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State and Local Tax

Minnesota Omnibus Tax Bill Increases Cannabis Tax, Makes Other Tax Changes

· 14 minute read

· 14 minute read

By Peter G. Pupke

On June 14, 2025, Minnesota Governor Tim Walz approved an omnibus tax bill that increases the state’s cannabis tax rate. The bill makes numerous corporate franchise and personal income tax changes including new income tax subtractions, changes to the alternative minimum tax, changes to treatment of certain retirement benefits, and changes to the sustainable aviation fuels, education, film production, research, renter’s, short line, and the homestead credit refund. The bill makes a number of sales and use tax changes to provisions relating to payments of tax by large vendors, changes to the qualified data center and sustainable aviation fuels exemptions, the definition of “certified service provider,” and the location of sales. The bill allows a brewer qualifying for the brewer tax credit to file its alcohol excise tax annually; and also makes changes to the provider tax research credit rate and pharmacy refund. The bill makes a number of changes to the state’s property taxes, including the exemptions for institutions of public charity, property used to distribute electricity to farmers, property owned by certain Indian tribes. The bill also enacts changes to the property tax treatment of low-income rental properties, agricultural property, class 1 property, affordable housing, utility cooperatives, the Sustainable Forest Incentive Act, and certain penalties relating to certificates of rent paid. Finally, the bill makes several changes to the insurance premium tax and the estate tax. (L. 2025, H9 (S.S.), effective as stated.)

Individual income and corporate franchise tax provisions.

The bill makes a number of amendments to the state’s individual income and corporate franchise tax law. Among the changes made are the following:

New income tax subtractions: Effective for taxable years beginning after December 31, 2024, the bill creates new income tax subtractions for coerced debt, certain consumer enforcement public compensation payments, and for foreign service pensions. Effective for taxable years beginning after December 31, 2025, the bill creates a new income tax subtraction for student loan payments made by critical access dental clinics. Effective June 15, 2025, the bill creates an income tax subtraction for stipend payments that were included in a collective bargaining agreement between the state of Minnesota and SEIU Healthcare Minnesota and Iowa. The bill excludes stipends for the income measures used to calculate the renter’s credit, homestead credit refund, and alternative minimum tax. The bill specifies that stipend payments must not be considered income, assets, or personal property for the purposes of determining eligibility for child care assistance, general assistance, housing support, the Minnesota Family Investment Program, other economic assistance programs, or certain health care programs.

Temporary additions and subtractions:  Effective retroactively at the same time the provisions adopted in the 2023 conformity bill were effective for federal purposes, the bill amends the temporary provisions of the 2023 conformity law relating to individuals, estates and trusts to clarify that “net income” includes the delayed business interest addition for composite and pass-through entity filers.

Alternative minimum tax: Effective for taxable years beginning after December 31, 2024, the bill specifies that the income tax subtractions enacted by the bill also reduce alternative minimum taxable income for the Minnesota alternative minimum tax.

Education credit: Effective for assignments after December 31, 2025, the bill repeals language allowing taxpayers to assign a Minnesota education credit to a lender and makes conforming changes to the provisions on the standard of conduct for tax preparers.

Film production credit: Effective retroactively for taxable years beginning after December 31, 2022, the bill makes a conforming change for a provision enacted in 2023 that allows taxpayers to claim the film credit if their expenses were incurred in any consecutive 12-month period.

Homestead credit refund: Effective for claims based on property taxes payable in 2026 and after, the bill specifies that discharges of indebtedness for coerced debts and consumer restitution payments are not included in the income measure used to calculate the homestead credit refund.

Research credit: Effective for taxable years beginning after December 31, 2024, the bill allows the research credit to be partially refundable beginning in tax year 2025, if a taxpayer elects. The amount refundable is the excess of the credit amount multiplied by the refundability rate. The excess is determined after the application of any existing research credit carryover. Amounts not refunded are an additional carryover. The bill also establishes the refundability rate for the partially refundable research credit for taxable years beginning after December 31, 2024.

Renter’s credit: Effective for taxable years beginning after December 31, 2024, the bill requires taxpayers to have claimed a dependent to claim the renter’s credit dependent exemption. The bill also modifies the calculation of “gross rent” for the renter’s credit, for claimants that had a portion of their rent paid for by medical assistance. And finally, the bill clarifies that married taxpayers filing joint returns can use rent paid by both spouses to claim the renter’s credit.

