HF 94

as introduced - 84th Legislature, 2005 1st Special Session (2005 - 2005) Posted on 12/15/2009 12:00am

A bill for an act
relating to taxation; requiring withholding; providing
for taxation of certain income; eliminating certain
deductions; conforming with certain federal income tax
changes; prohibiting state contracts with certain
vendors; providing for taxation of cigarettes, liquor,
and rented and leased vehicles; modifying certain
sales tax exemptions; defining "direct business" for
purposes of insurance taxes; modifying the homestead
market value credit reimbursement; establishing a tax
compliance program; appropriating money; amending
Minnesota Statutes 2004, sections 16C.03, by adding a
subdivision; 289A.20, subdivision 2; 289A.38, by
adding a subdivision; 289A.60, by adding a
subdivision; 290.01, subdivisions 19, 19a, 19b, 19c,
19d, 31; 290.06, subdivision 2c; 290.067, subdivision
2a; 290.091, subdivision 2; 290.10; 290.17,
subdivision 2; 290.92, by adding a subdivision;
290A.03, subdivisions 3, 15; 297A.61, subdivision 4,
by adding a subdivision; 297A.67, subdivision 8, by
adding a subdivision; 297A.68, subdivisions 2, 5;
297I.01, by adding a subdivision; Laws 2001, First
Special Session chapter 5, article 12, section 95;
proposing coding for new law in Minnesota Statutes,
chapters 289A; 295; 297A; 297F.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

ARTICLE 1

INCOME AND CORPORATE FRANCHISE TAXES

Section 1.

Minnesota Statutes 2004, section 289A.20,
subdivision 2, is amended to read:

Subd. 2.

Withholding from wages, entertainer withholding,
withholding from payments to out-of-state contractors, and
withholding by partnerships and small business corporations.

(a) A tax required to be deducted and withheld during the
quarterly period must be paid on or before the last day of the
month following the close of the quarterly period, unless an
earlier time for payment is provided. A tax required to be
deducted and withheld from compensation of an entertainer and
from a payment to an out-of-state contractor must be paid on or
before the date the return for such tax must be filed under
section 289A.18, subdivision 2. Taxes required to be deducted
and withheld by partnerships deleted text begin and deleted text end new text begin , new text end S corporations new text begin , and trusts
new text end must be paid on deleted text begin or before the date the return must be filed
under section 289A.18, subdivision 2 deleted text end new text begin a quarterly basis as
estimated taxes under section 289A.25 for partnerships and
trusts and under section 289A.26 for S corporations new text end .

(b) An employer who, during the previous quarter, withheld
more than $1,500 of tax under section 290.92, subdivision 2a or
3, or 290.923, subdivision 2, must deposit tax withheld under
those sections with the commissioner within the time allowed to
deposit the employer's federal withheld employment taxes under
Code of Federal Regulations, title 26, section 31.6302-1, as
amended through December 31, 2001, without regard to the safe
harbor or de minimis rules in subparagraph (f) or the one-day
rule in subsection (c), clause (3). Taxpayers must submit a
copy of their federal notice of deposit status to the
commissioner upon request by the commissioner.

(c) The commissioner may prescribe by rule other return
periods or deposit requirements. In prescribing the reporting
period, the commissioner may classify payors according to the
amount of their tax liability and may adopt an appropriate
reporting period for the class that the commissioner judges to
be consistent with efficient tax collection. In no event will
the duration of the reporting period be more than one year.

(d) If less than the correct amount of tax is paid to the
commissioner, proper adjustments with respect to both the tax
and the amount to be deducted must be made, without interest, in
the manner and at the times the commissioner prescribes. If the
underpayment cannot be adjusted, the amount of the underpayment
will be assessed and collected in the manner and at the times
the commissioner prescribes.

(e) If the aggregate amount of the tax withheld during a
fiscal year ending June 30 under section 290.92, subdivision 2a
or 3, is equal to or exceeds the amounts established for
remitting federal withheld taxes pursuant to the regulations
promulgated under section 6302(h) of the Internal Revenue Code,
the employer must remit each required deposit for wages paid in
the subsequent calendar year by electronic means.

(f) A third-party bulk filer as defined in section 290.92,
subdivision 30, paragraph (a), clause (2), who remits
withholding deposits must remit all deposits by electronic means
as provided in paragraph (e), regardless of the aggregate amount
of tax withheld during a fiscal year for all of the employers.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2005.
new text end

Sec. 2.

Minnesota Statutes 2004, section 290.01,
subdivision 19a, is amended to read:

Subd. 19a.

Additions to federal taxable income.

For
individuals, estates, and trusts, there shall be added to
federal taxable income:

(1)(i) interest income on obligations of any state other
than Minnesota or a political or governmental subdivision,
municipality, or governmental agency or instrumentality of any
state other than Minnesota exempt from federal income taxes
under the Internal Revenue Code or any other federal statute;
and

(ii) exempt-interest dividends as defined in section
852(b)(5) of the Internal Revenue Code, except the portion of
the exempt-interest dividends derived from interest income on
obligations of the state of Minnesota or its political or
governmental subdivisions, municipalities, governmental agencies
or instrumentalities, but only if the portion of the
exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95 percent or more of the
exempt-interest dividends that are paid by the regulated
investment company as defined in section 851(a) of the Internal
Revenue Code, or the fund of the regulated investment company as
defined in section 851(g) of the Internal Revenue Code, making
the payment; and

(iii) for the purposes of items (i) and (ii), interest on
obligations of an Indian tribal government described in section
7871(c) of the Internal Revenue Code shall be treated as
interest income on obligations of the state in which the tribe
is located;

(2) the amount of income taxes paid or accrued within the
taxable year under this chapter and income taxes paid to any
other state or to any province or territory of Canada, to the
extent allowed as a deduction under section 63(d) of the
Internal Revenue Code, but the addition may not be more than the
amount by which the itemized deductions as allowed under section
63(d) of the Internal Revenue Code exceeds the amount of the
standard deduction as defined in section 63(c) of the Internal
Revenue Code. For the purpose of this paragraph, the
disallowance of itemized deductions under section 68 of the
Internal Revenue Code of 1986, income tax is the last itemized
deduction disallowed;

(3) the capital gain amount of a lump sum distribution to
which the special tax under section 1122(h)(3)(B)(ii) of the Tax
Reform Act of 1986, Public Law 99-514, applies;

(4) the amount of income taxes paid or accrued within the
taxable year under this chapter and income taxes paid to any
other state or any province or territory of Canada, to the
extent allowed as a deduction in determining federal adjusted
gross income. For the purpose of this paragraph, income taxes
do not include the taxes imposed by sections 290.0922,
subdivision 1, paragraph (b), 290.9727, 290.9728, and 290.9729;

(5) the amount of expense, interest, or taxes disallowed
pursuant to section 290.10;

(6) the amount of a partner's pro rata share of net income
which does not flow through to the partner because the
partnership elected to pay the tax on the income under section
6242(a)(2) of the Internal Revenue Code; deleted text begin and
deleted text end

(7) 80 percent of the depreciation deduction allowed under
section 168(k) of the Internal Revenue Code. For purposes of
this clause, if the taxpayer has an activity that in the taxable
year generates a deduction for depreciation under section 168(k)
and the activity generates a loss for the taxable year that the
taxpayer is not allowed to claim for the taxable year, "the
depreciation allowed under section 168(k)" for the taxable year
is limited to excess of the depreciation claimed by the activity
under section 168(k) over the amount of the loss from the
activity that is not allowed in the taxable year. In succeeding
taxable years when the losses not allowed in the taxable year
are allowed, the depreciation under section 168(k) is allowed new text begin ;
and
new text end

new text begin (8) the amount of expenses disallowed under section 290.10,
subdivision 2 new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end

Sec. 3.

Minnesota Statutes 2004, section 290.01,
subdivision 19c, is amended to read:

Subd. 19c.

Corporations; additions to federal taxable
income.

For corporations, there shall be added to federal
taxable income:

(1) the amount of any deduction taken for federal income
tax purposes for income, excise, or franchise taxes based on net
income or related minimum taxes, including but not limited to
the tax imposed under section 290.0922, paid by the corporation
to Minnesota, another state, a political subdivision of another
state, the District of Columbia, or any foreign country or
possession of the United States;

(2) interest not subject to federal tax upon obligations
of: the United States, its possessions, its agencies, or its
instrumentalities; the state of Minnesota or any other state,
any of its political or governmental subdivisions, any of its
municipalities, or any of its governmental agencies or
instrumentalities; the District of Columbia; or Indian tribal
governments;

(3) exempt-interest dividends received as defined in
section 852(b)(5) of the Internal Revenue Code;

(4) the amount of any net operating loss deduction taken
for federal income tax purposes under section 172 or 832(c)(10)
of the Internal Revenue Code or operations loss deduction under
section 810 of the Internal Revenue Code;

(5) the amount of any special deductions taken for federal
income tax purposes under sections 241 to 247 of the Internal
Revenue Code;

(6) losses from the business of mining, as defined in
section 290.05, subdivision 1, clause (a), that are not subject
to Minnesota income tax;

(7) the amount of any capital losses deducted for federal
income tax purposes under sections 1211 and 1212 of the Internal
Revenue Code;

(8) the exempt foreign trade income of a foreign sales
corporation under sections 921(a) and 291 of the Internal
Revenue Code;

(9) the amount of percentage depletion deducted under
sections 611 through 614 and 291 of the Internal Revenue Code;

(10) for certified pollution control facilities placed in
service in a taxable year beginning before December 31, 1986,
and for which amortization deductions were elected under section
169 of the Internal Revenue Code of 1954, as amended through
December 31, 1985, the amount of the amortization deduction
allowed in computing federal taxable income for those
facilities;

(11) the amount of any deemed dividend from a foreign
operating corporation determined pursuant to section 290.17,
subdivision 4, paragraph (g);

(12) the amount of any environmental tax paid under section
59(a) of the Internal Revenue Code;

(13) the amount of a partner's pro rata share of net income
which does not flow through to the partner because the
partnership elected to pay the tax on the income under section
6242(a)(2) of the Internal Revenue Code;

(14) the amount of net income excluded under section 114 of
the Internal Revenue Code;

(15) any increase in subpart F income, as defined in
section 952(a) of the Internal Revenue Code, for the taxable
year when subpart F income is calculated without regard to the
provisions of section 614 of Public Law 107-147; deleted text begin and
deleted text end

(16) 80 percent of the depreciation deduction allowed under
section 168(k) of the Internal Revenue Code. For purposes of
this clause, if the taxpayer has an activity that in the taxable
year generates a deduction for depreciation under section 168(k)
and the activity generates a loss for the taxable year that the
taxpayer is not allowed to claim for the taxable year, "the
depreciation allowed under section 168(k)" for the taxable year
is limited to excess of the depreciation claimed by the activity
under section 168(k) over the amount of the loss from the
activity that is not allowed in the taxable year. In succeeding
taxable years when the losses not allowed in the taxable year
are allowed, the depreciation under section 168(k) is allowed new text begin ;
and
new text end

new text begin (17) the amount of expenses disallowed under section
290.10, subdivision 2 new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end

Sec. 4.

Minnesota Statutes 2004, section 290.10, is
amended to read:

290.10 NONDEDUCTIBLE ITEMS.

new text begin Subdivision 1. new text end

new text begin Expenses, interest, and taxes. new text end

Except as
provided in section 290.17, subdivision 4, paragraph (i), in
computing the net income of a taxpayer no deduction shall in any
case be allowed for expenses, interest and taxes connected with
or allocable against the production or receipt of all income not
included in the measure of the tax imposed by this chapter,
except that for corporations engaged in the business of mining
or producing iron ore, the mining of which is subject to the
occupation tax imposed by section 298.01, subdivision 4, this
shall not prevent the deduction of expenses and other items to
the extent that the expenses and other items are allowable under
this chapter and are not deductible, capitalizable, retainable
in basis, or taken into account by allowance or otherwise in
computing the occupation tax and do not exceed the amounts taken
for federal income tax purposes for that year. Occupation taxes
imposed under chapter 298, royalty taxes imposed under chapter
299, or depletion expenses may not be deducted under this clause.

new text begin Subd. 2. new text end

new text begin Fines, penalties, damages, and expenses. new text end

new text begin (a) No
deduction from taxable income for a trade or business expense
under section 162(a) of the Internal Revenue Code shall be
allowed for any fine, penalty, damages, or expenses paid to:
new text end

new text begin (1) the government of the United States, a state, a
territory or possession of the United States, the District of
Columbia, or the Commonwealth of Puerto Rico;
new text end

new text begin (2) the government of a foreign country; or
new text end

new text begin (3) a political subdivision of, or corporation or other
entity serving as an agency or instrumentality of, any
government described in clause (1) or (2).
new text end

new text begin (b) For purposes of this subdivision, "fine, penalty,
damages, or expenses" include, but are not limited to, any
amount:
new text end

new text begin (1) paid pursuant to a conviction or a plea of guilty or
nolo contendere for any crime in a criminal proceeding;
new text end

new text begin (2) paid as a civil penalty imposed by federal, state, or
local law, including tax penalties and interest;
new text end

new text begin (3) paid in settlement of the taxpayer's actual or
potential liability for a civil or criminal fine or penalty;
new text end

new text begin (4) forfeited as collateral posted in connection with a
proceeding that could result in imposition of a fine or penalty;
or
new text end

new text begin (5) legal fees and related expenses paid or incurred in the
prosecution or civil action arising from a violation of the law
imposing the fine or civil penalty, court costs assessed against
the taxpayer, or stenographic and printing charges, compensatory
damages, punitive damages, or restitution.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end

Sec. 5.

