1.1 	 A bill for an act
1.2 	 relating to taxation; requiring withholding; conforming with certain federal 
1.3 	income tax changes; prohibiting state contracts with certain vendors; providing 
1.4 	for taxation of liquor and rented vehicles; modifying certain sales tax exemptions; 
1.5 	defining "direct business" for purposes of insurance taxes; modifying the 
1.6 	homestead market value credit; amending Minnesota Statutes 2004, sections 
1.7 	16C.03, by adding a subdivision; 273.1384, subdivision 1; 289A.20, subdivision 
1.8 	2; 290.01, subdivisions 19, 19a, 19b, 19c, 19d, 31; 290.06, subdivision 
1.9 	2c; 290.067, subdivision 2a; 290.091, subdivision 2; 290.92, by adding a 
1.10 	subdivision; 290A.03, subdivisions 3, 15; 297A.68, subdivisions 2, 5; 297I.01, 
1.11 	by adding a subdivision; Laws 2001, First Special Session chapter 5, article 12, 
1.12 	section 95; proposing coding for new law in Minnesota Statutes, chapter 295.
1.13 	 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.14 	 ARTICLE 1
1.15 	 INCOME AND CORPORATE FRANCHISE TAXES

1.16 	 Section 1. Minnesota Statutes 2004, section 289A.20, subdivision 2, is amended to 
1.17 	read:
1.18 		 Subd. 2.Withholding from wages, entertainer withholding, withholding from 
1.19 	payments to out-of-state contractors, and withholding by partnerships and small 
1.20 	business corporations.  (a) A tax required to be deducted and withheld during the 
1.21 	quarterly period must be paid on or before the last day of the month following the close of 
1.22 	the quarterly period, unless an earlier time for payment is provided.  A tax required to be 
1.23 	deducted and withheld from compensation of an entertainer and from a payment to an 
1.24 	out-of-state contractor must be paid on or before the date the return for such tax must be 
1.25 	filed under section 289A.18, subdivision 2.  Taxes required to be deducted and withheld 
1.26 	by partnerships and ,S corporations, and trusts  must be paid on or before the date the 
1.27 	return must be filed under section 289A.18, subdivision 2a quarterly basis as estimated 
2.1 	taxes under section 289A.25 for partnerships and trusts and under section 289A.26 for S 
2.2 	corporations.
2.3 	 (b) An employer who, during the previous quarter, withheld more than $1,500 of 
2.4 	tax under section 290.92, subdivision 2a or 3, or 290.923, subdivision 2, must deposit tax 
2.5 	withheld under those sections with the commissioner within the time allowed to deposit 
2.6 	the employer's federal withheld employment taxes under Code of Federal Regulations, 
2.7 	title 26, section 31.6302-1, as amended through December 31, 2001, without regard to the 
2.8 	safe harbor or de minimis rules in subparagraph (f) or the one-day rule in subsection (c), 
2.9 	clause (3).  Taxpayers must submit a copy of their federal notice of deposit status to the 
2.10 	commissioner upon request by the commissioner.
2.11 	 (c) The commissioner may prescribe by rule other return periods or deposit 
2.12 	requirements.  In prescribing the reporting period, the commissioner may classify payors 
2.13 	according to the amount of their tax liability and may adopt an appropriate reporting 
2.14 	period for the class that the commissioner judges to be consistent with efficient tax 
2.15 	collection.  In no event will the duration of the reporting period be more than one year.
2.16 	 (d) If less than the correct amount of tax is paid to the commissioner, proper 
2.17 	adjustments with respect to both the tax and the amount to be deducted must be made, 
2.18 	without interest, in the manner and at the times the commissioner prescribes.  If the 
2.19 	underpayment cannot be adjusted, the amount of the underpayment will be assessed and 
2.20 	collected in the manner and at the times the commissioner prescribes.
2.21 	 (e) If the aggregate amount of the tax withheld during a fiscal year ending June 30 
2.22 	under section 290.92, subdivision 2a or 3, is equal to or exceeds the amounts established 
2.23 	for remitting federal withheld taxes pursuant to the regulations promulgated under section 
2.24 	6302(h) of the Internal Revenue Code, the employer must remit each required deposit for 
2.25 	wages paid in the subsequent calendar year by electronic means.
2.26 	 (f) A third-party bulk filer as defined in section 290.92, subdivision 30, paragraph 
2.27 	(a), clause (2), who remits withholding deposits must remit all deposits by electronic 
2.28 	means as provided in paragraph (e), regardless of the aggregate amount of tax withheld 
2.29 	during a fiscal year for all of the employers.

2.30 	EFFECTIVE DATE. This section is effective for tax years beginning after 
2.31 	December 31, 2005.

2.32 	 Sec. 2. Minnesota Statutes 2004, section 290.92, is amended by adding a subdivision 
2.33 	to read:
2.34 		 Subd. 31.Payments to persons who are not employees; withholding. Any person 
2.35 	engaged in a trade or business who in the course of such trade or business makes payments 
3.1 	to an individual, who is not an employee of the person, for work described in industry 
3.2 	code numbers 23 through 238990 of the North American Industry Classification System, 
3.3 	shall deduct from the payment and withhold two percent of the amount as Minnesota 
3.4 	withholding tax when the amount paid to that individual by the same person during the 
3.5 	calendar year exceeds $600.  For purposes of this section, a payment to any person that 
3.6 	is subject to withholding under this subdivision must be treated as if the payment was a 
3.7 	wage paid by an employer to an employee.  Every individual who is to receive a payment 
3.8 	that is subject to withholding under this subdivision shall furnish the contracting person 
3.9 	with a statement, containing the name, address, and Social Security account number of 
3.10 	the person receiving the payment.