Short line credit: Effective for taxable years beginning after December 31, 2024, the bill requires the commissioner of transportation to issue short line railroad credit certificates. The bill modifies the assignability of the credit by allowing the full amount of the credit to be transferred prior to a taxpayer claiming any portion of the credit or the full 5-year carryover. The bill eliminates the provision assigning liability on audit or assessments to the transferee and only allows one credit transfer per taxpayer per year. Also, effective for taxable years beginning after December 31, 2022, the bill clarifies that short line credit payments cannot exceed the product of the number of qualifying miles of railroad track and $3,000.

Sustainable aviation fuels credit: Effective June 15, 2025, the bill amends the sustainable aviation fuels credit to provide the commissioner cannot issue credit certificates for more than $11.6 million in total, and allocated as specified. The bill provides that any portion of a fiscal year’s credits that is not allocated by the commissioner does not cancel and may be carried forward to subsequent fiscal years until all credits have been allocated, except that the commissioner must not issue any credit certificates for fiscal years beginning after June 30, 2030, and any unallocated amounts cancel on that date.

Correction of errors for certain retirement contributions: Effective retroactively for contributions made in calendar year 2023 and designated to apply to the tax year 2022 contribution limitation, an annuity contract provider must designate certain IRA contributions to the tax year prior to the year the contribution is made, provided that the contribution is timely made under federal law and notice is provided to the provider within three years of the taxpayer’s return filing deadline.

Retirement benefits: Effective June 15, 2025, the bill clarifies that the public pension subtraction for “basic” pension plans applies to pensions earned based on service for which the member or survivor did not earn Social Security benefits.

Political contribution refund program: Effective for contributions made on or after December 31, 2026, the bill makes a number of amendments to the law governing the processing of political refund contribution claims, to reflect the electronic filing system required by the bill. Among the changes, the commissioner is prohibited from issuing a refund, whether in one payment or in aggregate, to a taxpayer if the refund exceeds the maximum refund amount permitted by law. Refund claims must be submitted using the electronic filing system and must reflect a minimum $10 claim amount.

Sales tax changes.

The bill makes a number of amendments to the state’s sales and use tax laws. Among the changes are:

Large vendors: Effective for taxes remitted after May 31, 2027, vendors with $250,000 or more of annual sales tax liability must remit 5.6% of their June liability two business days before June 30. The remaining amount of the payment would be due on August 20. The bill also enacts a late payment penalty for such taxpayers who do not make the early June payment.

Qualified data center exemption: Effective for sales and purchases made after June 30, 2025, the electricity sales tax exemption for qualified data centers and qualified refurbished data centers is repealed.

Sustainable aviation fuels exemption: Effective June 15, 2025, the bill limits the sustainable aviation fuels sales tax exemption to materials, supplies, and equipment purchased after June 30, 2027, and before July 1, 2034. The bill also amends the sales tax refund statute to properly reference the exemption for sustainable aviation fuel facilities.

Certified service providers: Effective for sales and purchases made after June 30, 2025, the bill aligns the definition of “certified service provider” with the definition in the Streamlined Sales and Use Tax Agreement. The bill also provides a certified service provider with relief from liability when a seller fails to remit all or a portion of their taxes prior to the due date if the provider provided sufficient notice of the seller’s failure to remit.

Location of sales: Effective for sales and purchases after June 30, 2025, the bill specifies that a seller has exercised due diligence in attempting to identify the 9-digit zip code for a sale if it utilizes certain software, including the look-up application created by the Postal Service or software certified by the Coding Accuracy Support System. For a sale that does not require a full street address, due diligence requires the seller to request the complete street address of the purchaser or the 9-digit zip code of the purchaser. A seller must exercise due diligence to be relieved of additional liability for sales tax due to incorrect scoring.

Hermantown: Effective June 15, 2025, the bill extends the expiration date of the Hermantown local sales tax, as well as makes several changes to the tax.

Excise taxes.

The bill also makes a number of excise tax changes:

Cannabis tax rate increase: Effective for sales and purchases made after June 30, 2025, the cannabis gross receipts tax is increased to 15% from 10%. The bill also repeals the marijuana and controlled substance tax effective August 1, 2025, and repeals the local government cannabis aid effective for aids payable in 2026 and thereafter.

Brewers: Effective January 1, 2026 for 2026 tax return obligations, a brewer qualifying for the brewer tax credit is allowed to file its alcohol excise tax return annually, without authorization from the Department of Revenue.

Provider tax research credit rate: Effective June 15, 2025, the bill establishes a permanent rate of 0.5% for the credit for research, under the provider tax.