Minnesota Statutes 2004, section 290.17,
subdivision 2, is amended to read:

Subd. 2.

Income not derived from conduct of a trade or
business.

The income of a taxpayer subject to the allocation
rules that is not derived from the conduct of a trade or
business must be assigned in accordance with paragraphs (a) to
(f):

(a)(1) Subject to paragraphs (a)(2) deleted text begin , deleted text end new text begin and new text end (a)(3), deleted text begin and
(a)(4), deleted text end income from wages as defined in section 3401(a) and (f)
of the Internal Revenue Code is assigned to this state if, and
to the extent that, the work of the employee is performed within
it; all other income from such sources is treated as income from
sources without this state.

Severance pay shall be considered income from labor or
personal or professional services.

(2) In the case of an individual who is a nonresident of
Minnesota and who is an athlete or entertainer, income from
compensation for labor or personal services performed within
this state shall be determined in the following manner:

(i) The amount of income to be assigned to Minnesota for an
individual who is a nonresident salaried athletic team employee
shall be determined by using a fraction in which the denominator
contains the total number of days in which the individual is
under a duty to perform for the employer, and the numerator is
the total number of those days spent in Minnesota. For purposes
of this paragraph, off-season training activities, unless
conducted at the team's facilities as part of a team imposed
program, are not included in the total number of duty days.
Bonuses earned as a result of play during the regular season or
for participation in championship, play-off, or all-star games
must be allocated under the formula. Signing bonuses are not
subject to allocation under the formula if they are not
conditional on playing any games for the team, are payable
separately from any other compensation, and are nonrefundable;
and

(ii) The amount of income to be assigned to Minnesota for
an individual who is a nonresident, and who is an athlete or
entertainer not listed in clause (i), for that person's athletic
or entertainment performance in Minnesota shall be determined by
assigning to this state all income from performances or athletic
contests in this state.

(3) For purposes of this section, amounts received by a
nonresident as "retirement income" as defined in section (b)(1)
of the State Income Taxation of Pension Income Act, Public Law
104-95, are not considered income derived from carrying on a
trade or business or from wages or other compensation for work
an employee performed in Minnesota, and are not taxable under
this chapter.

deleted text begin (4) Wages, otherwise assigned to this state under clause
(1) and not qualifying under clause (3), are not taxable under
this chapter if the following conditions are met:
deleted text end

deleted text begin (i) the recipient was not a resident of this state for any
part of the taxable year in which the wages were received; and
deleted text end

deleted text begin (ii) the wages are for work performed while the recipient
was a resident of this state.
deleted text end

(b) Income or gains from tangible property located in this
state that is not employed in the business of the recipient of
the income or gains must be assigned to this state.

(c) Income or gains from intangible personal property not
employed in the business of the recipient of the income or gains
must be assigned to this state if the recipient of the income or
gains is a resident of this state or is a resident trust or
estate.

Gain on the sale of a partnership interest is allocable to
this state in the ratio of the original cost of partnership
tangible property in this state to the original cost of
partnership tangible property everywhere, determined at the time
of the sale. If more than 50 percent of the value of the
partnership's assets consists of intangibles, gain or loss from
the sale of the partnership interest is allocated to this state
in accordance with the sales factor of the partnership for its
first full tax period immediately preceding the tax period of
the partnership during which the partnership interest was sold.

Gain on the sale of goodwill or income from a covenant not
to compete that is connected with a business operating all or
partially in Minnesota is allocated to this state to the extent
that the income from the business in the year preceding the year
of sale was assignable to Minnesota under subdivision 3.

When an employer pays an employee for a covenant not to
compete, the income allocated to this state is in the ratio of
the employee's service in Minnesota in the calendar year
preceding leaving the employment of the employer over the total
services performed by the employee for the employer in that year.

(d) Income from winnings on a bet made by an individual
while in Minnesota is assigned to this state. In this
paragraph, "bet" has the meaning given in section 609.75,
subdivision 2, as limited by section 609.75, subdivision 3,
clauses (1), (2), and (3).

(e) All items of gross income not covered in paragraphs (a)
to (d) and not part of the taxpayer's income from a trade or
business shall be assigned to the taxpayer's domicile.

(f) For the purposes of this section, working as an
employee shall not be considered to be conducting a trade or
business.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2005.
new text end

Sec. 6.

Minnesota Statutes 2004, section 290.92, is
amended by adding a subdivision to read:

new text begin Subd. 31. new text end

new text begin Payments to persons who are not employees;
withholding. new text end

new text begin Any person engaged in a trade or business who in
the course of such trade or business makes payments to an
individual, who is not an employee of the person, for work
described in industry code numbers 23 through 238990 of the
North American Industry Classification System, shall deduct from
the payment and withhold two percent of the amount as Minnesota
withholding tax when the amount paid to that individual by the
same person during the calendar year exceeds $600. For purposes
of this section, a payment to any person that is subject to
withholding under this subdivision must be treated as if the
payment was a wage paid by an employer to an employee. Every
individual who is to receive a payment that is subject to
withholding under this subdivision shall furnish the contracting
person with a statement, containing the name, address, and
Social Security account number of the person receiving the
payment.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for payments
made after July 31, 2005.
new text end

ARTICLE 2

FEDERAL UPDATE

Section 1.

Minnesota Statutes 2004, section 290.01,
subdivision 19, is amended to read:

Subd. 19.

Net income.

The term "net income" means the
federal taxable income, as defined in section 63 of the Internal
Revenue Code of 1986, as amended through the date named in this
subdivision, incorporating any elections made by the taxpayer in
accordance with the Internal Revenue Code in determining federal
taxable income for federal income tax purposes, and with the
modifications provided in subdivisions 19a to 19f.

In the case of a regulated investment company or a fund
thereof, as defined in section 851(a) or 851(g) of the Internal
Revenue Code, federal taxable income means investment company
taxable income as defined in section 852(b)(2) of the Internal
Revenue Code, except that:

(1) the exclusion of net capital gain provided in section
852(b)(2)(A) of the Internal Revenue Code does not apply;

(2) the deduction for dividends paid under section
852(b)(2)(D) of the Internal Revenue Code must be applied by
allowing a deduction for capital gain dividends and
exempt-interest dividends as defined in sections 852(b)(3)(C)
and 852(b)(5) of the Internal Revenue Code; and

(3) the deduction for dividends paid must also be applied
in the amount of any undistributed capital gains which the
regulated investment company elects to have treated as provided
in section 852(b)(3)(D) of the Internal Revenue Code.

The net income of a real estate investment trust as defined
and limited by section 856(a), (b), and (c) of the Internal
Revenue Code means the real estate investment trust taxable
income as defined in section 857(b)(2) of the Internal Revenue
Code.

The net income of a designated settlement fund as defined
in section 468B(d) of the Internal Revenue Code means the gross
income as defined in section 468B(b) of the Internal Revenue
Code.

The provisions of sections 1113(a), 1117, 1206(a), 1313(a),
1402(a), 1403(a), 1443, 1450, 1501(a), 1605, 1611(a), 1612,
1616, 1617, 1704(l), and 1704(m) of the Small Business Job
Protection Act, Public Law 104-188, the provisions of Public Law
104-117, the provisions of sections 313(a) and (b)(1), 602(a),
913(b), 941, 961, 971, 1001(a) and (b), 1002, 1003, 1012, 1013,
1014, 1061, 1062, 1081, 1084(b), 1086, 1087, 1111(a), 1131(b)
and (c), 1211(b), 1213, 1530(c)(2), 1601(f)(5) and (h), and
1604(d)(1) of the Taxpayer Relief Act of 1997, Public Law
105-34, the provisions of section 6010 of the Internal Revenue
Service Restructuring and Reform Act of 1998, Public Law
105-206, the provisions of section 4003 of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act,
1999, Public Law 105-277, and the provisions of section 318 of
the Consolidated Appropriation Act of 2001, Public Law 106-554,
shall become effective at the time they become effective for
federal purposes.

The Internal Revenue Code of 1986, as amended through
December 31, 1996, shall be in effect for taxable years
beginning after December 31, 1996.

The provisions of sections 202(a) and (b), 221(a), 225,
312, 313, 913(a), 934, 962, 1004, 1005, 1052, 1063, 1084(a) and
(c), 1089, 1112, 1171, 1204, 1271(a) and (b), 1305(a), 1306,
1307, 1308, 1309, 1501(b), 1502(b), 1504(a), 1505, 1527, 1528,
1530, 1601(d), (e), (f), and (i) and 1602(a), (b), (c), and (e)
of the Taxpayer Relief Act of 1997, Public Law 105-34, the
provisions of sections 6004, 6005, 6012, 6013, 6015, 6016, 7002,
and 7003 of the Internal Revenue Service Restructuring and
Reform Act of 1998, Public Law 105-206, the provisions of
section 3001 of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999, Public Law 105-277, the
provisions of section 3001 of the Miscellaneous Trade and
Technical Corrections Act of 1999, Public Law 106-36, and the
provisions of section 316 of the Consolidated Appropriation Act
of 2001, Public Law 106-554, shall become effective at the time
they become effective for federal purposes.

The Internal Revenue Code of 1986, as amended through
December 31, 1997, shall be in effect for taxable years
beginning after December 31, 1997.

The provisions of sections 5002, 6009, 6011, and 7001 of
the Internal Revenue Service Restructuring and Reform Act of
1998, Public Law 105-206, the provisions of section 9010 of the
Transportation Equity Act for the 21st Century, Public Law
105-178, the provisions of sections 1004, 4002, and 5301 of the
Omnibus Consolidation and Emergency Supplemental Appropriations
Act, 1999, Public Law 105-277, the provision of section 303 of
the Ricky Ray Hemophilia Relief Fund Act of 1998, Public Law
105-369, the provisions of sections 532, 534, 536, 537, and 538
of the Ticket to Work and Work Incentives Improvement Act of
1999, Public Law 106-170, the provisions of the Installment Tax
Correction Act of 2000, Public Law 106-573, and the provisions
of section 309 of the Consolidated Appropriation Act of 2001,
Public Law 106-554, shall become effective at the time they
become effective for federal purposes.

The Internal Revenue Code of 1986, as amended through
December 31, 1998, shall be in effect for taxable years
beginning after December 31, 1998.

The provisions of the FSC Repeal and Extraterritorial
Income Exclusion Act of 2000, Public Law 106-519, and the
provision of section 412 of the Job Creation and Worker
Assistance Act of 2002, Public Law 107-147, shall become
effective at the time it became effective for federal purposes.

The Internal Revenue Code of 1986, as amended through
December 31, 1999, shall be in effect for taxable years
beginning after December 31, 1999. The provisions of sections
306 and 401 of the Consolidated Appropriation Act of 2001,
Public Law 106-554, and the provision of section 632(b)(2)(A) of
the Economic Growth and Tax Relief Reconciliation Act of 2001,
Public Law 107-16, and provisions of sections 101 and 402 of the
Job Creation and Worker Assistance Act of 2002, Public Law
107-147, shall become effective at the same time it became
effective for federal purposes.

The Internal Revenue Code of 1986, as amended through
December 31, 2000, shall be in effect for taxable years
beginning after December 31, 2000. The provisions of sections
659a and 671 of the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law 107-16, the provisions of
sections 104, 105, and 111 of the Victims of Terrorism Tax
Relief Act of 2001, Public Law 107-134, and the provisions of
sections 201, 403, 413, and 606 of the Job Creation and Worker
Assistance Act of 2002, Public Law 107-147, shall become
effective at the same time it became effective for federal
purposes.

The Internal Revenue Code of 1986, as amended through March
15, 2002, shall be in effect for taxable years beginning after
December 31, 2001.

The provisions of sections 101 and 102 of the Victims of
Terrorism Tax Relief Act of 2001, Public Law 107-134, shall
become effective at the same time it becomes effective for
federal purposes.

The Internal Revenue Code of 1986, as amended through June
15, 2003, shall be in effect for taxable years beginning after
December 31, 2002 new text begin , provided that the provisions of the American
Jobs Creation Act of 2004, Public Law 108-435, are effective at
the same time they became effective for federal income tax
purposes new text end . The provisions of section 201 of the Jobs and Growth
Tax Relief and Reconciliation Act of 2003, H.R. 2, if it is
enacted into law, are effective at the same time it became
effective for federal purposes.