3.11 	EFFECTIVE DATE. This section is effective for payments made after July 31, 
3.12 	2005.

3.13 	 ARTICLE 2
3.14 	 FEDERAL UPDATE

3.15 	 Section 1. Minnesota Statutes 2004, section 290.01, subdivision 19, is amended to read:
3.16 		 Subd. 19.Net income.  The term "net income" means the federal taxable income, as 
3.17 	defined in section 63 of the Internal Revenue Code of 1986, as amended through the date 
3.18 	named in this subdivision, incorporating any elections made by the taxpayer in accordance 
3.19 	with the Internal Revenue Code in determining federal taxable income for federal income 
3.20 	tax purposes, and with the modifications provided in subdivisions 19a to 19f.
3.21 	 In the case of a regulated investment company or a fund thereof, as defined in section 
3.22 	851(a) or 851(g) of the Internal Revenue Code, federal taxable income means investment 
3.23 	company taxable income as defined in section 852(b)(2) of the Internal Revenue Code, 
3.24 	except that:
3.25 	 (1) the exclusion of net capital gain provided in section 852(b)(2)(A) of the Internal 
3.26 	Revenue Code does not apply;
3.27 	 (2) the deduction for dividends paid under section 852(b)(2)(D) of the Internal 
3.28 	Revenue Code must be applied by allowing a deduction for capital gain dividends and 
3.29 	exempt-interest dividends as defined in sections 852(b)(3)(C) and 852(b)(5) of the Internal 
3.30 	Revenue Code; and
3.31 	 (3) the deduction for dividends paid must also be applied in the amount of any 
3.32 	undistributed capital gains which the regulated investment company elects to have treated 
3.33 	as provided in section 852(b)(3)(D) of the Internal Revenue Code.
4.1 	 The net income of a real estate investment trust as defined and limited by section 
4.2 	856(a), (b), and (c) of the Internal Revenue Code means the real estate investment trust 
4.3 	taxable income as defined in section 857(b)(2) of the Internal Revenue Code.
4.4 	 The net income of a designated settlement fund as defined in section 468B(d) of 
4.5 	the Internal Revenue Code means the gross income as defined in section 468B(b) of the 
4.6 	Internal Revenue Code.
4.7 	 The provisions of sections 1113(a), 1117, 1206(a), 1313(a), 1402(a), 1403(a), 1443, 
4.8 	1450, 1501(a), 1605, 1611(a), 1612, 1616, 1617, 1704(l), and 1704(m) of the Small 
4.9 	Business Job Protection Act, Public Law 104-188, the provisions of Public Law 104-117, 
4.10 	the provisions of sections 313(a) and (b)(1), 602(a), 913(b), 941, 961, 971, 1001(a) and 
4.11 	(b), 1002, 1003, 1012, 1013, 1014, 1061, 1062, 1081, 1084(b), 1086, 1087, 1111(a), 
4.12 	1131(b) and (c), 1211(b), 1213, 1530(c)(2), 1601(f)(5) and (h), and 1604(d)(1) of the 
4.13 	Taxpayer Relief Act of 1997, Public Law 105-34, the provisions of section 6010 of the 
4.14 	Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206, the 
4.15 	provisions of section 4003 of the Omnibus Consolidated and Emergency Supplemental 
4.16 	Appropriations Act, 1999, Public Law 105-277, and the provisions of section 318 of the 
4.17 	Consolidated Appropriation Act of 2001, Public Law 106-554, shall become effective at 
4.18 	the time they become effective for federal purposes.
4.19 	 The Internal Revenue Code of 1986, as amended through December 31, 1996, shall 
4.20 	be in effect for taxable years beginning after December 31, 1996.
4.21 	 The provisions of sections 202(a) and (b), 221(a), 225, 312, 313, 913(a), 934, 962, 
4.22 	1004, 1005, 1052, 1063, 1084(a) and (c), 1089, 1112, 1171, 1204, 1271(a) and (b), 1305(a), 
4.23 	1306, 1307, 1308, 1309, 1501(b), 1502(b), 1504(a), 1505, 1527, 1528, 1530, 1601(d), (e), 
4.24 	(f), and (i) and 1602(a), (b), (c), and (e) of the Taxpayer Relief Act of 1997, Public Law 
4.25 	105-34, the provisions of sections 6004, 6005, 6012, 6013, 6015, 6016, 7002, and 7003 of 
4.26 	the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206, 
4.27 	the provisions of section 3001 of the Omnibus Consolidated and Emergency Supplemental 
4.28 	Appropriations Act, 1999, Public Law 105-277, the provisions of section 3001 of the 
4.29 	Miscellaneous Trade and Technical Corrections Act of 1999, Public Law 106-36, and the 
4.30 	provisions of section 316 of the Consolidated Appropriation Act of 2001, Public Law 
4.31 	106-554, shall become effective at the time they become effective for federal purposes.
4.32 	 The Internal Revenue Code of 1986, as amended through December 31, 1997, shall 
4.33 	be in effect for taxable years beginning after December 31, 1997.
4.34 	 The provisions of sections 5002, 6009, 6011, and 7001 of the Internal Revenue 
4.35 	Service Restructuring and Reform Act of 1998, Public Law 105-206, the provisions of 
4.36 	section 9010 of the Transportation Equity Act for the 21st Century, Public Law 105-178, 
5.1 	the provisions of sections 1004, 4002, and 5301 of the Omnibus Consolidation and 
5.2 	Emergency Supplemental Appropriations Act, 1999, Public Law 105-277, the provision 
5.3 	of section 303 of the Ricky Ray Hemophilia Relief Fund Act of 1998, Public Law 
5.4 	105-369, the provisions of sections 532, 534, 536, 537, and 538 of the Ticket to Work 
5.5 	and Work Incentives Improvement Act of 1999, Public Law 106-170, the provisions of 
5.6 	the Installment Tax Correction Act of 2000, Public Law 106-573, and the provisions of 
5.7 	section 309 of the Consolidated Appropriation Act of 2001, Public Law 106-554, shall 
5.8 	become effective at the time they become effective for federal purposes.
5.9 	 The Internal Revenue Code of 1986, as amended through December 31, 1998, shall 
5.10 	be in effect for taxable years beginning after December 31, 1998.
5.11 	 The provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 
5.12 	2000, Public Law 106-519, and the provision of section 412 of the Job Creation and 
5.13 	Worker Assistance Act of 2002, Public Law 107-147, shall become effective at the time 
5.14 	it became effective for federal purposes.
5.15 	 The Internal Revenue Code of 1986, as amended through December 31, 1999, 
5.16 	shall be in effect for taxable years beginning after December 31, 1999.  The provisions 
5.17 	of sections 306 and 401 of the Consolidated Appropriation Act of 2001, Public Law 
5.18 	106-554, and the provision of section 632(b)(2)(A) of the Economic Growth and Tax 
5.19 	Relief Reconciliation Act of 2001, Public Law 107-16, and provisions of sections 101 and 
5.20 	402 of the Job Creation and Worker Assistance Act of 2002, Public Law 107-147, shall 
5.21 	become effective at the same time it became effective for federal purposes.
5.22 	 The Internal Revenue Code of 1986, as amended through December 31, 2000, 
5.23 	shall be in effect for taxable years beginning after December 31, 2000.  The provisions 
5.24 	of sections 659a and 671 of the Economic Growth and Tax Relief Reconciliation Act of 
5.25 	2001, Public Law 107-16, the provisions of sections 104, 105, and 111 of the Victims of 
5.26 	Terrorism Tax Relief Act of 2001, Public Law 107-134, and the provisions of sections 201, 
5.27 	403, 413, and 606 of the Job Creation and Worker Assistance Act of 2002, Public Law 
5.28 	107-147, shall become effective at the same time it became effective for federal purposes.
5.29 	 The Internal Revenue Code of 1986, as amended through March 15, 2002, shall be 
5.30 	in effect for taxable years beginning after December 31, 2001.
5.31 	 The provisions of sections 101 and 102 of the Victims of Terrorism Tax Relief Act 
5.32 	of 2001, Public Law 107-134, shall become effective at the same time it becomes effective 
5.33 	for federal purposes.
5.34 	 The Internal Revenue Code of 1986, as amended through June 15, 2003, shall be in 
5.35 	effect for taxable years beginning after December 31, 2002, provided that the provisions 
5.36 	of the American Jobs Creation Act of 2004, Public Law 108-435, are effective at the same 
6.1 	time they became effective for federal income tax purposes.  The provisions of section 201 
6.2 	of the Jobs and Growth Tax Relief and Reconciliation Act of 2003, H.R. 2, if it is enacted 
6.3 	into law, are effective at the same time it became effective for federal purposes.
6.4 	 Except as otherwise provided, references to the Internal Revenue Code in 
6.5 	subdivisions 19a to 19g mean the code in effect for purposes of determining net income 
6.6 	for the applicable year.

6.7 	 Sec. 2. Minnesota Statutes 2004, section 290.01, subdivision 19a, is amended to read:
6.8 		 Subd. 19a.Additions to federal taxable income.  For individuals, estates, and 
6.9 	trusts, there shall be added to federal taxable income:
6.10 	 (1)(i) interest income on obligations of any state other than Minnesota or a political 
6.11 	or governmental subdivision, municipality, or governmental agency or instrumentality 
6.12 	of any state other than Minnesota exempt from federal income taxes under the Internal 
6.13 	Revenue Code or any other federal statute; and
6.14 	 (ii) exempt-interest dividends as defined in section 852(b)(5) of the Internal Revenue 
6.15 	Code, except the portion of the exempt-interest dividends derived from interest income 
6.16 	on obligations of the state of Minnesota or its political or governmental subdivisions, 
6.17 	municipalities, governmental agencies or instrumentalities, but only if the portion of the 
6.18 	exempt-interest dividends from such Minnesota sources paid to all shareholders represents 
6.19 	95 percent or more of the exempt-interest dividends that are paid by the regulated 
6.20 	investment company as defined in section 851(a) of the Internal Revenue Code, or the 
6.21 	fund of the regulated investment company as defined in section 851(g) of the Internal 
6.22 	Revenue Code, making the payment; and
6.23 	 (iii) for the purposes of items (i) and (ii), interest on obligations of an Indian tribal 
6.24 	government described in section 7871(c) of the Internal Revenue Code shall be treated as 
6.25 	interest income on obligations of the state in which the tribe is located;
6.26 	 (2) the amount of income or sales and use taxes paid or accrued within the taxable 
6.27 	year under this chapter and income or sales and use taxes paid to any other state or to any 
6.28 	province or territory of Canada, to the extent allowed as a deduction under section 63(d) 
6.29 	of the Internal Revenue Code of 1986, as amended through June 15, 2003, but the addition 
6.30 	may not be more than the amount by which the itemized deductions as allowed under 
6.31 	section 63(d) of the Internal Revenue Code exceeds the amount of the standard deduction 
6.32 	as defined in section 63(c) of the Internal Revenue Code.  For the purpose of this paragraph, 
6.33 	the disallowance of itemized deductions under section 68 of the Internal Revenue Code of 
6.34 	1986, income or sales and use tax is the last itemized deduction disallowed;
7.1 	 (3) the capital gain amount of a lump sum distribution to which the special tax under 
7.2 	section 1122(h)(3)(B)(ii) of the Tax Reform Act of 1986, Public Law 99-514, applies;
7.3 	 (4) the amount of income taxes paid or accrued within the taxable year under this 
7.4 	chapter and income taxes paid to any other state or any province or territory of Canada, 
7.5 	to the extent allowed as a deduction in determining federal adjusted gross income.  For 
7.6 	the purpose of this paragraph, income taxes do not include the taxes imposed by sections 
7.7 	290.0922, subdivision 1, paragraph (b), 290.9727, 290.9728, and 290.9729;
7.8 	 (5) the amount of expense, interest, or taxes disallowed pursuant to section 290.10;
7.9 	 (6) the amount of a partner's pro rata share of net income which does not flow 
7.10 	through to the partner because the partnership elected to pay the tax on the income under 
7.11 	section 6242(a)(2) of the Internal Revenue Code; and 
7.12 	 (7) 80 percent of the depreciation deduction allowed under section 168(k) of the 
7.13 	Internal Revenue Code.  For purposes of this clause, if the taxpayer has an activity that 
7.14 	in the taxable year generates a deduction for depreciation under section 168(k) and the 
7.15 	activity generates a loss for the taxable year that the taxpayer is not allowed to claim for 
7.16 	the taxable year, "the depreciation allowed under section 168(k)" for the taxable year is 
7.17 	limited to excess of the depreciation claimed by the activity under section 168(k) over the 
7.18 	amount of the loss from the activity that is not allowed in the taxable year.  In succeeding 
7.19 	taxable years when the losses not allowed in the taxable year are allowed, the depreciation 
7.20 	under section 168(k) is allowed;
7.21 	 (8) 80 percent of the amount by which the deduction allowed by section 179 of the 
7.22 	Internal Revenue Code exceeds the deduction allowable by section 179 of the Internal 
7.23 	Revenue Code of 1986, as amended through December 31, 2003; and 
7.24 	 (9) to the extent deducted in computing federal taxable income, the amount of the 
7.25 	deduction allowable under section 199 of the Internal Revenue Code.