Pharmacy refund: Effective for legend drugs delivered outside of Minnesota after December 31, 2025, the bill modifies the timing for when a pharmacy may claim a refund for the legend drugs tax paid on out-of-state drug shipments.

Property taxes.

The bill makes the following changes to the state’s property tax laws. Among the changes are:

Institutions of public charity: Effective for taxes payable in 2026 and after, property tax exemptions for charitable rental housing are limited so that exemptions are not available to rental housing if its use only furthers a charity’s purpose by providing housing to households chosen based on their income characteristics.

Property used to distribute electricity to farmers: Effective for assessment year 2025 and after, the property tax exemption for electric distribution systems used to supply electricity to farmers does not include substations, or transmission or generation equipment.

Exemptions for certain property owned by Indian tribe: Effective with assessment year 2026, the bill provides property tax exemptions for certain property owned by the Leech Lake Band of Ojibwe, the Grand Portage Band, and the Mille Lacs Band of Ojibwe.

Conservation property tax valuation: Effective with assessment year 2026 and after, assessors may, by resolution, reduce the valuation of property subject to a conservation easement if the property is in a metropolitan county that has both authorized such reductions and adopted a program to protect farmland or natural areas.

Low-income rental properties: Effective beginning with assessment year 2026, the bill defines the range of low-income rental properties which must comply with rent and income restrictions to qualify for class 4d(1) property tax classification.

Agricultural homestead property: Effective beginning with assessment year 2026, property qualifies for the agricultural homestead property tax classification if it is used to produce floriculture products. The bill also allows property to qualify for the agricultural property tax classification if it contains a residence, is less than 15 acres in size, and was used in the previous year for market farming that produced gross income of at least $20,000.

Class 1 property: Effective beginning with assessment year 2025 and after, the bill allows the value of class 1b property in excess of $50,000 to be classified as 4d(2) community land trust property if the property meets the requirements for the 4d(2) classification.

Utility cooperatives: Effective with assessment year 2025 and after, the bill clarifies how the distribution systems of electric utility cooperatives are taxed, and also clarifies that certain distribution line property owned by utility cooperatives is exempt.

Installment payments: Effective January 1, 2026, the bill sets the interest rate on confession of judgment payments equal to the prime rate charged by banks, except that the rate cannot be lower than 5% or greater than 14%.

Tax levy for free music: Effective June 15, 2025, the bill increases from $3,000 to $10,000 the amount a city of the third class is allowed to levy for free musical entertainment.

Affordable housing: Effective June 15, 2025, local units of government are allowed to abate property taxes on property that will be used for the development of affordable housing and on property that is held by a land bank organization for future development for up to five years. The bill requires repayment, plus interest, of an abatement received by a land bank organization if the land for which the abatement was granted is used for a purpose other than the purpose given by the land bank organization, prior to redevelopment.

Sustainable Forest Incentive Act (SFIA): Effective beginning with payments made in calendar year 2027, the SFIA payment rates are reduced. Effective June 15, 2025, the bill also provides procedures for withdrawal from the SFIA program based on reductions in SFIA payments.

Tax increment financing: The bill extends the expiration of certain temporary tax increment financing (TIF) districts and authorizes the creation of new TIF districts.

Certificates of rent paid: Effective for rent paid after December 31, 2025, the bill reduces the penalty for failing to provide a renter with a certificate of rent paid from $100 to $50. The bill enacts a new $50 penalty for failing to provide the Department with a copy of the certificate of rent paid. The bill also requires owners or managing agents to provide the Department with a copy of the certificate of rent paid that is furnished to the renter. Manufactured home park owners or managing agents must also provide the Department with a copy of the certificate of rent paid that is furnished to the renter.

Estate tax.

Effective June 15, 2025, for purposes of administering the recapture tax provisions for the qualified property subtractions, the bill removes the requirement that a qualified heir file two returns with the commissioner. The qualified heir is required to file one return, to be filed no earlier than 36 months and no later than 39 months after the decedent’s death.

Insurance premium tax.

Effective June 15, 2025, the bill extends the expiration date for the film credit under the premium tax to match the expiration date for the credit under the individual income and corporate franchise taxes enacted in 2023.

Enforcements of administrative order, penalties and cease and desist.

Effective for penalties assessed and orders issued after June 15, 2025, the bill lengthens the timelines for parties and the Office of Administrative Hearings to act in a contested case proceeding regarding a cease and desist order or administrative penalty issued to a tax preparer. The bill provides that a contested case hearing begins with the issuance of a notice and order for the hearing.

 

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