Except as otherwise provided, references to the Internal
Revenue Code in subdivisions 19a to 19g mean the code in effect
for purposes of determining net income for the applicable year.

Sec. 2.

Minnesota Statutes 2004, section 290.01,
subdivision 19a, is amended to read:

Subd. 19a.

Additions to federal taxable income.

For
individuals, estates, and trusts, there shall be added to
federal taxable income:

(1)(i) interest income on obligations of any state other
than Minnesota or a political or governmental subdivision,
municipality, or governmental agency or instrumentality of any
state other than Minnesota exempt from federal income taxes
under the Internal Revenue Code or any other federal statute;
and

(ii) exempt-interest dividends as defined in section
852(b)(5) of the Internal Revenue Code, except the portion of
the exempt-interest dividends derived from interest income on
obligations of the state of Minnesota or its political or
governmental subdivisions, municipalities, governmental agencies
or instrumentalities, but only if the portion of the
exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95 percent or more of the
exempt-interest dividends that are paid by the regulated
investment company as defined in section 851(a) of the Internal
Revenue Code, or the fund of the regulated investment company as
defined in section 851(g) of the Internal Revenue Code, making
the payment; and

(iii) for the purposes of items (i) and (ii), interest on
obligations of an Indian tribal government described in section
7871(c) of the Internal Revenue Code shall be treated as
interest income on obligations of the state in which the tribe
is located;

(2) the amount of income new text begin or sales and use new text end taxes paid or
accrued within the taxable year under this chapter and income new text begin or
sales and use new text end taxes paid to any other state or to any province
or territory of Canada, to the extent allowed as a deduction
under section 63(d) of the Internal Revenue Code new text begin of 1986, as
amended through June 15, 2003 new text end , but the addition may not be more
than the amount by which the itemized deductions as allowed
under section 63(d) of the Internal Revenue Code exceeds the
amount of the standard deduction as defined in section 63(c) of
the Internal Revenue Code. For the purpose of this paragraph,
the disallowance of itemized deductions under section 68 of the
Internal Revenue Code of 1986, income new text begin or sales and use new text end tax is
the last itemized deduction disallowed;

(3) the capital gain amount of a lump sum distribution to
which the special tax under section 1122(h)(3)(B)(ii) of the Tax
Reform Act of 1986, Public Law 99-514, applies;

(4) the amount of income taxes paid or accrued within the
taxable year under this chapter and income taxes paid to any
other state or any province or territory of Canada, to the
extent allowed as a deduction in determining federal adjusted
gross income. For the purpose of this paragraph, income taxes
do not include the taxes imposed by sections 290.0922,
subdivision 1, paragraph (b), 290.9727, 290.9728, and 290.9729;

(5) the amount of expense, interest, or taxes disallowed
pursuant to section 290.10;

(6) the amount of a partner's pro rata share of net income
which does not flow through to the partner because the
partnership elected to pay the tax on the income under section
6242(a)(2) of the Internal Revenue Code; deleted text begin and
deleted text end

(7) 80 percent of the depreciation deduction allowed under
section 168(k) of the Internal Revenue Code. For purposes of
this clause, if the taxpayer has an activity that in the taxable
year generates a deduction for depreciation under section 168(k)
and the activity generates a loss for the taxable year that the
taxpayer is not allowed to claim for the taxable year, "the
depreciation allowed under section 168(k)" for the taxable year
is limited to excess of the depreciation claimed by the activity
under section 168(k) over the amount of the loss from the
activity that is not allowed in the taxable year. In succeeding
taxable years when the losses not allowed in the taxable year
are allowed, the depreciation under section 168(k) is allowed new text begin ;
new text end

new text begin (8) 80 percent of the amount by which the deduction allowed
by section 179 of the Internal Revenue Code exceeds the
deduction allowable by section 179 of the Internal Revenue Code
of 1986, as amended through December 31, 2003; and
new text end

new text begin (9) to the extent deducted in computing federal taxable
income, the amount of the deduction allowable under section 199
of the Internal Revenue Code new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004, except the changes in clause
(2) are effective for tax years beginning after December 31,
2003.
new text end

Sec. 3.

Minnesota Statutes 2004, section 290.01,
subdivision 19b, is amended to read:

Subd. 19b.

Subtractions from federal taxable income.

For
individuals, estates, and trusts, there shall be subtracted from
federal taxable income:

(1) interest income on obligations of any authority,
commission, or instrumentality of the United States to the
extent includable in taxable income for federal income tax
purposes but exempt from state income tax under the laws of the
United States;

(2) if included in federal taxable income, the amount of
any overpayment of income tax to Minnesota or to any other
state, for any previous taxable year, whether the amount is
received as a refund or as a credit to another taxable year's
income tax liability;

(3) the amount paid to others, less the amount used to
claim the credit allowed under section 290.0674, not to exceed
$1,625 for each qualifying child in grades kindergarten to 6 and
$2,500 for each qualifying child in grades 7 to 12, for tuition,
textbooks, and transportation of each qualifying child in
attending an elementary or secondary school situated in
Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin,
wherein a resident of this state may legally fulfill the state's
compulsory attendance laws, which is not operated for profit,
and which adheres to the provisions of the Civil Rights Act of
1964 and chapter 363A. For the purposes of this clause,
"tuition" includes fees or tuition as defined in section
290.0674, subdivision 1, clause (1). As used in this clause,
"textbooks" includes books and other instructional materials and
equipment purchased or leased for use in elementary and
secondary schools in teaching only those subjects legally and
commonly taught in public elementary and secondary schools in
this state. Equipment expenses qualifying for deduction
includes expenses as defined and limited in section 290.0674,
subdivision 1, clause (3). "Textbooks" does not include
instructional books and materials used in the teaching of
religious tenets, doctrines, or worship, the purpose of which is
to instill such tenets, doctrines, or worship, nor does it
include books or materials for, or transportation to,
extracurricular activities including sporting events, musical or
dramatic events, speech activities, driver's education, or
similar programs. For purposes of the subtraction provided by
this clause, "qualifying child" has the meaning given in section
32(c)(3) of the Internal Revenue Code;

(4) income as provided under section 290.0802;

(5) to the extent included in federal adjusted gross
income, income realized on disposition of property exempt from
tax under section 290.491;

(6) to the extent included in federal taxable income,
postservice benefits for youth community service under section
124D.42 for volunteer service under United States Code, title
42, sections 12601 to 12604;

(7) to the extent not deducted in determining federal
taxable income by an individual who does not itemize deductions
for federal income tax purposes for the taxable year, an amount
equal to 50 percent of the excess of charitable contributions
allowable as a deduction for the taxable year under section
170(a) of the Internal Revenue Code over $500;

(8) for taxable years beginning before January 1, 2008, the
amount of the federal small ethanol producer credit allowed
under section 40(a)(3) of the Internal Revenue Code which is
included in gross income under section 87 of the Internal
Revenue Code;

(9) for individuals who are allowed a federal foreign tax
credit for taxes that do not qualify for a credit under section
290.06, subdivision 22, an amount equal to the carryover of
subnational foreign taxes for the taxable year, but not to
exceed the total subnational foreign taxes reported in claiming
the foreign tax credit. For purposes of this clause, "federal
foreign tax credit" means the credit allowed under section 27 of
the Internal Revenue Code, and "carryover of subnational foreign
taxes" equals the carryover allowed under section 904(c) of the
Internal Revenue Code minus national level foreign taxes to the
extent they exceed the federal foreign tax credit;

(10) in each of the five tax years immediately following
the tax year in which an addition is required under subdivision
19a, clause (7), an amount equal to one-fifth of the delayed
depreciation. For purposes of this clause, "delayed
depreciation" means the amount of the addition made by the
taxpayer under subdivision 19a, clause (7), minus the positive
value of any net operating loss under section 172 of the
Internal Revenue Code generated for the tax year of the
addition. The resulting delayed depreciation cannot be less
than zero; deleted text begin and
deleted text end

(11) job opportunity building zone income as provided under
section 469.316 new text begin ; and
new text end

new text begin (12) in each of the five tax years immediately following
the tax year in which an addition is required under subdivision
19a, clause (8), or 19c, clause (17), in the case of a
shareholder of a corporation that is an S corporation, an amount
equal to one-fifth of the addition made by the taxpayer under
subdivision 19a, clause (8), or 19c, clause (17), in the case of
a shareholder of a corporation that is an S corporation, minus
the positive value of any net operating loss under section 172
of the Internal Revenue Code generated for the tax year of the
addition. If the net operating loss exceeds the addition for
the tax year, a subtraction is not allowed under this clause new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004.
new text end

Sec. 4.

Minnesota Statutes 2004, section 290.01,
subdivision 19c, is amended to read:

Subd. 19c.

Corporations; additions to federal taxable
income.

For corporations, there shall be added to federal
taxable income:

(1) the amount of any deduction taken for federal income
tax purposes for income, excise, or franchise taxes based on net
income or related minimum taxes, including but not limited to
the tax imposed under section 290.0922, paid by the corporation
to Minnesota, another state, a political subdivision of another
state, the District of Columbia, or any foreign country or
possession of the United States;

(2) interest not subject to federal tax upon obligations
of: the United States, its possessions, its agencies, or its
instrumentalities; the state of Minnesota or any other state,
any of its political or governmental subdivisions, any of its
municipalities, or any of its governmental agencies or
instrumentalities; the District of Columbia; or Indian tribal
governments;

(3) exempt-interest dividends received as defined in
section 852(b)(5) of the Internal Revenue Code;

(4) the amount of any net operating loss deduction taken
for federal income tax purposes under section 172 or 832(c)(10)
of the Internal Revenue Code or operations loss deduction under
section 810 of the Internal Revenue Code;

(5) the amount of any special deductions taken for federal
income tax purposes under sections 241 to 247 of the Internal
Revenue Code;

(6) losses from the business of mining, as defined in
section 290.05, subdivision 1, clause (a), that are not subject
to Minnesota income tax;

(7) the amount of any capital losses deducted for federal
income tax purposes under sections 1211 and 1212 of the Internal
Revenue Code;

(8) the exempt foreign trade income of a foreign sales
corporation under sections 921(a) and 291 of the Internal
Revenue Code;

(9) the amount of percentage depletion deducted under
sections 611 through 614 and 291 of the Internal Revenue Code;

(10) for certified pollution control facilities placed in
service in a taxable year beginning before December 31, 1986,
and for which amortization deductions were elected under section
169 of the Internal Revenue Code of 1954, as amended through
December 31, 1985, the amount of the amortization deduction
allowed in computing federal taxable income for those
facilities;

(11) the amount of any deemed dividend from a foreign
operating corporation determined pursuant to section 290.17,
subdivision 4, paragraph (g);

(12) the amount of any environmental tax paid under section
59(a) of the Internal Revenue Code;

(13) the amount of a partner's pro rata share of net income
which does not flow through to the partner because the
partnership elected to pay the tax on the income under section
6242(a)(2) of the Internal Revenue Code;

(14) the amount of net income excluded under section 114 of
the Internal Revenue Code;

(15) any increase in subpart F income, as defined in
section 952(a) of the Internal Revenue Code, for the taxable
year when subpart F income is calculated without regard to the
provisions of section 614 of Public Law 107-147; deleted text begin and
deleted text end

(16) 80 percent of the depreciation deduction allowed under
section 168(k) of the Internal Revenue Code. For purposes of
this clause, if the taxpayer has an activity that in the taxable
year generates a deduction for depreciation under section 168(k)
and the activity generates a loss for the taxable year that the
taxpayer is not allowed to claim for the taxable year, "the
depreciation allowed under section 168(k)" for the taxable year
is limited to excess of the depreciation claimed by the activity
under section 168(k) over the amount of the loss from the
activity that is not allowed in the taxable year. In succeeding
taxable years when the losses not allowed in the taxable year
are allowed, the depreciation under section 168(k) is allowed new text begin ;
new text end

new text begin (17) 80 percent of the amount by which the deduction
allowed by section 179 of the Internal Revenue Code exceeds the
deduction allowable by section 179 of the Internal Revenue Code
of 1986, as amended through December 31, 2003; and
new text end

new text begin (18) to the extent deducted in computing federal taxable
income, the amount of the deduction allowable under section 199
of the Internal Revenue Code new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004.
new text end

Sec. 5.

Minnesota Statutes 2004, section 290.01,
subdivision 19d, is amended to read:

Subd. 19d.

Corporations; modifications decreasing federal
taxable income.