7.26 	EFFECTIVE DATE. This section is effective for tax years beginning after 
7.27 	December 31, 2004, except the changes in clause (2) are effective for tax years beginning 
7.28 	after December 31, 2003.

7.29 	 Sec. 3. Minnesota Statutes 2004, section 290.01, subdivision 19b, is amended to read:
7.30 		 Subd. 19b.Subtractions from federal taxable income.  For individuals, estates, 
7.31 	and trusts, there shall be subtracted from federal taxable income:
7.32 	 (1) interest income on obligations of any authority, commission, or instrumentality 
7.33 	of the United States to the extent includable in taxable income for federal income tax 
7.34 	purposes but exempt from state income tax under the laws of the United States;
8.1 	 (2) if included in federal taxable income, the amount of any overpayment of income 
8.2 	tax to Minnesota or to any other state, for any previous taxable year, whether the amount 
8.3 	is received as a refund or as a credit to another taxable year's income tax liability;
8.4 	 (3) the amount paid to others, less the amount used to claim the credit allowed under 
8.5 	section 290.0674, not to exceed $1,625 for each qualifying child in grades kindergarten 
8.6 	to 6 and $2,500 for each qualifying child in grades 7 to 12, for tuition, textbooks, and 
8.7 	transportation of each qualifying child in attending an elementary or secondary school 
8.8 	situated in Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin, wherein a 
8.9 	resident of this state may legally fulfill the state's compulsory attendance laws, which 
8.10 	is not operated for profit, and which adheres to the provisions of the Civil Rights Act 
8.11 	of 1964 and chapter 363A.  For the purposes of this clause, "tuition" includes fees or 
8.12 	tuition as defined in section 290.0674, subdivision 1, clause (1).  As used in this clause, 
8.13 	"textbooks" includes books and other instructional materials and equipment purchased 
8.14 	or leased for use in elementary and secondary schools in teaching only those subjects 
8.15 	legally and commonly taught in public elementary and secondary schools in this state.  
8.16 	Equipment expenses qualifying for deduction includes expenses as defined and limited in 
8.17 	section 290.0674, subdivision 1, clause (3).  "Textbooks" does not include instructional 
8.18 	books and materials used in the teaching of religious tenets, doctrines, or worship, the 
8.19 	purpose of which is to instill such tenets, doctrines, or worship, nor does it include books 
8.20 	or materials for, or transportation to, extracurricular activities including sporting events, 
8.21 	musical or dramatic events, speech activities, driver's education, or similar programs.  For 
8.22 	purposes of the subtraction provided by this clause, "qualifying child" has the meaning 
8.23 	given in section 32(c)(3) of the Internal Revenue Code;
8.24 	 (4) income as provided under section 290.0802;
8.25 	 (5) to the extent included in federal adjusted gross income, income realized on 
8.26 	disposition of property exempt from tax under section 290.491;
8.27 	 (6) to the extent included in federal taxable income, postservice benefits for youth 
8.28 	community service under section 124D.42 for volunteer service under United States 
8.29 	Code, title 42, sections 12601 to 12604;
8.30 	 (7) to the extent not deducted in determining federal taxable income by an individual 
8.31 	who does not itemize deductions for federal income tax purposes for the taxable year, 
8.32 	an amount equal to 50 percent of the excess of charitable contributions allowable as a 
8.33 	deduction for the taxable year under section 170(a) of the Internal Revenue Code over 
8.34 	$500;
9.1 	 (8) for taxable years beginning before January 1, 2008, the amount of the federal 
9.2 	small ethanol producer credit allowed under section 40(a)(3) of the Internal Revenue Code 
9.3 	which is included in gross income under section 87 of the Internal Revenue Code;
9.4 	 (9) for individuals who are allowed a federal foreign tax credit for taxes that do not 
9.5 	qualify for a credit under section 290.06, subdivision 22, an amount equal to the carryover 
9.6 	of subnational foreign taxes for the taxable year, but not to exceed the total subnational 
9.7 	foreign taxes reported in claiming the foreign tax credit.  For purposes of this clause, 
9.8 	"federal foreign tax credit" means the credit allowed under section 27 of the Internal 
9.9 	Revenue Code, and "carryover of subnational foreign taxes" equals the carryover allowed 
9.10 	under section 904(c) of the Internal Revenue Code minus national level foreign taxes to 
9.11 	the extent they exceed the federal foreign tax credit;
9.12 	 (10) in each of the five tax years immediately following the tax year in which an 
9.13 	addition is required under subdivision 19a, clause (7), an amount equal to one-fifth of 
9.14 	the delayed depreciation.  For purposes of this clause, "delayed depreciation" means the 
9.15 	amount of the addition made by the taxpayer under subdivision 19a, clause (7), minus the 
9.16 	positive value of any net operating loss under section 172 of the Internal Revenue Code 
9.17 	generated for the tax year of the addition.  The resulting delayed depreciation cannot be 
9.18 	less than zero; and 
9.19 	 (11) job opportunity building zone income as provided under section 469.316; and 
9.20 	 (12) in each of the five tax years immediately following the tax year in which an 
9.21 	addition is required under subdivision 19a, clause (8), or 19c, clause (17), in the case of a 
9.22 	shareholder of a corporation that is an S corporation, an amount equal to one-fifth of the 
9.23 	addition made by the taxpayer under subdivision 19a, clause (8), or 19c, clause (17), in the 
9.24 	case of a shareholder of a corporation that is an S corporation, minus the positive value of 
9.25 	any net operating loss under section 172 of the Internal Revenue Code generated for the 
9.26 	tax year of the addition.  If the net operating loss exceeds the addition for the tax year, a 
9.27 	subtraction is not allowed under this clause.

9.28 	EFFECTIVE DATE. This section is effective for tax years beginning after 
9.29 	December 31, 2004.

9.30 	 Sec. 4. Minnesota Statutes 2004, section 290.01, subdivision 19c, is amended to read:
9.31 		 Subd. 19c.Corporations; additions to federal taxable income.  For corporations, 
9.32 	there shall be added to federal taxable income:
9.33 	 (1) the amount of any deduction taken for federal income tax purposes for income, 
9.34 	excise, or franchise taxes based on net income or related minimum taxes, including but not 
9.35 	limited to the tax imposed under section 290.0922, paid by the corporation to Minnesota, 
10.1 	another state, a political subdivision of another state, the District of Columbia, or any 
10.2 	foreign country or possession of the United States;
10.3 	 (2) interest not subject to federal tax upon obligations of:  the United States, its 
10.4 	possessions, its agencies, or its instrumentalities; the state of Minnesota or any other 
10.5 	state, any of its political or governmental subdivisions, any of its municipalities, or any 
10.6 	of its governmental agencies or instrumentalities; the District of Columbia; or Indian 
10.7 	tribal governments;
10.8 	 (3) exempt-interest dividends received as defined in section 852(b)(5) of the Internal 
10.9 	Revenue Code;
10.10 	 (4) the amount of any net operating loss deduction taken for federal income tax 
10.11 	purposes under section 172 or 832(c)(10) of the Internal Revenue Code or operations loss 
10.12 	deduction under section 810 of the Internal Revenue Code;
10.13 	 (5) the amount of any special deductions taken for federal income tax purposes 
10.14 	under sections 241 to 247 of the Internal Revenue Code;
10.15 	 (6) losses from the business of mining, as defined in section 290.05, subdivision 1, 
10.16 	clause (a), that are not subject to Minnesota income tax;
10.17 	 (7) the amount of any capital losses deducted for federal income tax purposes under 
10.18 	sections 1211 and 1212 of the Internal Revenue Code;
10.19 	 (8) the exempt foreign trade income of a foreign sales corporation under sections 
10.20 	921(a) and 291 of the Internal Revenue Code;
10.21 	 (9) the amount of percentage depletion deducted under sections 611 through 614 and 
10.22 	291 of the Internal Revenue Code;
10.23 	 (10) for certified pollution control facilities placed in service in a taxable year 
10.24 	beginning before December 31, 1986, and for which amortization deductions were elected 
10.25 	under section 169 of the Internal Revenue Code of 1954, as amended through December 
10.26 	31, 1985, the amount of the amortization deduction allowed in computing federal taxable 
10.27 	income for those facilities;
10.28 	 (11) the amount of any deemed dividend from a foreign operating corporation 
10.29 	determined pursuant to section 290.17, subdivision 4, paragraph (g);
10.30 	 (12) the amount of any environmental tax paid under section 59(a) of the Internal 
10.31 	Revenue Code;
10.32 	 (13) the amount of a partner's pro rata share of net income which does not flow 
10.33 	through to the partner because the partnership elected to pay the tax on the income under 
10.34 	section 6242(a)(2) of the Internal Revenue Code;
10.35 	 (14) the amount of net income excluded under section 114 of the Internal Revenue 
10.36 	Code;
11.1 	 (15) any increase in subpart F income, as defined in section 952(a) of the Internal 
11.2 	Revenue Code, for the taxable year when subpart F income is calculated without regard to 
11.3 	the provisions of section 614 of Public Law 107-147; and 
11.4 	 (16) 80 percent of the depreciation deduction allowed under section 168(k) of the 
11.5 	Internal Revenue Code.  For purposes of this clause, if the taxpayer has an activity that 
11.6 	in the taxable year generates a deduction for depreciation under section 168(k) and the 
11.7 	activity generates a loss for the taxable year that the taxpayer is not allowed to claim for 
11.8 	the taxable year, "the depreciation allowed under section 168(k)" for the taxable year is 
11.9 	limited to excess of the depreciation claimed by the activity under section 168(k) over the 
11.10 	amount of the loss from the activity that is not allowed in the taxable year.  In succeeding 
11.11 	taxable years when the losses not allowed in the taxable year are allowed, the depreciation 
11.12 	under section 168(k) is allowed;
11.13 	 (17) 80 percent of the amount by which the deduction allowed by section 179 of the 
11.14 	Internal Revenue Code exceeds the deduction allowable by section 179 of the Internal 
11.15 	Revenue Code of 1986, as amended through December 31, 2003; and 
11.16 	 (18) to the extent deducted in computing federal taxable income, the amount of the 
11.17 	deduction allowable under section 199 of the Internal Revenue Code.

