If you are selling goods or products online and some of your customers are located in Minnesota, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Minnesota is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you are not required to collect sales tax for an Internet-based sale to someone in that state. However, Minnesota has special rules that apply to certain larger Internet retailers that make them subject to sales tax laws even without a physical presence in the state (see Minnesota’s Amazon law, below).
Examples of Physical Presence
Example 1: You are an online retailer located in Tuscaloosa, Alabama and make a sale through your website to a customer in Duluth, Minnesota—a state where your business has no physical presence: You are not required to collect sales tax from the Duluth customer. (There is an exception to this example if you are a large seller with substantial sales in Minnesota; see below.)
Example 2: You are an online retailer located in Saint Cloud, Minnesota and make a sale through your website to a customer in Saint Paul, Minnesota: You are required to collect sales tax from the Saint Paul customer.
Example 3: After several years of operating solely out of a warehouse in Tuscaloosa, Alabama, you open a one-room satellite office just outside of Minneapolis, Minnesota—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Rochester, Minnesota: You are required to collect sales tax from the Rochester customer.
In 2013, Minnesota’s sales tax statute was amended with new rules for out-of-state sellers. The changes have the effect of requiring larger Internet retailers with no physical presence in Minnesota to collect and pay Minnesota’s sales tax. Specifically, an out-of-state retailer needs to collect sales tax from Minnesota customers if that retailer:
In addition, an out-of-state retailer may need to collect sales tax from Minnesota customers if that retailer:
Another part of the 2013 law deals with so-called affiliate nexus. In short, if an out-of-state retailer has a person (subsidiary or affiliate) in Minnesota who works in certain specific ways with the retailer, then the retailer is maintaining a place of business in Minnesota for sales tax purposes. If you work with a person in Minnesota to help sell, store, or service your products, check Section 297A.66(4) of the Minnesota Statutes.
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Minnesota, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
You can find guidance on how physical presence is defined specifically under Minnesota law by checking Section 297A.66 of the Minnesota Statutes (M.S.). The section defines “retailer maintaining a place of business in this state.” Note that the definition includes places of business controlled directly or by a subsidiary or an affiliate.
For additional guidance, consult Minnesota Revenue Notice # 00-10, “Sales & Use Tax - Nexus Standards,” issued by the Minnesota Department of Revenue (DOR). The Notice discusses in detail when an out-of-state retailer has sufficient nexus with the state, and therefore is required to collect and remit Minnesota sales tax. Apart from essentially restating the statutory definition of “retailer maintaining a place of business in this state," the Notice also discusses the DOR’s position that a business that “conducts business activity in Minnesota on at least four days during a 12-month period” has enough nexus with the State to require it to collect and remit sales tax; it also provides illustrative examples in this regard. Keep in mind that this notice does not take account of the 2013 law.
The DOR provides further information about both physical presence and nexus in an instruction booklet on sales tax and use tax. The booklet does take account of the 2013 law. Also, in conjunction with Revenue Notice # 00-10, and by way of further assisting retailers, the Minnesota DOR publishes a Business Activity Questionnaire to help determine if a business has sufficient nexus with the state for sales tax purposes.
Some items sold via the Internet to Minnesota customers may be exempt from sales tax under Minnesota law. For example, under Subdivision 8 of M.S. 297A.67, clothing is exempt from sales tax. For more detailed information on tax-exempt items, consider checking the following sources:
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. The DOR publishes a detailed, readable webpage on the use tax, which states, among other things, that the use tax applies “if you [the customer] buy taxable items through mail-order catalogs or the Internet and Minnesota sales tax is not charged on the purchase.”
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses, it is the long-established physical presence rule that will apply with regard to collecting tax on sales to customers in Minnesota. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Minnesota Department of Revenue to see if the rules have changed.
Updated: April 14. 2016