MDH proposal, in turn, was drawn from a Model State Emergency Health Powers Act prepared for the federal Centers for Disease Control and Prevention. The MDH proposal and the model act addressed a broad range of issues. The emergency health powers bills received substantial debate as they moved through the legislative process, and the final act addresses fewer issues than the initial proposals. The act covers the following topics:

• When the governor may declare a public health emergency
• Changes to the emergency management powers of the governor and other officials
• A person’s right to refuse medical examinations, tests, and treatment
• Standards for isolation and quarantine, and due process procedures that apply to people who are isolated or quarantined
• Issues for the commissioner of health to study further and report on to the legislature in the 2003 session

All provisions in the act became effective May 23, 2002, the day following final enactment. The 2004 Legislature extended the act’s expiration date to August 1, 2005 (Laws 2004, ch. 279, art. 11, § 7). This sunset date gives the legislature three legislative sessions to modify and refine provisions in the act. If no legislative action is taken before the sunset date, the statutory changes made by the act will expire on that date.

MN Emergency Health Powers Act | Governor’s Authority

MN Emergency Health Powers Act | Management Powers and People’s Rights

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota Emergency Health Powers Act, written by legislative analyst Anna Bonelli.

The Single Member Limited Liability Company (SMLLC) As An Alternative to the Sole Proprietorship Some Frequently Asked Questions

There is increasing interest in the Single Member Limited Liability Company (SMLLC) as an alternative to the sole proprietorship for the organization and operation of a small business in Minnesota. A SMLLC is an LLC in which a single individual or other entity (called a “member”) owns all of the LLC ownership interest. A SMLLC is a legal entity separate from its owner and so offers the owner a degree of protection from liability for the acts, debts, and obligations of the SMLLC. The SMLLC also offers the choice of taxation as a corporation or taxation as a “disregarded entity” where the SMLLC is disregarded for income tax purposes and all income flows directly to the owner who reports the income and pays the tax using the owner’s personal income tax return. Anecdotal evidence would indicate that the majority of individuals considering the SMLLC as an alternative to a sole proprietorship choose to be taxed as a disregarded entity.1

The questions here do not address all issues associated with the choice of a SMLLC nor do they address the procedures for SMLLC formation.

How extensive is the liability protection given the owner of a SMLLC?

Unlike a sole proprietorship where the business owner and the business are one and the same, a SMLLC is an entity separate from its owner.2 Minnesota law provides that a member, governor, manager, or agent of a limited liability company is not personally liable for the acts, debts, liabilities, or obligations of the limited liability company.3

It is important to note that the owner will be liable for any personal guarantees or pledges the owner may make to any financial institutions or other lenders to guarantee a loan or other credit facility or financing made to the SMLLC.

The owner will be liable for any and all deliberate or negligent personal torts.

The owner can also be personally liable for actions (like signing a contract) where it is not clear that the owner is acting on behalf of the SMLLC. All documents of the SMLLC, to include checks, contracts, purchase orders, bids, and the like should bear the name of the business entity with LLC following the name. Likewise, those documents should be clear on their signature lines that the owner is an authorized signer and is signing on behalf of the SMLLC and not in his personal capacity.

Minnesota law also provides that the same conditions and circumstances under which creditors can “pierce the corporate veil” of a corporation to reach the assets of an owner also apply to piercing the veil of an LLC.4

Is the owner of a SMLLC an “employee” for purposes of federal employment and Social Security (FICA) taxes?

The owner of a SMLLC is self employed for purposes of employment and FICA taxes. Payments to the owner are not classed as “wages” but as “distributions.” The owner is subject to the self‐employment tax equal to the sum of both the employer and employee FICA and Medicare tax. For the year 2010 that total is 15.3 percent of the first $106,800 income and 2.9 percent of any income in excess of $106,800.5

Can the owner of a SMLLC deduct “trade or business expenses” of the SMLLC on the owner’s personal income tax return?

Treasury Regulations provide that the owner of a SMLLC is treated as a sole proprietor in this situation and may deduct trade or business expenses—including the LLC’s share of employment taxes—for activities carried on or through the SMLLC. These are reported on the owner’s Form 1040, Schedule C, E, or F (depending on the nature of the business).6 As a self‐employed taxpayer the owner may also deduct the cost of health insurance for the owner, the owner’s spouse, and the owner’s dependents.7

Does a SMLLC have to file an IRS election if it wants to be taxed as a disregarded entity?

Only a SMLLC wishing to be taxed as a corporation must file Form 8832 making the election. Treasury Regulations provide that an eligible entity (here the SMLLC) not filing an election will be “disregarded as an entity separate from its owner if it has a single owner.”8

Does a SMLLC require a federal Tax Identification Number (TIN)?

If the SMLLC has employees it will obtain its own TIN for making employment and FICA payments and filing quarterly and annual employment tax returns.9

If the SMLLC has no employees the owner may continue to use the owner’s Social Security number or to obtain a separate TIN. If the SMLLC does not have a TIN and the owner uses the owner’s Social Security number, Treasury Regulations require that the SSN be used for all federal tax purposes.10

Is the owner of a SMLLC personally liable for employment tax payments for SMLLC employees?

Not since 2009. Current regulations provide that the SMLLC itself and not the owner is the party liable for payment of employment taxes.11

How will a SMLLC be treated for State of Minnesota tax purposes?

Minnesota has adopted the federal tax treatment for LLC—including SMLLCs—formed in Minnesota.12

Can an LLC whose only owner‐members are a husband and wife be a SMLLC?

Treasury Regulations provide that an LLC whose only members are a husband and wife can be a SMLLC which the owners can elect to have taxed as a disregarded entity if—among other factors—the LLC is held as community property under state law.13 Minnesota is not a community property state.

A section of the Internal Revenue Code resulting from the Small Business and Work Opportunity Act of 2007 provides that a husband and wife owned unincorporated “qualified joint venture” can elect to not be taxed as a partnership and instead have the respective income of each spouse taxed as if it were sole proprietor income.14 The guidance for such an election on the IRS’ web site, however, states that “A business owned and operated by the spouses through a limited liability company does not qualify for the election.”

1 The reasons for choosing taxation as a corporation (for example, tax treatment of business losses) are beyond the scope of this publication which is directed toward the SMLLC choosing to be taxed as a disregarded entity.

This publication is published to offer timely, accurate, and useful information on topics of concern to small businesses in Minnesota. It is for general information purposes only. It is not legal advice and should not be relied on for resolution or evaluation of legal issues or questions. Readers are advised to consult with their private legal advisors for specific legal advice on any legal issues they may have.

Information in this publication on tax matters, both federal and state, is not tax advice and cannot be used for the purposes of avoiding federal or state tax liabilities or penalties or for the purpose of promoting, marketing or recommending any entity, investment plan or other transaction. Readers are advised to consult with their private tax advisors for specific tax advice on any tax related issues they may have. 

This post has been adapted from the  Minnesota Department of Employment and Economic Development’s publication, The Single Member Limited Liability Company (SMLLC) As An Alternative to the Sole Proprietorship Some Frequently Asked Questions