11.18 	EFFECTIVE DATE. This section is effective for tax years beginning after 
11.19 	December 31, 2004.

11.20 	 Sec. 5. Minnesota Statutes 2004, section 290.01, subdivision 19d, is amended to read:
11.21 		 Subd. 19d.Corporations; modifications decreasing federal taxable income.  For 
11.22 	corporations, there shall be subtracted from federal taxable income after the increases 
11.23 	provided in subdivision 19c:
11.24 	 (1) the amount of foreign dividend gross-up added to gross income for federal 
11.25 	income tax purposes under section 78 of the Internal Revenue Code;
11.26 	 (2) the amount of salary expense not allowed for federal income tax purposes due to 
11.27 	claiming the federal jobs credit under section 51 of the Internal Revenue Code;
11.28 	 (3) any dividend (not including any distribution in liquidation) paid within the 
11.29 	taxable year by a national or state bank to the United States, or to any instrumentality of 
11.30 	the United States exempt from federal income taxes, on the preferred stock of the bank 
11.31 	owned by the United States or the instrumentality;
11.32 	 (4) amounts disallowed for intangible drilling costs due to differences between 
11.33 	this chapter and the Internal Revenue Code in taxable years beginning before January 
11.34 	1, 1987, as follows:
12.1 	 (i) to the extent the disallowed costs are represented by physical property, an amount 
12.2 	equal to the allowance for depreciation under Minnesota Statutes 1986, section 290.09, 
12.3 	subdivision 7, subject to the modifications contained in subdivision 19e; and
12.4 	 (ii) to the extent the disallowed costs are not represented by physical property, an 
12.5 	amount equal to the allowance for cost depletion under Minnesota Statutes 1986, section 
12.6 	290.09, subdivision 8;
12.7 	 (5) the deduction for capital losses pursuant to sections 1211 and 1212 of the 
12.8 	Internal Revenue Code, except that:
12.9 	 (i) for capital losses incurred in taxable years beginning after December 31, 1986, 
12.10 	capital loss carrybacks shall not be allowed;
12.11 	 (ii) for capital losses incurred in taxable years beginning after December 31, 1986, 
12.12 	a capital loss carryover to each of the 15 taxable years succeeding the loss year shall be 
12.13 	allowed;
12.14 	 (iii) for capital losses incurred in taxable years beginning before January 1, 1987, a 
12.15 	capital loss carryback to each of the three taxable years preceding the loss year, subject to 
12.16 	the provisions of Minnesota Statutes 1986, section 290.16, shall be allowed; and
12.17 	 (iv) for capital losses incurred in taxable years beginning before January 1, 1987, 
12.18 	a capital loss carryover to each of the five taxable years succeeding the loss year to the 
12.19 	extent such loss was not used in a prior taxable year and subject to the provisions of 
12.20 	Minnesota Statutes 1986, section 290.16, shall be allowed;
12.21 	 (6) an amount for interest and expenses relating to income not taxable for federal 
12.22 	income tax purposes, if (i) the income is taxable under this chapter and (ii) the interest and 
12.23 	expenses were disallowed as deductions under the provisions of section 171(a)(2), 265 or 
12.24 	291 of the Internal Revenue Code in computing federal taxable income;
12.25 	 (7) in the case of mines, oil and gas wells, other natural deposits, and timber for 
12.26 	which percentage depletion was disallowed pursuant to subdivision 19c, clause (11), a 
12.27 	reasonable allowance for depletion based on actual cost.  In the case of leases the deduction 
12.28 	must be apportioned between the lessor and lessee in accordance with rules prescribed 
12.29 	by the commissioner.  In the case of property held in trust, the allowable deduction must 
12.30 	be apportioned between the income beneficiaries and the trustee in accordance with the 
12.31 	pertinent provisions of the trust, or if there is no provision in the instrument, on the basis 
12.32 	of the trust's income allocable to each;
12.33 	 (8) for certified pollution control facilities placed in service in a taxable year 
12.34 	beginning before December 31, 1986, and for which amortization deductions were elected 
12.35 	under section 169 of the Internal Revenue Code of 1954, as amended through December 
13.1 	31, 1985, an amount equal to the allowance for depreciation under Minnesota Statutes 
13.2 	1986, section 290.09, subdivision 7;
13.3 	 (9) amounts included in federal taxable income that are due to refunds of income, 
13.4 	excise, or franchise taxes based on net income or related minimum taxes paid by the 
13.5 	corporation to Minnesota, another state, a political subdivision of another state, the 
13.6 	District of Columbia, or a foreign country or possession of the United States to the extent 
13.7 	that the taxes were added to federal taxable income under section 290.01, subdivision 19c, 
13.8 	clause (1), in a prior taxable year;
13.9 	 (10) 80 percent of royalties, fees, or other like income accrued or received from a 
13.10 	foreign operating corporation or a foreign corporation which is part of the same unitary 
13.11 	business as the receiving corporation;
13.12 	 (11) income or gains from the business of mining as defined in section 290.05, 
13.13 	subdivision 1, clause (a), that are not subject to Minnesota franchise tax;
13.14 	 (12) the amount of handicap access expenditures in the taxable year which are not 
13.15 	allowed to be deducted or capitalized under section 44(d)(7) of the Internal Revenue Code;
13.16 	 (13) the amount of qualified research expenses not allowed for federal income tax 
13.17 	purposes under section 280C(c) of the Internal Revenue Code, but only to the extent that 
13.18 	the amount exceeds the amount of the credit allowed under section 290.068;
13.19 	 (14) the amount of salary expenses not allowed for federal income tax purposes due 
13.20 	to claiming the Indian employment credit under section 45A(a) of the Internal Revenue 
13.21 	Code;
13.22 	 (15) the amount of any refund of environmental taxes paid under section 59A of the 
13.23 	Internal Revenue Code;
13.24 	 (16) for taxable years beginning before January 1, 2008, the amount of the federal 
13.25 	small ethanol producer credit allowed under section 40(a)(3) of the Internal Revenue Code 
13.26 	which is included in gross income under section 87 of the Internal Revenue Code;
13.27 	 (17) for a corporation whose foreign sales corporation, as defined in section 922 
13.28 	of the Internal Revenue Code, constituted a foreign operating corporation during any 
13.29 	taxable year ending before January 1, 1995, and a return was filed by August 15, 1996, 
13.30 	claiming the deduction under section 290.21, subdivision 4, for income received from 
13.31 	the foreign operating corporation, an amount equal to 1.23 multiplied by the amount of 
13.32 	income excluded under section 114 of the Internal Revenue Code, provided the income is 
13.33 	not income of a foreign operating company;
13.34 	 (18) any decrease in subpart F income, as defined in section 952(a) of the Internal 
13.35 	Revenue Code, for the taxable year when subpart F income is calculated without regard to 
13.36 	the provisions of section 614 of Public Law 107-147; and 
14.1 	 (19) in each of the five tax years immediately following the tax year in which an 
14.2 	addition is required under subdivision 19c, clause (16), an amount equal to one-fifth of 
14.3 	the delayed depreciation.  For purposes of this clause, "delayed depreciation" means the 
14.4 	amount of the addition made by the taxpayer under subdivision 19c, clause (16).  The 
14.5 	resulting delayed depreciation cannot be less than zero; and 
14.6 	 (20) in each of the five tax years immediately following the tax year in which an 
14.7 	addition is required under subdivision 19c, clause (17), an amount equal to one-fifth of the 
14.8 	amount of the addition.

14.9 	EFFECTIVE DATE. This section is effective for tax years beginning after 
14.10 	December 31, 2004.

14.11 	 Sec. 6. Minnesota Statutes 2004, section 290.01, subdivision 31, is amended to read:
14.12 		 Subd. 31.Internal revenue code.  Unless specifically defined otherwise, "Internal 
14.13 	Revenue Code" means the Internal Revenue Code of 1986, as amended through June 15, 
14.14 	2003, and as further amended by the American Jobs Creation Act of 2004, Public Law 
14.15 	108-435.

14.16 	EFFECTIVE DATE. This section is effective the day following final enactment 
14.17 	except the changes incorporated by federal changes are effective at the same times as the 
14.18 	changes were effective for federal purposes.