For corporations, there shall be subtracted
from federal taxable income after the increases provided in
subdivision 19c:

(1) the amount of foreign dividend gross-up added to gross
income for federal income tax purposes under section 78 of the
Internal Revenue Code;

(2) the amount of salary expense not allowed for federal
income tax purposes due to claiming the federal jobs credit
under section 51 of the Internal Revenue Code;

(3) any dividend (not including any distribution in
liquidation) paid within the taxable year by a national or state
bank to the United States, or to any instrumentality of the
United States exempt from federal income taxes, on the preferred
stock of the bank owned by the United States or the
instrumentality;

(4) amounts disallowed for intangible drilling costs due to
differences between this chapter and the Internal Revenue Code
in taxable years beginning before January 1, 1987, as follows:

(i) to the extent the disallowed costs are represented by
physical property, an amount equal to the allowance for
depreciation under Minnesota Statutes 1986, section 290.09,
subdivision 7, subject to the modifications contained in
subdivision 19e; and

(ii) to the extent the disallowed costs are not represented
by physical property, an amount equal to the allowance for cost
depletion under Minnesota Statutes 1986, section 290.09,
subdivision 8;

(5) the deduction for capital losses pursuant to sections
1211 and 1212 of the Internal Revenue Code, except that:

(i) for capital losses incurred in taxable years beginning
after December 31, 1986, capital loss carrybacks shall not be
allowed;

(ii) for capital losses incurred in taxable years beginning
after December 31, 1986, a capital loss carryover to each of the
15 taxable years succeeding the loss year shall be allowed;

(iii) for capital losses incurred in taxable years
beginning before January 1, 1987, a capital loss carryback to
each of the three taxable years preceding the loss year, subject
to the provisions of Minnesota Statutes 1986, section 290.16,
shall be allowed; and

(iv) for capital losses incurred in taxable years beginning
before January 1, 1987, a capital loss carryover to each of the
five taxable years succeeding the loss year to the extent such
loss was not used in a prior taxable year and subject to the
provisions of Minnesota Statutes 1986, section 290.16, shall be
allowed;

(6) an amount for interest and expenses relating to income
not taxable for federal income tax purposes, if (i) the income
is taxable under this chapter and (ii) the interest and expenses
were disallowed as deductions under the provisions of section
171(a)(2), 265 or 291 of the Internal Revenue Code in computing
federal taxable income;

(7) in the case of mines, oil and gas wells, other natural
deposits, and timber for which percentage depletion was
disallowed pursuant to subdivision 19c, clause (11), a
reasonable allowance for depletion based on actual cost. In the
case of leases the deduction must be apportioned between the
lessor and lessee in accordance with rules prescribed by the
commissioner. In the case of property held in trust, the
allowable deduction must be apportioned between the income
beneficiaries and the trustee in accordance with the pertinent
provisions of the trust, or if there is no provision in the
instrument, on the basis of the trust's income allocable to
each;

(8) for certified pollution control facilities placed in
service in a taxable year beginning before December 31, 1986,
and for which amortization deductions were elected under section
169 of the Internal Revenue Code of 1954, as amended through
December 31, 1985, an amount equal to the allowance for
depreciation under Minnesota Statutes 1986, section 290.09,
subdivision 7;

(9) amounts included in federal taxable income that are due
to refunds of income, excise, or franchise taxes based on net
income or related minimum taxes paid by the corporation to
Minnesota, another state, a political subdivision of another
state, the District of Columbia, or a foreign country or
possession of the United States to the extent that the taxes
were added to federal taxable income under section 290.01,
subdivision 19c, clause (1), in a prior taxable year;

(10) 80 percent of royalties, fees, or other like income
accrued or received from a foreign operating corporation or a
foreign corporation which is part of the same unitary business
as the receiving corporation;

(11) income or gains from the business of mining as defined
in section 290.05, subdivision 1, clause (a), that are not
subject to Minnesota franchise tax;

(12) the amount of handicap access expenditures in the
taxable year which are not allowed to be deducted or capitalized
under section 44(d)(7) of the Internal Revenue Code;

(13) the amount of qualified research expenses not allowed
for federal income tax purposes under section 280C(c) of the
Internal Revenue Code, but only to the extent that the amount
exceeds the amount of the credit allowed under section 290.068;

(14) the amount of salary expenses not allowed for federal
income tax purposes due to claiming the Indian employment credit
under section 45A(a) of the Internal Revenue Code;

(15) the amount of any refund of environmental taxes paid
under section 59A of the Internal Revenue Code;

(16) for taxable years beginning before January 1, 2008,
the amount of the federal small ethanol producer credit allowed
under section 40(a)(3) of the Internal Revenue Code which is
included in gross income under section 87 of the Internal
Revenue Code;

(17) for a corporation whose foreign sales corporation, as
defined in section 922 of the Internal Revenue Code, constituted
a foreign operating corporation during any taxable year ending
before January 1, 1995, and a return was filed by August 15,
1996, claiming the deduction under section 290.21, subdivision
4, for income received from the foreign operating corporation,
an amount equal to 1.23 multiplied by the amount of income
excluded under section 114 of the Internal Revenue Code,
provided the income is not income of a foreign operating
company;

(18) any decrease in subpart F income, as defined in
section 952(a) of the Internal Revenue Code, for the taxable
year when subpart F income is calculated without regard to the
provisions of section 614 of Public Law 107-147; deleted text begin and
deleted text end

(19) in each of the five tax years immediately following
the tax year in which an addition is required under subdivision
19c, clause (16), an amount equal to one-fifth of the delayed
depreciation. For purposes of this clause, "delayed
depreciation" means the amount of the addition made by the
taxpayer under subdivision 19c, clause (16). The resulting
delayed depreciation cannot be less than zero new text begin ; and
new text end

new text begin (20) in each of the five tax years immediately following
the tax year in which an addition is required under subdivision
19c, clause (17), an amount equal to one-fifth of the amount of
the addition new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004.
new text end

Sec. 6.

Minnesota Statutes 2004, section 290.01,
subdivision 31, is amended to read:

Subd. 31.

Internal revenue code.

Unless specifically
defined otherwise, "Internal Revenue Code" means the Internal
Revenue Code of 1986, as amended through June 15, 2003 new text begin , and as
further amended by the American Jobs Creation Act of 2004,
Public Law 108-435 new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective the day
following final enactment except the changes incorporated by
federal changes are effective at the same times as the changes
were effective for federal purposes.
new text end

Sec. 7.

Minnesota Statutes 2004, section 290.06,
subdivision 2c, is amended to read:

Subd. 2c.

Schedules of rates for individuals, estates,
and trusts.

(a) The income taxes imposed by this chapter upon
married individuals filing joint returns and surviving spouses
as defined in section 2(a) of the Internal Revenue Code must be
computed by applying to their taxable net income the following
schedule of rates:

(1) On the first $25,680, 5.35 percent;

(2) On all over $25,680, but not over $102,030, 7.05
percent;

(3) On all over $102,030, 7.85 percent.

Married individuals filing separate returns, estates, and
trusts must compute their income tax by applying the above rates
to their taxable income, except that the income brackets will be
one-half of the above amounts.

(b) The income taxes imposed by this chapter upon unmarried
individuals must be computed by applying to taxable net income
the following schedule of rates:

(1) On the first $17,570, 5.35 percent;

(2) On all over $17,570, but not over $57,710, 7.05
percent;

(3) On all over $57,710, 7.85 percent.

(c) The income taxes imposed by this chapter upon unmarried
individuals qualifying as a head of household as defined in
section 2(b) of the Internal Revenue Code must be computed by
applying to taxable net income the following schedule of rates:

(1) On the first $21,630, 5.35 percent;

(2) On all over $21,630, but not over $86,910, 7.05
percent;

(3) On all over $86,910, 7.85 percent.

(d) In lieu of a tax computed according to the rates set
forth in this subdivision, the tax of any individual taxpayer
whose taxable net income for the taxable year is less than an
amount determined by the commissioner must be computed in
accordance with tables prepared and issued by the commissioner
of revenue based on income brackets of not more than $100. The
amount of tax for each bracket shall be computed at the rates
set forth in this subdivision, provided that the commissioner
may disregard a fractional part of a dollar unless it amounts to
50 cents or more, in which case it may be increased to $1.

(e) An individual who is not a Minnesota resident for the
entire year must compute the individual's Minnesota income tax
as provided in this subdivision. After the application of the
nonrefundable credits provided in this chapter, the tax
liability must then be multiplied by a fraction in which:

(1) the numerator is the individual's Minnesota source
federal adjusted gross income as defined in section 62 of the
Internal Revenue Code and increased by the additions required
under section 290.01, subdivision 19a, clauses (1), (5), deleted text begin and
deleted text end (6), new text begin (7), (8), and (9), new text end and reduced by the subtraction under
section 290.01, subdivision 19b, clause (11), and the Minnesota
assignable portion of the subtraction for United States
government interest under section 290.01, subdivision 19b,
clause (1), new text begin and the subtractions under clauses (10), (11), and
(12), new text end after applying the allocation and assignability provisions
of section 290.081, clause (a), or 290.17; and

(2) the denominator is the individual's federal adjusted
gross income as defined in section 62 of the Internal Revenue
Code of 1986, increased by the amounts specified in section
290.01, subdivision 19a, clauses (1), (5), deleted text begin and deleted text end (6), new text begin (7), (8),
and (9), new text end and reduced by the amounts specified in section 290.01,
subdivision 19b, clauses (1) deleted text begin and deleted text end new text begin , (10), new text end (11) new text begin , and (12) new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004.
new text end

Sec. 8.

Minnesota Statutes 2004, section 290.067,
subdivision 2a, is amended to read:

Subd. 2a.

Income.

(a) For purposes of this section,
"income" means the sum of the following:

(1) federal adjusted gross income as defined in section 62
of the Internal Revenue Code; and

(2) the sum of the following amounts to the extent not
included in clause (1):

(i) all nontaxable income;

(ii) the amount of a passive activity loss that is not
disallowed as a result of section 469, paragraph (i) or (m) of
the Internal Revenue Code and the amount of passive activity
loss carryover allowed under section 469(b) of the Internal
Revenue Code;

(iii) an amount equal to the total of any discharge of
qualified farm indebtedness of a solvent individual excluded
from gross income under section 108(g) of the Internal Revenue
Code;

(iv) cash public assistance and relief;

(v) any pension or annuity (including railroad retirement
benefits, all payments received under the federal Social
Security Act, supplemental security income, and veterans
benefits), which was not exclusively funded by the claimant or
spouse, or which was funded exclusively by the claimant or
spouse and which funding payments were excluded from federal
adjusted gross income in the years when the payments were made;

(vi) interest received from the federal or a state
government or any instrumentality or political subdivision
thereof;

(vii) workers' compensation;

(viii) nontaxable strike benefits;

(ix) the gross amounts of payments received in the nature
of disability income or sick pay as a result of accident,
sickness, or other disability, whether funded through insurance
or otherwise;

(x) a lump sum distribution under section 402(e)(3) of the
Internal Revenue Code new text begin of 1986, as amended through December 31,
1995 new text end ;

(xi) contributions made by the claimant to an individual
retirement account, including a qualified voluntary employee
contribution; simplified employee pension plan; self-employed
retirement plan; cash or deferred arrangement plan under section
401(k) of the Internal Revenue Code; or deferred compensation
plan under section 457 of the Internal Revenue Code; deleted text begin and
deleted text end

(xii) nontaxable scholarship or fellowship grants new text begin ; and
new text end

new text begin (xiii) the amount of deduction allowed under section 199 of
the Internal Revenue Code new text end .

In the case of an individual who files an income tax return
on a fiscal year basis, the term "federal adjusted gross income"
means federal adjusted gross income reflected in the fiscal year
ending in the next calendar year. Federal adjusted gross income
may not be reduced by the amount of a net operating loss
carryback or carryforward or a capital loss carryback or
carryforward allowed for the year.

(b) "Income" does not include:

(1) amounts excluded pursuant to the Internal Revenue Code,
sections 101(a) and 102;

(2) amounts of any pension or annuity that were exclusively
funded by the claimant or spouse if the funding payments were
not excluded from federal adjusted gross income in the years
when the payments were made;

(3) surplus food or other relief in kind supplied by a
governmental agency;

(4) relief granted under chapter 290A;

(5) child support payments received under a temporary or
final decree of dissolution or legal separation; and

(6) restitution payments received by eligible individuals
and excludable interest as defined in section 803 of the
Economic Growth and Tax Relief Reconciliation Act of 2001,
Public Law 107-16.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2003.
new text end

Sec. 9.

Minnesota Statutes 2004, section 290.091,
subdivision 2, is amended to read:

Subd. 2.

Definitions.