14.19 	 Sec. 7. Minnesota Statutes 2004, section 290.06, subdivision 2c, is amended to read:
14.20 		 Subd. 2c.Schedules of rates for individuals, estates, and trusts.  (a) The income 
14.21 	taxes imposed by this chapter upon married individuals filing joint returns and surviving 
14.22 	spouses as defined in section 2(a) of the Internal Revenue Code must be computed by 
14.23 	applying to their taxable net income the following schedule of rates:
14.24 	 (1) On the first $25,680, 5.35 percent;
14.25 	 (2) On all over $25,680, but not over $102,030, 7.05 percent;
14.26 	 (3) On all over $102,030, 7.85 percent.
14.27 	 Married individuals filing separate returns, estates, and trusts must compute their 
14.28 	income tax by applying the above rates to their taxable income, except that the income 
14.29 	brackets will be one-half of the above amounts.
14.30 	 (b) The income taxes imposed by this chapter upon unmarried individuals must be 
14.31 	computed by applying to taxable net income the following schedule of rates:
14.32 	 (1) On the first $17,570, 5.35 percent;
14.33 	 (2) On all over $17,570, but not over $57,710, 7.05 percent;
15.1 	 (3) On all over $57,710, 7.85 percent.
15.2 	 (c) The income taxes imposed by this chapter upon unmarried individuals qualifying 
15.3 	as a head of household as defined in section 2(b) of the Internal Revenue Code must be 
15.4 	computed by applying to taxable net income the following schedule of rates:
15.5 	 (1) On the first $21,630, 5.35 percent;
15.6 	 (2) On all over $21,630, but not over $86,910, 7.05 percent;
15.7 	 (3) On all over $86,910, 7.85 percent.
15.8 	 (d) In lieu of a tax computed according to the rates set forth in this subdivision, the 
15.9 	tax of any individual taxpayer whose taxable net income for the taxable year is less than 
15.10 	an amount determined by the commissioner must be computed in accordance with tables 
15.11 	prepared and issued by the commissioner of revenue based on income brackets of not 
15.12 	more than $100.  The amount of tax for each bracket shall be computed at the rates set 
15.13 	forth in this subdivision, provided that the commissioner may disregard a fractional part of 
15.14 	a dollar unless it amounts to 50 cents or more, in which case it may be increased to $1.
15.15 	 (e) An individual who is not a Minnesota resident for the entire year must compute 
15.16 	the individual's Minnesota income tax as provided in this subdivision.  After the 
15.17 	application of the nonrefundable credits provided in this chapter, the tax liability must 
15.18 	then be multiplied by a fraction in which:
15.19 	 (1) the numerator is the individual's Minnesota source federal adjusted gross income 
15.20 	as defined in section 62 of the Internal Revenue Code and increased by the additions 
15.21 	required under section 290.01, subdivision 19a, clauses (1), (5), and  (6), (7), (8), and 
15.22 	(9),and reduced by the subtraction under section 290.01, subdivision 19b, clause (11), and 
15.23 	the Minnesota assignable portion of the subtraction for United States government interest 
15.24 	under section 290.01, subdivision 19b, clause (1), and the subtractions under clauses 
15.25 	(10), (11), and (12),after applying the allocation and assignability provisions of section 
15.26 	290.081, clause (a), or 290.17; and
15.27 	 (2) the denominator is the individual's federal adjusted gross income as defined in 
15.28 	section 62 of the Internal Revenue Code of 1986, increased by the amounts specified in 
15.29 	section 290.01, subdivision 19a, clauses (1), (5), and (6), (7), (8), and (9),and reduced by 
15.30 	the amounts specified in section 290.01, subdivision 19b, clauses (1) and , (10),(11), 
15.31 	and (12).

15.32 	EFFECTIVE DATE. This section is effective for tax years beginning after 
15.33 	December 31, 2004.

15.34 	 Sec. 8. Minnesota Statutes 2004, section 290.067, subdivision 2a, is amended to read:
16.1 		 Subd. 2a.Income.  (a) For purposes of this section, "income" means the sum of 
16.2 	the following:
16.3 	 (1) federal adjusted gross income as defined in section 62 of the Internal Revenue 
16.4 	Code; and
16.5 	 (2) the sum of the following amounts to the extent not included in clause (1):
16.6 	 (i) all nontaxable income;
16.7 	 (ii) the amount of a passive activity loss that is not disallowed as a result of section 
16.8 	469, paragraph (i) or (m) of the Internal Revenue Code and the amount of passive activity 
16.9 	loss carryover allowed under section 469(b) of the Internal Revenue Code;
16.10 	 (iii) an amount equal to the total of any discharge of qualified farm indebtedness 
16.11 	of a solvent individual excluded from gross income under section 108(g) of the Internal 
16.12 	Revenue Code;
16.13 	 (iv) cash public assistance and relief;
16.14 	 (v) any pension or annuity (including railroad retirement benefits, all payments 
16.15 	received under the federal Social Security Act, supplemental security income, and veterans 
16.16 	benefits), which was not exclusively funded by the claimant or spouse, or which was 
16.17 	funded exclusively by the claimant or spouse and which funding payments were excluded 
16.18 	from federal adjusted gross income in the years when the payments were made;
16.19 	 (vi) interest received from the federal or a state government or any instrumentality 
16.20 	or political subdivision thereof;
16.21 	 (vii) workers' compensation;
16.22 	 (viii) nontaxable strike benefits;
16.23 	 (ix) the gross amounts of payments received in the nature of disability income or 
16.24 	sick pay as a result of accident, sickness, or other disability, whether funded through 
16.25 	insurance or otherwise;
16.26 	 (x) a lump sum distribution under section 402(e)(3) of the Internal Revenue Code 
16.27 	of 1986, as amended through December 31, 1995;
16.28 	 (xi) contributions made by the claimant to an individual retirement account, 
16.29 	including a qualified voluntary employee contribution; simplified employee pension plan; 
16.30 	self-employed retirement plan; cash or deferred arrangement plan under section 401(k) 
16.31 	of the Internal Revenue Code; or deferred compensation plan under section 457 of the 
16.32 	Internal Revenue Code; and 
16.33 	 (xii) nontaxable scholarship or fellowship grants; and 
16.34 	 (xiii) the amount of deduction allowed under section 199 of the Internal Revenue 
16.35 	Code.
17.1 	 In the case of an individual who files an income tax return on a fiscal year basis, the 
17.2 	term "federal adjusted gross income" means federal adjusted gross income reflected in the 
17.3 	fiscal year ending in the next calendar year.  Federal adjusted gross income may not be 
17.4 	reduced by the amount of a net operating loss carryback or carryforward or a capital loss 
17.5 	carryback or carryforward allowed for the year.
17.6 	 (b) "Income" does not include:
17.7 	 (1) amounts excluded pursuant to the Internal Revenue Code, sections 101(a) and 
17.8 	102;
17.9 	 (2) amounts of any pension or annuity that were exclusively funded by the claimant 
17.10 	or spouse if the funding payments were not excluded from federal adjusted gross income 
17.11 	in the years when the payments were made;
17.12 	 (3) surplus food or other relief in kind supplied by a governmental agency;
17.13 	 (4) relief granted under chapter 290A;
17.14 	 (5) child support payments received under a temporary or final decree of dissolution 
17.15 	or legal separation; and
17.16 	 (6) restitution payments received by eligible individuals and excludable interest as 
17.17 	defined in section 803 of the Economic Growth and Tax Relief Reconciliation Act of 
17.18 	2001, Public Law 107-16.

17.19 	EFFECTIVE DATE. This section is effective for tax years beginning after 
17.20 	December 31, 2003.

17.21 	 Sec. 9. Minnesota Statutes 2004, section 290.091, subdivision 2, is amended to read:
17.22 		 Subd. 2.Definitions.  For purposes of the tax imposed by this section, the following 
17.23 	terms have the meanings given:
17.24 	 (a) "Alternative minimum taxable income" means the sum of the following for 
17.25 	the taxable year:
17.26 	 (1) the taxpayer's federal alternative minimum taxable income as defined in section 
17.27 	55(b)(2) of the Internal Revenue Code;
17.28 	 (2) the taxpayer's itemized deductions allowed in computing federal alternative 
17.29 	minimum taxable income, but excluding:
17.30 	 (i) the charitable contribution deduction under section 170 of the Internal Revenue 
17.31 	Code to the extent that the deduction exceeds 1.0 percent of adjusted gross income, as 
17.32 	defined in section 62 of the Internal Revenue Code;
17.33 	 (ii) the medical expense deduction;
17.34 	 (iii) the casualty, theft, and disaster loss deduction; and
17.35 	 (iv) the impairment-related work expenses of a disabled person;
18.1 	 (3) for depletion allowances computed under section 613A(c) of the Internal 
18.2 	Revenue Code, with respect to each property (as defined in section 614 of the Internal 
18.3 	Revenue Code), to the extent not included in federal alternative minimum taxable income, 
18.4 	the excess of the deduction for depletion allowable under section 611 of the Internal 
18.5 	Revenue Code for the taxable year over the adjusted basis of the property at the end of the 
18.6 	taxable year (determined without regard to the depletion deduction for the taxable year);
18.7 	 (4) to the extent not included in federal alternative minimum taxable income, the 
18.8 	amount of the tax preference for intangible drilling cost under section 57(a)(2) of the 
18.9 	Internal Revenue Code determined without regard to subparagraph (E);
18.10 	 (5) to the extent not included in federal alternative minimum taxable income, the 
18.11 	amount of interest income as provided by section 290.01, subdivision 19a, clause (1); and
18.12 	 (6) the amount of addition required by section 290.01, subdivision 19a, clause 
18.13 	clauses (7), (8), and (9);
18.14 	 less the sum of the amounts determined under the following:
18.15 	 (1) interest income as defined in section 290.01, subdivision 19b, clause (1);
18.16 	 (2) an overpayment of state income tax as provided by section 290.01, subdivision 
18.17 	19b, clause (2), to the extent included in federal alternative minimum taxable income;
18.18 	 (3) the amount of investment interest paid or accrued within the taxable year on 
18.19 	indebtedness to the extent that the amount does not exceed net investment income, as 
18.20 	defined in section 163(d)(4) of the Internal Revenue Code.  Interest does not include 
18.21 	amounts deducted in computing federal adjusted gross income; and
18.22 	 (4) amounts subtracted from federal taxable income as provided by section 290.01, 
18.23 	subdivision 19b, clauses (10) and , (11), and (12).
18.24 	 In the case of an estate or trust, alternative minimum taxable income must be 
18.25 	computed as provided in section 59(c) of the Internal Revenue Code.
18.26 	 (b) "Investment interest" means investment interest as defined in section 163(d)(3) 
18.27 	of the Internal Revenue Code.
18.28 	 (c) "Tentative minimum tax" equals 6.4 percent of alternative minimum taxable 
18.29 	income after subtracting the exemption amount determined under subdivision 3.
18.30 	 (d) "Regular tax" means the tax that would be imposed under this chapter (without 
18.31 	regard to this section and section 290.032), reduced by the sum of the nonrefundable 
18.32 	credits allowed under this chapter.
18.33 	 (e) "Net minimum tax" means the minimum tax imposed by this section.

18.34 	EFFECTIVE DATE. This section is effective for tax years beginning after 
18.35 	December 31, 2004.

19.1 	 Sec. 10. Minnesota Statutes 2004, section 290A.03, subdivision 3, is amended to read:
19.2 		 Subd. 3.Income.  (1) "Income" means the sum of the following:
19.3 	 (a) federal adjusted gross income as defined in the Internal Revenue Code; and
19.4 	 (b) the sum of the following amounts to the extent not included in clause (a):
19.5 	 (i) all nontaxable income;
19.6 	 (ii) the amount of a passive activity loss that is not disallowed as a result of section 
19.7 	469, paragraph (i) or (m) of the Internal Revenue Code and the amount of passive activity 
19.8 	loss carryover allowed under section 469(b) of the Internal Revenue Code;
19.9 	 (iii) an amount equal to the total of any discharge of qualified farm indebtedness 
19.10 	of a solvent individual excluded from gross income under section 108(g) of the Internal 
19.11 	Revenue Code;
19.12 	 (iv) cash public assistance and relief;
19.13 	 (v) any pension or annuity (including railroad retirement benefits, all payments 
19.14 	received under the federal Social Security Act, supplemental security income, and veterans 
19.15 	benefits), which was not exclusively funded by the claimant or spouse, or which was 
19.16 	funded exclusively by the claimant or spouse and which funding payments were excluded 
19.17 	from federal adjusted gross income in the years when the payments were made;
19.18 	 (vi) interest received from the federal or a state government or any instrumentality 
19.19 	or political subdivision thereof;
19.20 	 (vii) workers' compensation;
19.21 	 (viii) nontaxable strike benefits;
19.22 	 (ix) the gross amounts of payments received in the nature of disability income or 
19.23 	sick pay as a result of accident, sickness, or other disability, whether funded through 
19.24 	insurance or otherwise;
19.25 	 (x) a lump sum distribution under section 402(e)(3) of the Internal Revenue Code 
19.26 	of 1986, as amended through December 31, 1995;
19.27 	 (xi) contributions made by the claimant to an individual retirement account, 
19.28 	including a qualified voluntary employee contribution; simplified employee pension plan; 
19.29 	self-employed retirement plan; cash or deferred arrangement plan under section 401(k) 
19.30 	of the Internal Revenue Code; or deferred compensation plan under section 457 of the 
19.31 	Internal Revenue Code; and 
19.32 	 (xii) nontaxable scholarship or fellowship grants; and 
19.33 	 (xiii) the amount of deduction allowed under section 199 of the Internal Revenue 
19.34 	Code.
19.35 	 In the case of an individual who files an income tax return on a fiscal year basis, the 
19.36 	term "federal adjusted gross income" shall mean federal adjusted gross income reflected 
20.1 	in the fiscal year ending in the calendar year.  Federal adjusted gross income shall not be 
20.2 	reduced by the amount of a net operating loss carryback or carryforward or a capital loss 
20.3 	carryback or carryforward allowed for the year.
20.4 	 (2) "Income" does not include:
20.5 	 (a) amounts excluded pursuant to the Internal Revenue Code, sections 101(a) and 
20.6 	102;
20.7 	 (b) amounts of any pension or annuity which was exclusively funded by the claimant 
20.8 	or spouse and which funding payments were not excluded from federal adjusted gross 
20.9 	income in the years when the payments were made;
20.10 	 (c) surplus food or other relief in kind supplied by a governmental agency;
20.11 	 (d) relief granted under this chapter;
20.12 	 (e) child support payments received under a temporary or final decree of dissolution 
20.13 	or legal separation; or
20.14 	 (f) restitution payments received by eligible individuals and excludable interest as 
20.15 	defined in section 803 of the Economic Growth and Tax Relief Reconciliation Act of 
20.16 	2001, Public Law 107-16.
20.17 	 (3) The sum of the following amounts may be subtracted from income:
20.18 	 (a) for the claimant's first dependent, the exemption amount multiplied by 1.4;
20.19 	 (b) for the claimant's second dependent, the exemption amount multiplied by 1.3;
20.20 	 (c) for the claimant's third dependent, the exemption amount multiplied by 1.2;
20.21 	 (d) for the claimant's fourth dependent, the exemption amount multiplied by 1.1;
20.22 	 (e) for the claimant's fifth dependent, the exemption amount; and
20.23 	 (f) if the claimant or claimant's spouse was disabled or attained the age of 65 on 
20.24 	or before December 31 of the year for which the taxes were levied or rent paid, the 
20.25 	exemption amount.
20.26 	 For purposes of this subdivision, the "exemption amount" means the exemption 
20.27 	amount under section 151(d) of the Internal Revenue Code for the taxable year for which 
20.28 	the income is reported.

20.29 	EFFECTIVE DATE. This section is effective for property tax refunds based on 
20.30 	household income for 2004 and thereafter.

20.31 	 Sec. 11. Minnesota Statutes 2004, section 290A.03, subdivision 15, is amended to read:
20.32 		 Subd. 15.Internal revenue code.  "Internal Revenue Code" means the Internal 
20.33 	Revenue Code of 1986, as amended through June 15, 2003, and as further amended by the 
20.34 	American Jobs Creation Act of 2004, Public Law 108-435.

21.1 	EFFECTIVE DATE. This section is effective for property tax refunds based on 
21.2 	property taxes payable on or after December 31, 2004, and rent paid on or after December 
21.3 	31, 2003.

21.4 	 ARTICLE 3
21.5 	 SALES, USE, AND SPECIAL TAXES

21.6 	 Section 1. Minnesota Statutes 2004, section 16C.03, is amended by adding a 
21.7 	subdivision to read:
21.8 		 Subd. 18.Contracts with foreign vendors. (a) The commissioner and other 
21.9 	agencies to which this section applies and the legislative branch of government shall, 
21.10 	subject to paragraph (d), cancel a contract for goods or services from a vendor or an 
21.11 	affiliate of a vendor or suspend or debar a vendor or an affiliate of a vendor from future 
21.12 	contracts upon notification from the commissioner of revenue that the vendor or an 
21.13 	affiliate of the vendor has not registered to collect the sales and use tax imposed under 
21.14 	chapter 297A on its sales in Minnesota or to a destination in Minnesota.  This subdivision 
21.15 	shall not apply to state colleges and universities, the courts, and any agency in the judicial 
21.16 	branch of government.  For purposes of this subdivision, the term "affiliate" means any 
21.17 	person or entity that is controlled by, or is under common control of, a vendor through 
21.18 	stock ownership or other affiliation.
21.19 	 (b) Beginning January 1, 2006, each vendor or affiliate of a vendor selling goods or 
21.20 	services, subject to tax under chapter 297A, to an agency or the legislature must provide 
21.21 	its Minnesota sales and use tax business identification number, upon request, to show that 
21.22 	the vendor is registered to collect Minnesota sales or use tax.
21.23 	 (c) The commissioner of revenue shall periodically provide to the commissioner 
21.24 	and the legislative branch a list of vendors who have not registered to collect Minnesota 
21.25 	sales and use tax and who are subject to being suspended or debarred as vendors or having 
21.26 	their contracts canceled.
21.27 	 (d) The provisions of this subdivision may be waived by the commissioner or the 
21.28 	legislative branch when the vendor is the single source of such goods or services, in the 
21.29 	event of an emergency, or when it is in the best interests of the state as determined by the 
21.30 	commissioner in consultation with the commissioner of revenue.  Such consultation is not 
21.31 	a disclosure violation under chapter 270B.