For purposes of the tax imposed by
this section, the following terms have the meanings given:

(a) "Alternative minimum taxable income" means the sum of
the following for the taxable year:

(1) the taxpayer's federal alternative minimum taxable
income as defined in section 55(b)(2) of the Internal Revenue
Code;

(2) the taxpayer's itemized deductions allowed in computing
federal alternative minimum taxable income, but excluding:

(i) the charitable contribution deduction under section 170
of the Internal Revenue Code to the extent that the deduction
exceeds 1.0 percent of adjusted gross income, as defined in
section 62 of the Internal Revenue Code;

(ii) the medical expense deduction;

(iii) the casualty, theft, and disaster loss deduction; and

(iv) the impairment-related work expenses of a disabled
person;

(3) for depletion allowances computed under section 613A(c)
of the Internal Revenue Code, with respect to each property (as
defined in section 614 of the Internal Revenue Code), to the
extent not included in federal alternative minimum taxable
income, the excess of the deduction for depletion allowable
under section 611 of the Internal Revenue Code for the taxable
year over the adjusted basis of the property at the end of the
taxable year (determined without regard to the depletion
deduction for the taxable year);

(4) to the extent not included in federal alternative
minimum taxable income, the amount of the tax preference for
intangible drilling cost under section 57(a)(2) of the Internal
Revenue Code determined without regard to subparagraph (E);

(5) to the extent not included in federal alternative
minimum taxable income, the amount of interest income as
provided by section 290.01, subdivision 19a, clause (1); and

(6) the amount of addition required by section 290.01,
subdivision 19a, deleted text begin clause deleted text end new text begin clauses new text end (7) new text begin , (8), and (9) new text end ;

less the sum of the amounts determined under the following:

(1) interest income as defined in section 290.01,
subdivision 19b, clause (1);

(2) an overpayment of state income tax as provided by
section 290.01, subdivision 19b, clause (2), to the extent
included in federal alternative minimum taxable income;

(3) the amount of investment interest paid or accrued
within the taxable year on indebtedness to the extent that the
amount does not exceed net investment income, as defined in
section 163(d)(4) of the Internal Revenue Code. Interest does
not include amounts deducted in computing federal adjusted gross
income; and

(4) amounts subtracted from federal taxable income as
provided by section 290.01, subdivision 19b, clauses (10) deleted text begin and deleted text end new text begin ,
new text end (11) new text begin , and (12) new text end .

In the case of an estate or trust, alternative minimum
taxable income must be computed as provided in section 59(c) of
the Internal Revenue Code.

(b) "Investment interest" means investment interest as
defined in section 163(d)(3) of the Internal Revenue Code.

(c) "Tentative minimum tax" equals 6.4 percent of
alternative minimum taxable income after subtracting the
exemption amount determined under subdivision 3.

(d) "Regular tax" means the tax that would be imposed under
this chapter (without regard to this section and section
290.032), reduced by the sum of the nonrefundable credits
allowed under this chapter.

(e) "Net minimum tax" means the minimum tax imposed by this
section.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for tax years
beginning after December 31, 2004.
new text end

Sec. 10.

Minnesota Statutes 2004, section 290A.03,
subdivision 3, is amended to read:

Subd. 3.

Income.

(1) "Income" means the sum of the
following:

(a) federal adjusted gross income as defined in the
Internal Revenue Code; and

(b) the sum of the following amounts to the extent not
included in clause (a):

(i) all nontaxable income;

(ii) the amount of a passive activity loss that is not
disallowed as a result of section 469, paragraph (i) or (m) of
the Internal Revenue Code and the amount of passive activity
loss carryover allowed under section 469(b) of the Internal
Revenue Code;

(iii) an amount equal to the total of any discharge of
qualified farm indebtedness of a solvent individual excluded
from gross income under section 108(g) of the Internal Revenue
Code;

(iv) cash public assistance and relief;

(v) any pension or annuity (including railroad retirement
benefits, all payments received under the federal Social
Security Act, supplemental security income, and veterans
benefits), which was not exclusively funded by the claimant or
spouse, or which was funded exclusively by the claimant or
spouse and which funding payments were excluded from federal
adjusted gross income in the years when the payments were made;

(vi) interest received from the federal or a state
government or any instrumentality or political subdivision
thereof;

(vii) workers' compensation;

(viii) nontaxable strike benefits;

(ix) the gross amounts of payments received in the nature
of disability income or sick pay as a result of accident,
sickness, or other disability, whether funded through insurance
or otherwise;

(x) a lump sum distribution under section 402(e)(3) of the
Internal Revenue Code new text begin of 1986, as amended through December 31,
1995 new text end ;

(xi) contributions made by the claimant to an individual
retirement account, including a qualified voluntary employee
contribution; simplified employee pension plan; self-employed
retirement plan; cash or deferred arrangement plan under section
401(k) of the Internal Revenue Code; or deferred compensation
plan under section 457 of the Internal Revenue Code; deleted text begin and
deleted text end

(xii) nontaxable scholarship or fellowship grants new text begin ; and
new text end

new text begin (xiii) the amount of deduction allowed under section 199 of
the Internal Revenue Code new text end .

In the case of an individual who files an income tax return
on a fiscal year basis, the term "federal adjusted gross income"
shall mean federal adjusted gross income reflected in the fiscal
year ending in the calendar year. Federal adjusted gross income
shall not be reduced by the amount of a net operating loss
carryback or carryforward or a capital loss carryback or
carryforward allowed for the year.

(2) "Income" does not include:

(a) amounts excluded pursuant to the Internal Revenue Code,
sections 101(a) and 102;

(b) amounts of any pension or annuity which was exclusively
funded by the claimant or spouse and which funding payments were
not excluded from federal adjusted gross income in the years
when the payments were made;

(c) surplus food or other relief in kind supplied by a
governmental agency;

(d) relief granted under this chapter;

(e) child support payments received under a temporary or
final decree of dissolution or legal separation; or

(f) restitution payments received by eligible individuals
and excludable interest as defined in section 803 of the
Economic Growth and Tax Relief Reconciliation Act of 2001,
Public Law 107-16.

(3) The sum of the following amounts may be subtracted from
income:

(a) for the claimant's first dependent, the exemption
amount multiplied by 1.4;

(b) for the claimant's second dependent, the exemption
amount multiplied by 1.3;

(c) for the claimant's third dependent, the exemption
amount multiplied by 1.2;

(d) for the claimant's fourth dependent, the exemption
amount multiplied by 1.1;

(e) for the claimant's fifth dependent, the exemption
amount; and

(f) if the claimant or claimant's spouse was disabled or
attained the age of 65 on or before December 31 of the year for
which the taxes were levied or rent paid, the exemption amount.

For purposes of this subdivision, the "exemption amount"
means the exemption amount under section 151(d) of the Internal
Revenue Code for the taxable year for which the income is
reported.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for property
tax refunds based on household income for 2004 and thereafter.
new text end

Sec. 11.

Minnesota Statutes 2004, section 290A.03,
subdivision 15, is amended to read:

Subd. 15.

Internal revenue code.

"Internal Revenue Code"
means the Internal Revenue Code of 1986, as amended through June
15, 2003 new text begin , and as further amended by the American Jobs Creation
Act of 2004, Public Law 108-435 new text end .

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for property
tax refunds based on property taxes payable on or after December
31, 2004, and rent paid on or after December 31, 2003.
new text end

ARTICLE 3

SALES, USE, AND SPECIAL TAXES

Section 1.

Minnesota Statutes 2004, section 16C.03, is
amended by adding a subdivision to read:

new text begin Subd. 18. new text end

new text begin Contracts with foreign vendors. new text end

new text begin (a) The
commissioner and other agencies to which this section applies
and the legislative branch of government shall, subject to
paragraph (d), cancel a contract for goods or services from a
vendor or an affiliate of a vendor or suspend or debar a vendor
or an affiliate of a vendor from future contracts upon
notification from the commissioner of revenue that the vendor or
an affiliate of the vendor has not registered to collect the
sales and use tax imposed under chapter 297A on its sales in
Minnesota or to a destination in Minnesota. This subdivision
shall not apply to state colleges and universities, the courts,
and any agency in the judicial branch of government. For
purposes of this subdivision, the term "affiliate" means any
person or entity that is controlled by, or is under common
control of, a vendor through stock ownership or other
affiliation.
new text end

new text begin (b) Beginning January 1, 2006, each vendor or affiliate of
a vendor selling goods or services, subject to tax under chapter
297A, to an agency or the legislature must provide its Minnesota
sales and use tax business identification number, upon request,
to show that the vendor is registered to collect Minnesota sales
or use tax.
new text end

new text begin (c) The commissioner of revenue shall periodically provide
to the commissioner and the legislative branch a list of vendors
who have not registered to collect Minnesota sales and use tax
and who are subject to being suspended or debarred as vendors or
having their contracts canceled.
new text end

new text begin (d) The provisions of this subdivision may be waived by the
commissioner or the legislative branch when the vendor is the
single source of such goods or services, in the event of an
emergency, or when it is in the best interests of the state as
determined by the commissioner in consultation with the
commissioner of revenue. Such consultation is not a disclosure
violation under chapter 270B.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for all
contracts entered into after December 31, 2005.
new text end

Sec. 2.

new text begin [295.75] LIQUOR GROSS RECEIPTS TAX.
new text end

new text begin Subdivision 1. new text end

new text begin Definitions. new text end

new text begin (a) For purposes of this
section, the following terms have the meanings given.
new text end

new text begin (b) "Commissioner" means the commissioner of revenue.
new text end

new text begin (c) "Gross receipts" means the total amount received, in
money or by barter or exchange, for all liquor sales at retail
as measured by the sales price, but does not include any taxes
imposed directly on the consumer that are separately stated on
the invoice, bill of sale, or similar document given to the
purchaser.
new text end

new text begin (d) "Liquor" means:
new text end

new text begin (1) intoxicating liquor, as defined in section 340A.101,
subdivision 14;
new text end

new text begin (2) beverage containing intoxicating liquor; and
new text end

new text begin (3) 3.2 percent malt liquor, as defined in section
340A.101, subdivision 19, when sold at an on-sale or off-sale
municipal liquor store or other establishment licensed to sell
any type of intoxicating liquor.
new text end

new text begin (e) "Liquor retailer" means a retailer that sells liquor.
new text end

new text begin (f) "Retail sale" has the meaning given in section 297A.61,
subdivision 4.
new text end

new text begin Subd. 2. new text end

new text begin Gross receipts tax imposed. new text end

new text begin A tax is imposed on
each liquor retailer equal to 2.5 percent of gross receipts from
retail sales in Minnesota of liquor.
new text end

new text begin Subd. 3. new text end

new text begin Use tax imposed; credit for taxes paid. new text end

new text begin (a) A
person that receives liquor for use or storage in Minnesota,
other than from a liquor retailer that paid the tax under
subdivision 2, is subject to tax at the rate imposed under
subdivision 2. Liability for the tax is incurred when the
person has possession of the liquor in Minnesota. The tax must
be remitted to the commissioner in the same manner prescribed
for the taxes imposed under chapter 297A.
new text end

new text begin (b) A person that has paid taxes to another jurisdiction on
the same transaction and is subject to tax under this section is
entitled to a credit for the tax legally due and paid to another
jurisdiction to the extent of the lesser of (1) the tax actually
paid to the other jurisdiction, or (2) the amount of tax imposed
by Minnesota on the transaction subject to tax in the other
jurisdiction.
new text end

new text begin Subd. 4. new text end

new text begin Tax collection required. new text end

new text begin A liquor retailer with
nexus in Minnesota, who is not subject to tax under subdivision
2, is required to collect the tax imposed under subdivision 3
from the purchaser of the liquor and give the purchaser a
receipt for the tax paid. The tax collected must be remitted to
the commissioner in the same manner prescribed for the taxes
imposed under chapter 297A.
new text end

new text begin Subd. 5. new text end

new text begin Taxes paid to another jurisdiction; credit. new text end

new text begin A
liquor retailer that has paid taxes to another jurisdiction
measured by gross receipts and is subject to tax under this
section on the same gross receipts is entitled to a credit for
the tax legally due and paid to another jurisdiction to the
extent of the lesser of (1) the tax actually paid to the other
jurisdiction, or (2) the amount of tax imposed by Minnesota on
the gross receipts subject to tax in the other taxing
jurisdictions.
new text end

new text begin Subd. 6. new text end

new text begin Exemptions. new text end

new text begin All of the exemptions applicable to
the taxes imposed under chapter 297A are applicable to the taxes
imposed under this section.
new text end

new text begin Subd. 7. new text end

new text begin Sourcing of sales. new text end

new text begin All of the provisions of
section 297A.668 apply to the taxes imposed by this section.
new text end

new text begin Subd. 8. new text end

new text begin Payment; reporting. new text end

new text begin A liquor retailer shall
report the tax on a return prescribed by the commissioner of
revenue, and shall remit the tax with the return. The return
and the tax must be filed and paid using the filing cycle and
due dates provided for taxes imposed under chapter 297A.
new text end

new text begin Subd. 9. new text end

new text begin Administration. new text end

new text begin Unless specifically provided
otherwise by this section, the audit, assessment, refund,
penalty, interest, enforcement, collection remedies, appeal, and
administrative provisions of chapters 270 and 289A that are
applicable to taxes imposed under chapter 297A apply to taxes
imposed under this section.
new text end

new text begin Subd. 10. new text end

new text begin Interest on overpayments. new text end

new text begin Interest must be
paid on an overpayment refunded or credited to the taxpayer from
the date of payment of the tax until the date the refund is paid
or credited. For purposes of this subdivision, the date of
payment is the due date of the return or the date of actual
payment of the tax, whichever is later.
new text end

new text begin Subd. 11. new text end

new text begin Deposit of revenues. new text end

new text begin The commissioner shall
deposit all revenues, including penalties and interest, derived
from the tax imposed by this section in the general fund.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales and
purchases occurring on or after January 1, 2006.
new text end

Sec. 3.

Minnesota Statutes 2004, section 297A.61,
subdivision 4, is amended to read:

Subd. 4.

Retail sale.

(a) A "retail sale" means any
sale, lease, or rental for any purpose other than resale,
sublease, or subrent.

(b) A sale of property used by the owner only by leasing it
to others or by holding it in an effort to lease it, and put to
no use by the owner other than resale after the lease or effort
to lease, is a sale of property for resale.

(c) A sale of master computer software that is purchased
and used to make copies for sale or lease is a sale of property
for resale.

(d) A sale of building materials, supplies, and equipment
to owners, contractors, subcontractors, or builders for the
erection of buildings or the alteration, repair, or improvement
of real property is a retail sale in whatever quantity sold,
whether the sale is for purposes of resale in the form of real
property or otherwise.

(e) A sale of carpeting, linoleum, or similar floor
covering to a person who provides for installation of the floor
covering is a retail sale and not a sale for resale since a sale
of floor covering which includes installation is a contract for
the improvement of real property.

(f) A sale of shrubbery, plants, sod, trees, and similar
items to a person who provides for installation of the items is
a retail sale and not a sale for resale since a sale of
shrubbery, plants, sod, trees, and similar items that includes
installation is a contract for the improvement of real property.

(g) A sale of tangible personal property that is awarded as
prizes is a retail sale and is not considered a sale of property
for resale.

(h) A sale of tangible personal property utilized or
employed in the furnishing or providing of services under
subdivision 3, paragraph (g), clause (1), including, but not
limited to, property given as promotional items, is a retail
sale and is not considered a sale of property for resale.

(i) A sale of tangible personal property used in conducting
lawful gambling under chapter 349 or the state lottery under
chapter 349A, including, but not limited to, property given as
promotional items, is a retail sale and is not considered a sale
of property for resale.

(j) A sale of machines, equipment, or devices that are used
to furnish, provide, or dispense goods or services, including,
but not limited to, coin-operated devices, is a retail sale and
is not considered a sale of property for resale.

(k) In the case of a lease, a retail sale occurs new text begin (1) new text end when
an obligation to make a lease payment becomes due under the
terms of the agreement or the trade practices of the lessor new text begin or
(2) in the case of a lease of a motor vehicle, as defined in
section 297B.01, subdivision 5, but excluding vehicles with a
manufacturer's gross vehicle weight rating greater than 10,000
pounds and rentals of vehicles for not more than 28 days, at the
time the lease is executed new text end .

(l) In the case of a conditional sales contract, a retail
sale occurs upon the transfer of title or possession of the
tangible personal property.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for leases
entered into after September 30, 2005.
new text end

Sec. 4.

Minnesota Statutes 2004, section 297A.61, is
amended by adding a subdivision to read:

new text begin Subd. 37. new text end

new text begin Event souvenir clothing. new text end

new text begin "Event souvenir
clothing" is clothing that is sold at a state-subsidized
facility and that bears a name, image, or logo of the
entertainer, athlete, or team that performs at the facility. As
used in this subdivision, a "state-subsidized facility" means
the Metrodome financed under section 473.581, the basketball
arena that receives payments from the Amateur Sports Commission
under section 473.556, subdivision 16, the hockey arena that
received a loan of state funds under Laws 1998, chapter 404,
section 23, subdivision 6, and the entertainment and convention
center that received a grant under Laws 1998, chapter 404,
section 23, subdivision 9.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales after
June 30, 2005.
new text end

Sec. 5.

Minnesota Statutes 2004, section 297A.67,
subdivision 8, is amended to read:

Subd. 8.

Clothing.

(a) Clothing is exempt. For purposes
of this subdivision, "clothing" means all human wearing apparel
suitable for general use.

(b) Clothing includes, but is not limited to, aprons,
household and shop; athletic supporters; baby receiving
blankets; bathing suits and caps; beach capes and coats; belts
and suspenders; boots; coats and jackets; costumes; children and
adult diapers, including disposable; ear muffs; footlets; formal
wear; garters and garter belts; girdles; gloves and mittens for
general use; hats and caps; hosiery; insoles for shoes; lab
coats; neckties; overshoes; pantyhose; rainwear; rubber pants;
sandals; scarves; shoes and shoe laces; slippers; sneakers;
socks and stockings; steel-toed boots; underwear; uniforms,
athletic and nonathletic; and wedding apparel.

(c) Clothing does not include the following:

(1) belt buckles sold separately;

(2) costume masks sold separately;

(3) patches and emblems sold separately;

(4) sewing equipment and supplies, including but not
limited to, knitting needles, patterns, pins, scissors, sewing
machines, sewing needles, tape measures, and thimbles;

(5) sewing materials that become part of clothing,
including but not limited to, buttons, fabric, lace, thread,
yarn, and zippers;

(6) clothing accessories or equipment;

(7) sports or recreational equipment; deleted text begin and
deleted text end

(8) protective equipment new text begin ; and
new text end

new text begin (9) event souvenir clothing new text end .

Clothing also does not include apparel made from fur if a
uniform definition of "apparel made from fur" is developed by
the member states of the Streamlined Sales and Use Tax Agreement.

For purposes of this subdivision, "clothing accessories or
equipment" means incidental items worn on the person or in
conjunction with clothing. Clothing accessories and equipment
include, but are not limited to, briefcases; cosmetics; hair
notions, including barrettes, hair bows, and hairnets; handbags;
handkerchiefs; jewelry; nonprescription sunglasses; umbrellas;
wallets; watches; and wigs and hairpieces. "Sports or
recreational equipment" means items designed for human use and
worn in conjunction with an athletic or recreational activity
that are not suitable for general use. Sports and recreational
equipment includes, but is not limited to, ballet and tap shoes;
cleated or spiked athletic shoes; gloves, including, but not
limited to, baseball, bowling, boxing, hockey, and golf gloves;
goggles; hand and elbow guards; life preservers and vests; mouth
guards; roller and ice skates; shin guards; shoulder pads; ski
boots; waders; and wetsuits and fins. "Protective equipment"
means items for human wear and designed as protection of the
wearer against injury or disease or as protection against damage
or injury of other persons or property but not suitable for
general use. Protective equipment includes, but is not limited
to, breathing masks; clean room apparel and equipment; ear and
hearing protectors; face shields; finger guards; hard hats;
helmets; paint or dust respirators; protective gloves; safety
glasses and goggles; safety belts; tool belts; and welders
gloves and masks.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales after
June 30, 2005.
new text end

Sec. 6.

Minnesota Statutes 2004, section 297A.67, is
amended by adding a subdivision to read:

new text begin Subd. 32. new text end

new text begin Cigarettes. new text end

new text begin Cigarettes upon which a tax has
been imposed under section 297F.25 are exempt.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales and
purchases made after July 31, 2005.
new text end

Sec. 7.

Minnesota Statutes 2004, section 297A.68,
subdivision 2, is amended to read:

Subd. 2.

Materials consumed in industrial production.

(a) Materials stored, used, or consumed in industrial production
of personal property intended to be sold ultimately at retail
are exempt, whether or not the item so used becomes an
ingredient or constituent part of the property produced.
Materials that qualify for this exemption include, but are not
limited to, the following:

(1) chemicals, including chemicals used for cleaning food
processing machinery and equipment;

(2) materials, including chemicals, fuels, and electricity
purchased by persons engaged in industrial production to treat
waste generated as a result of the production process;

(3) fuels, electricity, gas, and steam used or consumed in
the production process, except that electricity, gas, or steam
used for space heating, cooling, or lighting is exempt if (i) it
is in excess of the average climate control or lighting for the
production area, and (ii) it is necessary to produce that
particular product;

(4) petroleum products and lubricants;

(5) packaging materials, including returnable containers
used in packaging food and beverage products;

(6) accessory tools, equipment, and other items that are
separate detachable units with an ordinary useful life of less
than 12 months used in producing a direct effect upon the
product; and

(7) the following materials, tools, and equipment used in
metalcasting: crucibles, thermocouple protection sheaths and
tubes, stalk tubes, refractory materials, molten metal filters
and filter boxes, degassing lances, and base blocks.

(b) This exemption does not include:

(1) machinery, equipment, implements, tools, accessories,
appliances, contrivances and furniture and fixtures, except
those listed in paragraph (a), clause (6); and

(2) petroleum and special fuels used in producing or
generating power for propelling ready-mixed concrete trucks on
the public highways of this state.

(c) Industrial production includes, but is not limited to,
research, development, design or production of any tangible
personal property, manufacturing, processing (other than by
restaurants and consumers) of agricultural products (whether
vegetable or animal), commercial fishing, refining, smelting,
reducing, brewing, distilling, printing, mining, quarrying,
lumbering, generating electricity, the production of road
building materials, and the research, development, design, or
production of computer software. Industrial production does not
include painting, cleaning, repairing or similar processing of
property except as part of the original manufacturing process.
new text begin Industrial production does not include the transportation,
transmission, or distribution of petroleum, liquefied gas,
natural gas, water, or steam, in, by, or through pipes, lines,
tanks, mains, or other means of transporting those products.
For purposes of this paragraph, "transportation, transmission,
or distribution" does not include blending of petroleum or
biodiesel fuel as defined in section 239.77.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales and
purchases made after June 30, 2005.
new text end

Sec. 8.

Minnesota Statutes 2004, section 297A.68,
subdivision 5, is amended to read:

Subd. 5.

Capital equipment.

(a) Capital equipment is
exempt. The tax must be imposed and collected as if the rate
under section 297A.62, subdivision 1, applied, and then refunded
in the manner provided in section 297A.75.

"Capital equipment" means machinery and equipment purchased
or leased, and used in this state by the purchaser or lessee
primarily for manufacturing, fabricating, mining, or refining
tangible personal property to be sold ultimately at retail if
the machinery and equipment are essential to the integrated
production process of manufacturing, fabricating, mining, or
refining. Capital equipment also includes machinery and
equipment used to electronically transmit results retrieved by a
customer of an on-line computerized data retrieval system.

(b) Capital equipment includes, but is not limited to:

(1) machinery and equipment used to operate, control, or
regulate the production equipment;

(2) machinery and equipment used for research and
development, design, quality control, and testing activities;

(3) environmental control devices that are used to maintain
conditions such as temperature, humidity, light, or air pressure
when those conditions are essential to and are part of the
production process;

(4) materials and supplies used to construct and install
machinery or equipment;

(5) repair and replacement parts, including accessories,
whether purchased as spare parts, repair parts, or as upgrades
or modifications to machinery or equipment;

(6) materials used for foundations that support machinery
or equipment;

(7) materials used to construct and install special purpose
buildings used in the production process;

(8) ready-mixed concrete equipment in which the ready-mixed
concrete is mixed as part of the delivery process regardless if
mounted on a chassis and leases of ready-mixed concrete trucks;
and

(9) machinery or equipment used for research, development,
design, or production of computer software.

(c) Capital equipment does not include the following:

(1) motor vehicles taxed under chapter 297B;

(2) machinery or equipment used to receive or store raw
materials;

(3) building materials, except for materials included in
paragraph (b), clauses (6) and (7);

(4) machinery or equipment used for nonproduction purposes,
including, but not limited to, the following: plant security,
fire prevention, first aid, and hospital stations; support
operations or administration; pollution control; and plant
cleaning, disposal of scrap and waste, plant communications,
space heating, cooling, lighting, or safety;

(5) farm machinery and aquaculture production equipment as
defined by section 297A.61, subdivisions 12 and 13;

(6) machinery or equipment purchased and installed by a
contractor as part of an improvement to real property; deleted text begin or
deleted text end

(7) new text begin machinery or equipment used in the transportation,
transmission, or distribution of petroleum, liquefied gas,
natural gas, water, or steam, in, by, or through pipes, lines,
tanks, mains, or other means of transporting those products.
This clause does not apply to machinery or equipment used to
blend petroleum or biodiesel fuel as defined in section 239.77;
or
new text end

new text begin (8) new text end any other item that is not essential to the integrated
process of manufacturing, fabricating, mining, or refining.

(d) For purposes of this subdivision:

(1) "Equipment" means independent devices or tools separate
from machinery but essential to an integrated production
process, including computers and computer software, used in
operating, controlling, or regulating machinery and equipment;
and any subunit or assembly comprising a component of any
machinery or accessory or attachment parts of machinery, such as
tools, dies, jigs, patterns, and molds.