21.32 	EFFECTIVE DATE. This section is effective for all contracts entered into after 
21.33 	December 31, 2005.

22.1 	 Sec. 2. [295.75] LIQUOR GROSS RECEIPTS TAX.
22.2 		 Subdivision 1.Definitions. (a) For purposes of this section, the following terms 
22.3 	have the meanings given.
22.4 	 (b) "Commissioner" means the commissioner of revenue.
22.5 	 (c) "Gross receipts" means the total amount received, in money or by barter or 
22.6 	exchange, for all liquor sales at retail as measured by the sales price, but does not include 
22.7 	any taxes imposed directly on the consumer that are separately stated on the invoice, bill 
22.8 	of sale, or similar document given to the purchaser.
22.9 	 (d) "Liquor" means:
22.10 	 (1) intoxicating liquor, as defined in section 340A.101, subdivision 14;
22.11 	 (2) beverage containing intoxicating liquor; and 
22.12 	 (3) 3.2 percent malt liquor, as defined in section 340A.101, subdivision 19, when 
22.13 	sold at an on-sale or off-sale municipal liquor store or other establishment licensed to sell 
22.14 	any type of intoxicating liquor.
22.15 	 (e) "Liquor retailer" means a retailer that sells liquor.
22.16 	 (f) "Retail sale" has the meaning given in section 297A.61, subdivision 4.
22.17 		 Subd. 2.Gross receipts tax imposed. A tax is imposed on each liquor retailer equal 
22.18 	to 2.5 percent of gross receipts from retail sales in Minnesota of liquor.
22.19 		 Subd. 3.Use tax imposed; credit for taxes paid. (a) A person that receives liquor 
22.20 	for use or storage in Minnesota, other than from a liquor retailer that paid the tax under 
22.21 	subdivision 2, is subject to tax at the rate imposed under subdivision 2.  Liability for the 
22.22 	tax is incurred when the person has possession of the liquor in Minnesota.  The tax must 
22.23 	be remitted to the commissioner in the same manner prescribed for the taxes imposed 
22.24 	under chapter 297A.
22.25 	 (b) A person that has paid taxes to another jurisdiction on the same transaction and 
22.26 	is subject to tax under this section is entitled to a credit for the tax legally due and paid 
22.27 	to another jurisdiction to the extent of the lesser of (1) the tax actually paid to the other 
22.28 	jurisdiction, or (2) the amount of tax imposed by Minnesota on the transaction subject to 
22.29 	tax in the other jurisdiction.
22.30 		 Subd. 4.Tax collection required. A liquor retailer with nexus in Minnesota, who 
22.31 	is not subject to tax under subdivision 2, is required to collect the tax imposed under 
22.32 	subdivision 3 from the purchaser of the liquor and give the purchaser a receipt for the 
22.33 	tax paid.  The tax collected must be remitted to the commissioner in the same manner 
22.34 	prescribed for the taxes imposed under chapter 297A.
22.35 		 Subd. 5.Taxes paid to another jurisdiction; credit. A liquor retailer that has 
22.36 	paid taxes to another jurisdiction measured by gross receipts and is subject to tax under 
23.1 	this section on the same gross receipts is entitled to a credit for the tax legally due and 
23.2 	paid to another jurisdiction to the extent of the lesser of (1) the tax actually paid to the 
23.3 	other jurisdiction, or (2) the amount of tax imposed by Minnesota on the gross receipts 
23.4 	subject to tax in the other taxing jurisdictions.
23.5 		 Subd. 6.Exemptions. All of the exemptions applicable to the taxes imposed under 
23.6 	chapter 297A are applicable to the taxes imposed under this section.
23.7 		 Subd. 7.Sourcing of sales. All of the provisions of section 297A.668 apply to 
23.8 	the taxes imposed by this section.
23.9 		 Subd. 8.Payment; reporting. A liquor retailer shall report the tax on a return 
23.10 	prescribed by the commissioner of revenue, and shall remit the tax with the return.  The 
23.11 	return and the tax must be filed and paid using the filing cycle and due dates provided for 
23.12 	taxes imposed under chapter 297A.
23.13 		 Subd. 9.Administration. Unless specifically provided otherwise by this section, 
23.14 	the audit, assessment, refund, penalty, interest, enforcement, collection remedies, appeal, 
23.15 	and administrative provisions of chapters 270 and 289A that are applicable to taxes 
23.16 	imposed under chapter 297A apply to taxes imposed under this section.
23.17 		 Subd. 10.Interest on overpayments. Interest must be paid on an overpayment 
23.18 	refunded or credited to the taxpayer from the date of payment of the tax until the date the 
23.19 	refund is paid or credited.  For purposes of this subdivision, the date of payment is the due 
23.20 	date of the return or the date of actual payment of the tax, whichever is later.
23.21 		 Subd. 11.Deposit of revenues. The commissioner shall deposit all revenues, 
23.22 	including penalties and interest, derived from the tax imposed by this section in the 
23.23 	general fund.

23.24 	EFFECTIVE DATE. This section is effective for sales and purchases occurring on 
23.25 	or after January 1, 2006.

23.26 	 Sec. 3. Minnesota Statutes 2004, section 297A.68, subdivision 2, is amended to read:
23.27 		 Subd. 2.Materials consumed in industrial production.  (a) Materials stored, used, 
23.28 	or consumed in industrial production of personal property intended to be sold ultimately at 
23.29 	retail are exempt, whether or not the item so used becomes an ingredient or constituent 
23.30 	part of the property produced. Materials that qualify for this exemption include, but 
23.31 	are not limited to, the following:
23.32 	 (1) chemicals, including chemicals used for cleaning food processing machinery 
23.33 	and equipment;
24.1 	 (2) materials, including chemicals, fuels, and electricity purchased by persons 
24.2 	engaged in industrial production to treat waste generated as a result of the production 
24.3 	process;
24.4 	 (3) fuels, electricity, gas, and steam used or consumed in the production process, 
24.5 	except that electricity, gas, or steam used for space heating, cooling, or lighting is exempt 
24.6 	if (i) it is in excess of the average climate control or lighting for the production area, and 
24.7 	(ii) it is necessary to produce that particular product;
24.8 	 (4) petroleum products and lubricants;
24.9 	 (5) packaging materials, including returnable containers used in packaging food 
24.10 	and beverage products;
24.11 	 (6) accessory tools, equipment, and other items that are separate detachable units 
24.12 	with an ordinary useful life of less than 12 months used in producing a direct effect upon 
24.13 	the product; and
24.14 	 (7) the following materials, tools, and equipment used in metalcasting:  crucibles, 
24.15 	thermocouple protection sheaths and tubes, stalk tubes, refractory materials, molten metal 
24.16 	filters and filter boxes, degassing lances, and base blocks.
24.17 	 (b) This exemption does not include:
24.18 	 (1) machinery, equipment, implements, tools, accessories, appliances, contrivances 
24.19 	and furniture and fixtures, except those listed in paragraph (a), clause (6); and
24.20 	 (2) petroleum and special fuels used in producing or generating power for propelling 
24.21 	ready-mixed concrete trucks on the public highways of this state.
24.22 	 (c) Industrial production includes, but is not limited to, research, development, 
24.23 	design or production of any tangible personal property, manufacturing, processing 
24.24 	(other than by restaurants and consumers) of agricultural products (whether vegetable or 
24.25 	animal), commercial fishing, refining, smelting, reducing, brewing, distilling, printing, 
24.26 	mining, quarrying, lumbering, generating electricity, the production of road building 
24.27 	materials, and the research, development, design, or production of computer software.  
24.28 	Industrial production does not include painting, cleaning, repairing or similar processing 
24.29 	of property except as part of the original manufacturing process. Industrial production 
24.30 	does not include the transportation, transmission, or distribution of petroleum, liquefied 
24.31 	gas, natural gas, water, or steam, in, by, or through pipes, lines, tanks, mains, or other 
24.32 	means of transporting those products. For purposes of this paragraph, "transportation, 
24.33 	transmission, or distribution" does not include blending of petroleum or biodiesel fuel as 
24.34 	defined in section 239.77.