(2) "Fabricating" means to make, build, create, produce, or
assemble components or property to work in a new or different
manner.

(3) "Integrated production process" means a process or
series of operations through which tangible personal property is
manufactured, fabricated, mined, or refined. For purposes of
this clause, (i) manufacturing begins with the removal of raw
materials from inventory and ends when the last process prior to
loading for shipment has been completed; (ii) fabricating begins
with the removal from storage or inventory of the property to be
assembled, processed, altered, or modified and ends with the
creation or production of the new or changed product; (iii)
mining begins with the removal of overburden from the site of
the ores, minerals, stone, peat deposit, or surface materials
and ends when the last process before stockpiling is completed;
and (iv) refining begins with the removal from inventory or
storage of a natural resource and ends with the conversion of
the item to its completed form.

(4) "Machinery" means mechanical, electronic, or electrical
devices, including computers and computer software, that are
purchased or constructed to be used for the activities set forth
in paragraph (a), beginning with the removal of raw materials
from inventory through completion of the product, including
packaging of the product.

(5) "Machinery and equipment used for pollution control"
means machinery and equipment used solely to eliminate, prevent,
or reduce pollution resulting from an activity described in
paragraph (a).

(6) "Manufacturing" means an operation or series of
operations where raw materials are changed in form, composition,
or condition by machinery and equipment and which results in the
production of a new article of tangible personal property. For
purposes of this subdivision, "manufacturing" includes the
generation of electricity or steam to be sold at retail.

(7) "Mining" means the extraction of minerals, ores, stone,
or peat.

(8) "On-line data retrieval system" means a system whose
cumulation of information is equally available and accessible to
all its customers.

(9) "Primarily" means machinery and equipment used 50
percent or more of the time in an activity described in
paragraph (a).

(10) "Refining" means the process of converting a natural
resource to an intermediate or finished product, including the
treatment of water to be sold at retail.

new text begin (11) This subdivision does not apply to telecommunications
equipment as provided in subdivision 35, and does not apply to
wire, cable, fiber, poles, or conduit for telecommunications
services.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for sales and
purchases made after June 30, 2005.
new text end

Sec. 9.

new text begin [297A.825] MOTOR VEHICLE LEASES.
new text end

new text begin Subdivision 1. new text end

new text begin Motor vehicle lease price; payment. new text end

new text begin (a)
In the case of a lease of a motor vehicle as provided in section
297A.61, subdivision 4, paragraph (k), clause (2), the tax is
imposed on the total amount to be paid by the lessee under the
lease agreement. The lessor shall collect the tax in full at
the time the lease is executed or, if the tax is included in the
lease and the lease is assigned, the tax is due from the
original lessor at the time the lease is assigned. The total
amount to be paid by the lessee under the lease agreement equals
the agreed-upon value of the vehicle less manufacturer's
rebates, the stated residual value of the leased vehicle, and
the total value allowed for a vehicle owned by the lessee taken
in trade by the lessor, plus the price of any taxable goods and
services included in the lease and the rent charge as provided
by Code of Federal Regulations, title 12, section 213.4,
excluding any rent charge related to the capitalization of the
tax.
new text end

new text begin (b) If the total amount paid by the lessee for use of the
leased vehicle includes amounts that are not calculated at the
time the lease is executed, the tax is imposed and must be
collected by the lessor at the time the amounts are paid by the
lessee. In the case of a lease which by its terms may be
renewed, the sales tax is due and payable on the total amount to
be paid during the initial term of the lease, and then for each
subsequent renewal period on the total amount to be paid during
the renewal period.
new text end

new text begin (c) If a lease is canceled or rescinded on or before 90
days of its execution or if a vehicle is returned to the
manufacturer under section 325F.665, the lessor may file a claim
for a refund of the total tax paid minus the amount of tax due
for the period the vehicle is used by the lessee.
new text end

new text begin (d) If a lessee's obligation to make payments on a lease is
canceled more than 90 days after its execution, a credit is
allowed against sales tax or motor vehicle sales tax due on a
subsequent lease or purchase of a motor vehicle if that lease or
purchase is consummated within 30 days of the date the prior
lease was canceled. The amount of the credit shall be equal to
(1) the sales tax paid at the inception of the lease, multiplied
by (2) the ratio of the number of full months remaining in the
lease at the time of termination compared to the term of the
lease used in calculating sales tax paid at the inception of the
lease.
new text end

new text begin Subd. 2. new text end

new text begin Lease of motor vehicles. new text end

new text begin When the lease of a
motor vehicle as defined in section 297A.61, subdivision 4,
paragraph (k), clause (2), originates in another state, the
sales tax under subdivision 1 shall be calculated by the lessor
on the total amount that is due under the lease agreement after
the vehicle is required to be registered in Minnesota. If the
total amount to be paid by the lessee under the lease agreement
has already been subjected to tax by another state, a credit for
taxes paid in the other state is allowed as provided in section
297A.80.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin Subdivision 1 of this section is
effective for leases entered into after September 30, 2005.
Subdivision 2 of this section is effective for vehicles
registering in Minnesota after September 30, 2005.
new text end

Sec. 10.

new text begin [297F.25] CIGARETTE SALES TAX.
new text end

new text begin Subdivision 1. new text end

new text begin Imposition. new text end

new text begin A tax is imposed on
distributors on the sale of cigarettes by a cigarette
distributor to a retailer or cigarette subjobber for resale in
this state. The tax is equal to 6.5 percent of the weighted
average retail price. The weighted average retail price must be
expressed in cents per pack when rounded to the nearest
one-tenth of a cent. The weighted average retail price must be
determined annually, with new rates published by May 1, and
effective for sales on or after August 1. The weighted average
retail price must be established by surveying cigarette
retailers statewide in a manner and time determined by the
commissioner. The determination of the commissioner pursuant to
this subdivision is not a "rule" and is not subject to the
Administrative Procedure Act contained in chapter 14. As of
August 1, 2005, the tax is 20 cents per pack of 20 cigarettes.
For packs of cigarettes with other than 20 cigarettes, the tax
must be adjusted proportionally.
new text end

new text begin Subd. 2. new text end

new text begin Payment. new text end

new text begin Each taxpayer must remit payments of
the taxes to the commissioner on the same dates prescribed under
section 297F.09, subdivision 1, for cigarette tax returns,
including the accelerated remittance of the June liability.
new text end

new text begin Subd. 3. new text end

new text begin Return. new text end

new text begin A taxpayer must file a return with the
commissioner on the same dates prescribed under section 297F.09,
subdivision 1, for cigarette tax returns. Notwithstanding any
other provisions of this chapter, the tax due on the return is
based upon actual stamps purchased during the reporting period.
new text end

new text begin Subd. 4. new text end

new text begin Form of return. new text end

new text begin The return must contain the
information and be in the form prescribed by the commissioner.
new text end

new text begin Subd. 5. new text end

new text begin Tax as debt. new text end

new text begin The tax that is required to be
paid by the distributor is a debt from the retailer or cigarette
subjobber to the distributor recoverable at law in the same
manner as other debts. A cigarette retailer or subjobber must
pay the tax imposed under subdivision 1 to the distributor
before the 12th day of the month following the month in which
the cigarettes were purchased from the distributor.
new text end

new text begin Subd. 6. new text end

new text begin Sales tax stamp. new text end

new text begin Payment of the tax imposed
under section 297F.05 and by this section must be evidenced by a
dual-purpose single stamp affixed to each package.
new text end

new text begin Subd. 7. new text end

new text begin Administration. new text end

new text begin The stamping, audit,
assessment, interest, penalty, appeal, refund, and collection
provisions applicable to the taxes imposed under this chapter
apply to taxes imposed under this section.
new text end

new text begin Subd. 8. new text end

new text begin Deposit of revenues. new text end

new text begin Notwithstanding the
provisions of section 297F.10, the commissioner shall deposit
all revenues, including penalties and interest, derived from the
tax imposed by this section, in the general fund.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for all sales
made on or after August 1, 2005.
new text end

Sec. 11.

Minnesota Statutes 2004, section 297I.01, is
amended by adding a subdivision to read:

new text begin Subd. 6a. new text end

new text begin Direct business. new text end

new text begin (a) "Direct business" means
all insurance provided by an insurance company or its agents,
and specifically includes stop-loss insurance purchased in
connection with a self-insurance plan for employee health
benefits or for other purposes, but excludes:
new text end

new text begin (1) reinsurance in which an insurance company assumes the
liability of another insurance company; and
new text end

new text begin (2) self-insurance.
new text end

new text begin (b) For purposes of this subdivision, an insurance company
includes a nonprofit health service corporation, health
maintenance organization, and community integrated service
network.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for insurance
premiums received after December 31, 2005.
new text end

Sec. 12.

Laws 2001, First Special Session chapter 5,
article 12, section 95, is amended to read:

Sec. 95 new text begin REPEALER.
new text end

(a) Minnesota Statutes 2000, sections 297A.61, subdivision
16; 297A.68, subdivision 21; and 297A.71, subdivisions 2 and 16,
are repealed effective for sales and purchases occurring after
June 30, 2001, except that the repeal of section 297A.61,
subdivision 16, paragraph (d), is effective for sales and
purchases occurring after July 31, 2001.

(b) Minnesota Statutes 2000, deleted text begin sections deleted text end new text begin section new text end 297A.62,
subdivision 2, deleted text begin and 297A.64, subdivision 1, are deleted text end new text begin is new text end repealed
effective for sales and purchases made after December 31, 2005.

(c) Minnesota Statutes 2000, section 297A.71, subdivision
15, is repealed effective for sales and purchases made after
June 30, 2002.

(d) Minnesota Statutes 2000, section 289A.60, subdivision
15, is repealed effective for liabilities after January 1, 2003.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective the day
following final enactment.
new text end

Sec. 13. new text begin FLOOR STOCKS TAX.
new text end

new text begin Subdivision 1. new text end

new text begin Cigarettes. new text end

new text begin A floor stocks cigarette
sales tax is imposed on every person engaged in the business in
this state as a distributor, retailer, subjobber, vendor,
manufacturer, or manufacturer's representative of cigarettes, on
the stamped cigarettes and unaffixed stamps in the person's
possession or under the person's control at 12:01 a.m. on August
1, 2005. The tax is imposed at the rate of 20 cents per pack of
20 cigarettes. For packs of cigarettes with other than 20
cigarettes, the tax shall be adjusted proportionally.
new text end

new text begin Each distributor, by August 10, 2005, shall file a return
with the commissioner, in the form the commissioner prescribes,
showing the stamped cigarettes and unaffixed stamps on hand at
12:01 a.m. on August 1, 2005, and the amount of tax due on the
cigarettes and unaffixed stamps. The tax imposed by this
section is due and payable by September 7, 2005, and after that
date bears interest at the rate of one percent a month.
new text end

new text begin Each retailer, subjobber, vendor, manufacturer, or
manufacturer's representative, by August 10, 2005, shall file a
return with the commissioner, in the form the commissioner
prescribes, showing the cigarettes on hand at 12:01 a.m. on
August 1, 2005, and the amount of tax due on the cigarettes.
The tax imposed by this section is due and payable by September
7, 2005, and after that date bears interest at the rate of one
percent a month.
new text end

new text begin Subd. 2. new text end

new text begin Audit and enforcement. new text end

new text begin The tax imposed by this
section is subject to the audit, assessment, penalty, and
collection provisions applicable to the taxes imposed under
Minnesota Statutes, chapter 297F. The commissioner may require
a distributor to receive and maintain copies of floor stocks tax
returns filed by all persons requesting a credit for returned
cigarettes.
new text end

new text begin Subd. 3. new text end

new text begin Deposit of proceeds. new text end

new text begin The revenue from the tax
imposed under this section shall be deposited by the
commissioner in the state treasury and credited to the general
fund.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective August 1, 2005.
new text end

ARTICLE 4

TAX SHELTER AND VOLUNTARY COMPLIANCE INITIATIVES

Section 1.

new text begin [289A.121] REGISTRATION OF TAX SHELTERS.
new text end

new text begin Subdivision 1. new text end

new text begin Definitions. new text end

new text begin For the purposes of this
section, the following terms have the meanings given.
new text end

new text begin (a) "Abusive tax avoidance transaction" means a Minnesota
tax shelter or a reportable transaction.
new text end

new text begin (b) "Material advisor" has the meaning given in section
111(b)(1) of the Internal Revenue Code, and must be interpreted
in accordance with any regulations or rulings adopted or issued
by the Internal Revenue Service that govern that section.
new text end

new text begin (c) "Minnesota tax shelter" means a transaction which is
not a reportable transaction, which substantially reduces a tax
imposed under chapter 290 and has one or more of the following
characteristics:
new text end

new text begin (1) it is offered to the taxpayer under conditions of
confidentiality, as that term is defined in Treas. Reg. section
1.6011-4(3)(ii), and for which the taxpayer has paid a fee;
new text end

new text begin (2) the terms of the transaction offer the taxpayer or a
related party the right to a full or partial refund of fees if
all or part of the intended tax consequences of the transaction
are not realized, or if fees are contingent upon the taxpayer
realizing tax benefits;
new text end

new text begin (3) it is a transaction or a series of related transactions
that result in a corporation or a partnership with only
corporate partners claiming a reduction in net income in excess
of $10,000,000 in any combination of tax years;
new text end

new text begin (4) it is a transaction or a series of related transactions
that result in an individual, a partnership with one or more
noncorporate partners, S corporation, or trust claiming a
reduction in net income in excess of $4,000,000 in any
combination of taxable years, whether or not any losses flow
through to one or more shareholders or beneficiaries; or
new text end

new text begin (5) it is a transaction or series of related transactions,
identified as a Minnesota tax shelter in a rule promulgated by
the commissioner of revenue, entered into after the date the
rule becomes effective.
new text end

new text begin (d) "Reportable transaction" has the meaning given in
Treas. Reg. section 1.6011-4 between February 29, 2000, and
January 1, 2006.
new text end

new text begin Subd. 2. new text end

new text begin Reports by material advisors. new text end

new text begin (a) On the first
day that a material advisor sells a Minnesota tax shelter or
reportable transaction, the material advisor must file with the
commissioner a copy of any federal tax shelter registration
information relating to reportable transactions if that
registration is applicable to any person subject to taxation
under chapter 290.
new text end

new text begin (b) On or before April 15, 2006, material advisors must
report to the commissioner all federal tax shelters used by a
person subject to tax under chapter 290 that the material
advisor offered for sale between February 28, 2000, and January
1, 2006, which were reportable transactions.
new text end

new text begin (c) On or before April 15, 2006, material advisors must
report to the commissioner all Minnesota tax shelters that the
material advisor offered for sale between February 28, 2000, and
January 1, 2006, if the transactions would have had to be
disclosed under subdivision 3 had it been in effect at that time.
new text end

new text begin (d) In addition to the requirements set forth in paragraphs
(a), (b), and (c), a material advisor must report to the
commissioner any transactions entered into on or after April 15,
2006, that become listed as reportable transactions or a
Minnesota tax shelter.
new text end

new text begin Subd. 3. new text end

new text begin Maintaining participant lists. new text end

new text begin Any person
organizing or selling Minnesota tax shelters or reportable
transactions must maintain a list of participants that are
subject to a tax imposed by chapter 290.
new text end

new text begin Subd. 4. new text end

new text begin Reporting. new text end

new text begin All persons, including material
advisors who organize or sell Minnesota tax shelters or
reportable transactions, must provide the following information
to the commissioner within 20 days from receiving a written
request from the commissioner to provide the information:
new text end

new text begin (1) legal name of the taxpayer;
new text end

new text begin (2) Minnesota tax identification number;
new text end

new text begin (3) federal tax identification number; and
new text end

new text begin (4) description of the Minnesota tax shelter or reportable
transaction.
new text end

new text begin Subd. 5. new text end

new text begin Disclosure statements by taxpayers. new text end

new text begin Every
person subject to taxation under chapter 290 who has
participated in a reportable transaction or a Minnesota tax
shelter which resulted in a tax decrease must file a disclosure
statement on a form prescribed by the commissioner. The form
must be filed with the tax return.
new text end

Sec. 2.

Minnesota Statutes 2004, section 289A.38, is
amended by adding a subdivision to read:

new text begin Subd. 16. new text end

new text begin Voluntary compliance
initiative. new text end

new text begin Notwithstanding other limitations in the
subdivision, an amount of tax related to a reportable
transaction or a Minnesota tax shelter that is not reported in
the voluntary compliance initiative described in section 4 may
be assessed within eight and one-half years after the date the
return is filed.
new text end

Sec. 3.

Minnesota Statutes 2004, section 289A.60, is
amended by adding a subdivision to read:

new text begin Subd. 26. new text end

new text begin Penalty for failure to report a tax
shelter. new text end

new text begin (a) A penalty of $15,000 is imposed on a person who
fails to register a tax shelter as required under section
289A.121 on or before the date prescribed.
new text end

new text begin (b) A penalty of $10,000 is imposed on a person who fails
to report to the commissioner a Minnesota tax shelter or a
reportable transaction within 20 days of the date prescribed
under section 289A.121. For each day after the 20th day that
the person organizing or selling the Minnesota tax shelter or
reportable transaction failed to make the information required
in section 289A.121, subdivision 2, available to the
commissioner after the commissioner made a written request for
the list, an additional $10,000 penalty is imposed on that
person.
new text end

new text begin (c) A penalty is imposed on a person who fails to make a
report required by section 289A.121, subdivision 2, on or before
the date prescribed. The penalty is the greater of:
new text end

new text begin (1) $100,000; or
new text end

new text begin (2) 50 percent of the gross income that the person derived
from the activity.
new text end

new text begin (d) A penalty is imposed on a person who intentionally
disregards the requirement to maintain and provide information
required in section 289A.121. The penalty is the greater of:
new text end

new text begin (1) $100,000; or
new text end

new text begin (2) 75 percent of the gross income that the person derived
from the activity.
new text end

new text begin (e) A penalty of $15,000 is imposed on a person who fails
to provide a list required under section 289A.121, subdivision
4, which does not contain all the information required in that
section.
new text end

Sec. 4. new text begin TAX SHELTER VOLUNTARY COMPLIANCE INITIATIVE.
new text end

new text begin Subdivision 1. new text end

new text begin Commissioner to initiate. new text end

new text begin The
commissioner of revenue shall develop and administer a Minnesota
tax shelter voluntary compliance initiative for taxpayers
subject to Minnesota Statutes, section 289A.60, subdivision 26,
as provided in this chapter.
new text end

new text begin Subd. 2. new text end

new text begin Term; application. new text end

new text begin The Minnesota tax shelter
voluntary compliance initiative shall be conducted from July 1,
2005, to December 31, 2005, pursuant to Minnesota Statutes,
section 270.07. The Minnesota tax shelter voluntary compliance
initiative shall apply to tax liabilities and penalties
attributable to Minnesota tax shelters and reportable
transactions for tax years beginning before January 1, 2005. An
abusive tax avoidance transaction means a Minnesota tax shelter
or a reportable transaction as defined in Minnesota Statutes,
section 289A.121, subdivision 1.
new text end

new text begin Subd. 3. new text end

new text begin Implementation. new text end

new text begin The commissioner of revenue may
issue forms and instructions and take other actions necessary,
including the use of agreements pursuant to Minnesota Statutes,
section 270.67, to implement the Minnesota tax shelter voluntary
compliance initiative.
new text end

new text begin Subd. 4. new text end

new text begin Persons not eligible to participate. new text end

new text begin (a) Any
person is not eligible for participation in the Minnesota tax
shelter voluntary compliance initiative, if:
new text end

new text begin (1) the taxpayer was convicted of a crime in connection
with an abusive tax avoidance transaction or transactions;
new text end

new text begin (2) a criminal complaint was filed against the taxpayer in
connection with an abusive tax avoidance transaction or
transactions;
new text end

new text begin (3) the taxpayer is the subject of a criminal investigation
in connection with an abusive tax avoidance transaction or
transactions; or
new text end

new text begin (4) the taxpayer was eligible to participate in the
Internal Revenue Service's Offshore Voluntary Compliance
Initiative, as set forth in Revenue Procedure 2003-11.
new text end

new text begin Subd. 5. new text end

new text begin Eligible participants. new text end

new text begin (a) Any person who is
not ineligible to participate in the Minnesota tax shelter
voluntary compliance initiative under subdivision 4, is eligible
to participate in the Minnesota tax shelter voluntary compliance
initiative.
new text end

new text begin (b) A person participating in the Minnesota tax shelter
voluntary compliance initiative waiving the right to an
administrative appeal, a claim for refund, or an action in
district court must do both of the following:
new text end

new text begin (1) the participating person must file an amended return
for each taxable year for which the taxpayer has filed a tax
return using an abusive tax avoidance transaction to underreport
the taxpayer's tax liability for that tax year. Each amended
return shall report all income from all sources, without regard
to the abusive tax avoidance transaction; and
new text end

new text begin (2) the participating person must pay taxes and interest
due in full, except that the commissioner of revenue may enter
into an installment payment agreement pursuant to Minnesota
Statutes, section 270.67, prior to taxpayer filing an amended
return.
new text end

new text begin (c) The commissioner of revenue shall abate all penalties
imposed under Minnesota Statutes, chapter 289A, which could have
been assessed in connection with the use of an abusive tax
avoidance transaction, for each taxable year for which the
taxpayer elects to participate in the Minnesota tax shelter
voluntary compliance initiative, to the extent those penalties
are a result of underreporting of tax liabilities attributable
to the use of abusive tax avoidance transactions, for which a
participating person files an amended return in compliance with
paragraph (b).
new text end

new text begin (d) No criminal action shall be brought against a taxpayer
for the taxable years reported under the Minnesota tax shelter
voluntary compliance initiative with respect to the issues for
which a taxpayer voluntarily complies under this chapter.
new text end

new text begin (e) A person filing an amended return under this paragraph
of the Minnesota tax shelter voluntary compliance initiative may
not file a claim for refund, an administrative appeal, or an
action in district court in regard to the amount of taxes or
interest paid with the amended return.
new text end

new text begin (f) A person participating in the Minnesota tax shelter
voluntary compliance initiative not waiving the right to an
administrative appeal, a claim for refund, or an action in
district court must do both of the following:
new text end

new text begin (1) the participating person must file an amended return
for each taxable year for which the taxpayer has filed a tax
return using an abusive tax avoidance transaction to underreport
the taxpayer's tax liability for that tax year. Each amended
return shall report all income from all sources, without regard
to the abusive tax avoidance transactions; and
new text end

new text begin (2) the participating person must pay taxes and interest
due in full, except that the commissioner of revenue may enter
into an installment payment agreement pursuant to Minnesota
Statutes, section 270.67, prior to taxpayer filing an amended
return.
new text end

new text begin (g) The commissioner of revenue shall abate all penalties
imposed under Minnesota Statutes, chapter 289A, except for the
penalty for intentional disregard of law or rules imposed under
Minnesota Statutes, section 289A.60, subdivision 5, which could
have been assessed in connection with the use of an abusive tax
avoidance transaction, for each taxable year for which the
taxpayer elects to participate in the Minnesota tax shelter
voluntary compliance initiative, to the extent those penalties
are a result of underreporting of tax liabilities attributable
to the use of abusive tax avoidance transactions, for which a
participating person files an amended return in compliance with
paragraph (b).
new text end

new text begin (h) No criminal action shall be brought against a taxpayer
for the taxable years reported under the Minnesota tax shelter
voluntary compliance initiative with respect to the issues for
which a taxpayer voluntarily complies under this chapter.
new text end

Sec. 5. new text begin COMMISSIONER ORDERS AND PENALTIES.
new text end

new text begin After December 31, 2005, the commissioner of revenue may
issue an order of assessment within the time period permitted
under Minnesota Statutes, section 289A.38, upon an amended
return filed under this chapter for an underreported amount of
tax, may impose penalties on an underreported amount of tax on
an amended return filed under this chapter, or initiate a
criminal action against any person based on any underreported
amount of tax on an amended return filed under this chapter.
new text end

new text begin A penalty is imposed upon any person who:
new text end

new text begin (1) is not ineligible to file an amended return pursuant to
this chapter;
new text end

new text begin (2) has engaged in abusive tax shelter transactions; and
new text end

new text begin (3) fails to voluntarily amend their tax returns for each
taxable year for which an amended return may be filed and the
person underreported income attributable to an abusive tax
shelter transaction.
new text end

new text begin The penalty is equal to 200 percent of the underreported tax
that is attributable to the abusive tax shelter transaction.
new text end

ARTICLE 5

MISCELLANEOUS

Section 1. new text begin CITY AID PAYMENTS.
new text end

new text begin In 2005 and 2006, market value credit reimbursements for
each city payable under Minnesota Statutes, section 273.1384,
are reduced by the dollar amount of the 2003 reduction in market
value credit reimbursements for that city due to Laws 2003,
First Special Session chapter 21, article 5, section 12. No
city's market value credit reimbursements are reduced to less
than zero under this section. To the extent sufficient
information is available on each payment date, the commissioner
shall pay the annual 2005 and 2006 market value credit
reimbursement amounts, after reduction under this section, to
cities in equal installments on the dates specified in Minnesota
Statutes, section 273.1384.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective the day
following final enactment.
new text end

Sec. 2. new text begin TAX RELIEF ACCOUNT TRANSFER.
new text end

new text begin On November 1, 2005, the commissioner of finance shall
transfer the balance in the tax relief account under Minnesota
Statutes, section 16A.1522, subdivision 4, but not to exceed
$39,445,000, to the general fund.
new text end