24.35 	EFFECTIVE DATE. This section is effective for sales and purchases made after 
24.36 	June 30, 2005.

25.1 	 Sec. 4. Minnesota Statutes 2004, section 297A.68, subdivision 5, is amended to read:
25.2 		 Subd. 5.Capital equipment.  (a) Capital equipment is exempt.  The tax must be 
25.3 	imposed and collected as if the rate under section 297A.62, subdivision 1, applied, and 
25.4 	then refunded in the manner provided in section 297A.75.
25.5 	 "Capital equipment" means machinery and equipment purchased or leased, and used 
25.6 	in this state by the purchaser or lessee primarily for manufacturing, fabricating, mining, 
25.7 	or refining tangible personal property to be sold ultimately at retail if the machinery and 
25.8 	equipment are essential to the integrated production process of manufacturing, fabricating, 
25.9 	mining, or refining.  Capital equipment also includes machinery and equipment used to 
25.10 	electronically transmit results retrieved by a customer of an on-line computerized data 
25.11 	retrieval system.
25.12 	 (b) Capital equipment includes, but is not limited to:
25.13 	 (1) machinery and equipment used to operate, control, or regulate the production 
25.14 	equipment;
25.15 	 (2) machinery and equipment used for research and development, design, quality 
25.16 	control, and testing activities;
25.17 	 (3) environmental control devices that are used to maintain conditions such as 
25.18 	temperature, humidity, light, or air pressure when those conditions are essential to and are 
25.19 	part of the production process;
25.20 	 (4) materials and supplies used to construct and install machinery or equipment;
25.21 	 (5) repair and replacement parts, including accessories, whether purchased as spare 
25.22 	parts, repair parts, or as upgrades or modifications to machinery or equipment;
25.23 	 (6) materials used for foundations that support machinery or equipment;
25.24 	 (7) materials used to construct and install special purpose buildings used in the 
25.25 	production process;
25.26 	 (8) ready-mixed concrete equipment in which the ready-mixed concrete is mixed as 
25.27 	part of the delivery process regardless if mounted on a chassis and leases of ready-mixed 
25.28 	concrete trucks; and
25.29 	 (9) machinery or equipment used for research, development, design, or production 
25.30 	of computer software.
25.31 	 (c) Capital equipment does not include the following:
25.32 	 (1) motor vehicles taxed under chapter 297B;
25.33 	 (2) machinery or equipment used to receive or store raw materials;
25.34 	 (3) building materials, except for materials included in paragraph (b), clauses (6) 
25.35 	and (7);
26.1 	 (4) machinery or equipment used for nonproduction purposes, including, but not 
26.2 	limited to, the following:  plant security, fire prevention, first aid, and hospital stations; 
26.3 	support operations or administration; pollution control; and plant cleaning, disposal of 
26.4 	scrap and waste, plant communications, space heating, cooling, lighting, or safety;
26.5 	 (5) farm machinery and aquaculture production equipment as defined by section 
26.6 	297A.61, subdivisions 12 and 13;
26.7 	 (6) machinery or equipment purchased and installed by a contractor as part of an 
26.8 	improvement to real property; or 
26.9 	 (7) machinery or equipment used in the transportation, transmission, or distribution 
26.10 	of petroleum, liquefied gas, natural gas, water, or steam, in, by, or through pipes, lines, 
26.11 	tanks, mains, or other means of transporting those products. This clause does not apply to 
26.12 	machinery or equipment used to blend petroleum or biodiesel fuel as defined in section 
26.13 	239.77; or 
26.14 	 (8) any other item that is not essential to the integrated process of manufacturing, 
26.15 	fabricating, mining, or refining.
26.16 	 (d) For purposes of this subdivision:
26.17 	 (1) "Equipment" means independent devices or tools separate from machinery but 
26.18 	essential to an integrated production process, including computers and computer software, 
26.19 	used in operating, controlling, or regulating machinery and equipment; and any subunit or 
26.20 	assembly comprising a component of any machinery or accessory or attachment parts of 
26.21 	machinery, such as tools, dies, jigs, patterns, and molds.
26.22 	 (2) "Fabricating" means to make, build, create, produce, or assemble components or 
26.23 	property to work in a new or different manner.
26.24 	 (3) "Integrated production process" means a process or series of operations through 
26.25 	which tangible personal property is manufactured, fabricated, mined, or refined.  For 
26.26 	purposes of this clause, (i) manufacturing begins with the removal of raw materials 
26.27 	from inventory and ends when the last process prior to loading for shipment has been 
26.28 	completed; (ii) fabricating begins with the removal from storage or inventory of the 
26.29 	property to be assembled, processed, altered, or modified and ends with the creation 
26.30 	or production of the new or changed product; (iii) mining begins with the removal of 
26.31 	overburden from the site of the ores, minerals, stone, peat deposit, or surface materials and 
26.32 	ends when the last process before stockpiling is completed; and (iv) refining begins with 
26.33 	the removal from inventory or storage of a natural resource and ends with the conversion 
26.34 	of the item to its completed form.
26.35 	 (4) "Machinery" means mechanical, electronic, or electrical devices, including 
26.36 	computers and computer software, that are purchased or constructed to be used for the 
27.1 	activities set forth in paragraph (a), beginning with the removal of raw materials from 
27.2 	inventory through completion of the product, including packaging of the product.
27.3 	 (5) "Machinery and equipment used for pollution control" means machinery and 
27.4 	equipment used solely to eliminate, prevent, or reduce pollution resulting from an activity 
27.5 	described in paragraph (a).
27.6 	 (6) "Manufacturing" means an operation or series of operations where raw materials 
27.7 	are changed in form, composition, or condition by machinery and equipment and which 
27.8 	results in the production of a new article of tangible personal property.  For purposes of 
27.9 	this subdivision, "manufacturing" includes the generation of electricity or steam to be 
27.10 	sold at retail.
27.11 	 (7) "Mining" means the extraction of minerals, ores, stone, or peat.
27.12 	 (8) "On-line data retrieval system" means a system whose cumulation of information 
27.13 	is equally available and accessible to all its customers.
27.14 	 (9) "Primarily" means machinery and equipment used 50 percent or more of the time 
27.15 	in an activity described in paragraph (a).
27.16 	 (10) "Refining" means the process of converting a natural resource to an intermediate 
27.17 	or finished product, including the treatment of water to be sold at retail.

27.18 	EFFECTIVE DATE. This section is effective for sales and purchases made after 
27.19 	June 30, 2005.

27.20 	 Sec. 5. Minnesota Statutes 2004, section 297I.01, is amended by adding a subdivision 
27.21 	to read:
27.22 		 Subd. 6a.Direct business. (a) "Direct business" means all insurance provided 
27.23 	by an insurance company or its agents, and specifically includes stop-loss insurance 
27.24 	purchased in connection with a self-insurance plan for employee health benefits or for 
27.25 	other purposes, but excludes:
27.26 	 (1) reinsurance in which an insurance company assumes the liability of another 
27.27 	insurance company; and 
27.28 	 (2) self-insurance.
27.29 	 (b) For purposes of this subdivision, an insurance company includes a nonprofit 
27.30 	health service corporation, health maintenance organization, and community integrated 
27.31 	service network.

27.32 	EFFECTIVE DATE. This section is effective for insurance premiums received 
27.33 	after December 31, 2005.

28.1 	 Sec. 6. Laws 2001, First Special Session chapter 5, article 12, section 95, is amended 
28.2 	to read:
28.3 	 Sec. 95REPEALER.
 28.4 	 (a) Minnesota Statutes 2000, sections 297A.61, subdivision 16; 297A.68, subdivision 
28.5 	21; and 297A.71, subdivisions 2 and 16, are repealed effective for sales and purchases 
28.6 	occurring after June 30, 2001, except that the repeal of section 297A.61, subdivision 16, 
28.7 	paragraph (d), is effective for sales and purchases occurring after July 31, 2001.
28.8 	 (b) Minnesota Statutes 2000, sections section 297A.62, subdivision 2, and 297A.64, 
28.9 	subdivision 1, are is repealed effective for sales and purchases made after December 
28.10 	31, 2005.
28.11 	 (c) Minnesota Statutes 2000, section 297A.71, subdivision 15, is repealed effective 
28.12 	for sales and purchases made after June 30, 2002.
28.13 	 (d) Minnesota Statutes 2000, section 289A.60, subdivision 15, is repealed effective 
28.14 	for liabilities after January 1, 2003.

28.15 	 EFFECTIVE DATE. This section is effective the day following final enactment.

28.16 	 ARTICLE 4
28.17 	 MISCELLANEOUS

28.18 	 Section 1. Minnesota Statutes 2004, section 273.1384, subdivision 1, is amended to 
28.19 	read:
28.20 		 Subdivision 1.Residential homestead market value credit.  Each county auditor 
28.21 	shall determine a homestead credit for each class 1a, 1b, 1c, and 2a homestead property 
28.22 	within the county equal to 0.4 percent of the first $76,000 of market value of the property. 
28.23 	The amount of homestead credit for a homestead may not exceed $304 and is reduced by 
28.24 	minus.09 percent of the market value in excess of $76,000. The credit amount may not be 
28.25 	less than zero.In the case of an agricultural or resort homestead, only the market value of 
28.26 	the house, garage, and immediately surrounding one acre of land is eligible in determining 
28.27 	the property's homestead credit.  In the case of a property which is classified as part 
28.28 	homestead and part nonhomestead, (i) the credit shall apply only to the homestead portion 
28.29 	of the property., but (ii) if a portion of a property is classified as nonhomestead solely 
28.30 	because not all the owners occupy the property, or solely because both spouses do not 
28.31 	occupy the property, the credit amount shall be initially computed as if that nonhomestead 
28.32 	portion were also in the homestead class and then prorated to the owner-occupant's 
28.33 	percentage of ownership or prorated to one-half if both spouses do not occupy the property.

29.1 	EFFECTIVE DATE. This section is effective for taxes payable in 2006 and 
29.2 	thereafter.

29.3 	 Sec. 2. CITY AID PAYMENTS.
 29.4 	 In 2005 and 2006, market value credit reimbursements for each city payable 
29.5 	under Minnesota Statutes, section 273.1384, are reduced by the dollar amount of the 
29.6 	2003 reduction in market value credit reimbursements for that city due to Laws 2003, 
29.7 	First Special Session chapter 21, article 5, section 12.  No city's market value credit 
29.8 	reimbursements are reduced to less than zero under this section.  To the extent sufficient 
29.9 	information is available on each payment date, the commissioner shall pay the annual 2005 
29.10 	and 2006 market value credit reimbursement amounts, after reduction under this section, to 
29.11 	cities in equal installments on the dates specified in Minnesota Statutes, section 273.1384.

29.12 	 EFFECTIVE DATE. This section is effective the day following final enactment.