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Minnesota Legislature

Office of the Revisor of Statutes

SF 1668

as introduced - 90th Legislature (2017 - 2018) Posted on 03/29/2018 04:10pm

KEY: stricken = removed, old language.
underscored = added, new language.

Current Version - as introduced

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A bill for an act
relating to taxation; income; modifying the small business investment credit; adding
definitions; requiring additional information from applicant businesses; providing
for priority businesses; modifying allocation of credits; making the credit
permanent; amending Minnesota Statutes 2016, section 116J.8737, subdivisions
1, 2, 5, 6, 7, 9, by adding a subdivision; repealing Minnesota Statutes 2016, section
116J.8737, subdivision 12.

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

Section 1.

Minnesota Statutes 2016, section 116J.8737, subdivision 1, is amended to read:


Subdivision 1.

Definitions.

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

(b) "Qualified small business" means a business that has been certified by the
commissioner under subdivision 2.

(c) "Qualified investor" means an investor who has been certified by the commissioner
under subdivision 3.

(d) "Qualified fund" means a pooled angel investment network fund that has been certified
by the commissioner under subdivision 4.

(e) "Qualified investment" deleted text beginmeansdeleted text end new text beginand "qualifying investment" mean new text enda cash investment
in a qualified small business of a minimum of:

(1) $10,000 in a calendar year by a qualified investor; or

(2) $30,000 in a calendar year by a qualified fund.

A qualified investment must be made in exchange for common stock, a partnership or
membership interest, preferred stock, debt with mandatory conversion to equity, or an
equivalent ownership interest as determined by the commissioner.

(f) "Family" means a family member within the meaning of the Internal Revenue Code,
section 267(c)(4).

(g) "Pass-through entity" means a corporation that for the applicable taxable year is
treated as an S corporation or a general partnership, limited partnership, limited liability
partnership, trust, or limited liability company and which for the applicable taxable year is
not taxed as a corporation under chapter 290.

(h) "Intern" means a student of an accredited institution of higher education, or a former
student who has graduated in the past six months from an accredited institution of higher
education, who is employed by a qualified small business in a nonpermanent position for
a duration of nine months or less that provides training and experience in the primary
business activity of the business.

(i) "Liquidation event" means a conversion of qualified investment for cash, cash and
other consideration, or any other form of equity or debt interest.

(j) "Qualified greater Minnesota business" means a qualified small business that is also
certified by the commissioner as a qualified greater Minnesota business under subdivision
2, paragraph (h).

(k) "Minority group member" means a United States citizen who is Asian, Pacific
Islander, Black, Hispanic, or Native American.

(l) "Minority-owned business" means a business for which one or more minority group
members:

(1) own at least 50 percent of the business, or, in the case of a publicly owned business,
own at least 51 percent of the stock; and

(2) manage the business and control the daily business operations.

(m) "Women" means persons of the female gender.

(n) "Women-owned business" means a business for which one or more women:

(1) own at least 50 percent of the business, or, in the case of a publicly owned business,
own at least 51 percent of the stock; and

(2) manage the business and control the daily business operations.

(o) "Officer" means a person elected or appointed by the board of directors to manage
the daily operations of the qualified small business;

(p) "Principal" means a person having authority to act on behalf of the qualified small
business.

new text begin (q) "Local government aid" means aid paid to cities and townships under sections
477A.011 to 477A.03.
new text end

new text begin (r) "Municipality" means a statutory or home rule charter city or a town.
new text end

new text begin (s) "Priority business" means a qualified small business that states in its application that
it will use the qualified investment in a Minnesota municipality that is not certified to receive
local government aid in the year in which credits for the qualified investment are to be
allocated.
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.

Minnesota Statutes 2016, section 116J.8737, subdivision 2, is amended to read:


Subd. 2.

Certification of qualified small businesses.

(a) Businesses may apply to the
commissioner for certification as a qualified small business or qualified greater Minnesota
small business for a calendar year. new text begin The business must state on the application the Minnesota
municipality or municipalities in which it would use the qualified investment.
new text endThe application
must be in the form and be made under the procedures specified by the commissioner,
accompanied by an application fee of $150. Application fees are deposited in the small
business investment tax credit administration account in the special revenue fund. deleted text beginThe
application for certification for 2010 must be made available on the department's Web site
by August 1, 2010.
deleted text end Applications deleted text beginfor subsequent years' certificationdeleted text end must be made available
on the department's Web site by November 1 of the deleted text beginprecedingdeleted text end yearnew text begin preceding the year for
which a business is applying for certification
new text end.

(b) Within 30 days of receiving an application for certification under this subdivision,
the commissioner must either certify the business as satisfying the conditions required of a
qualified small business or qualified greater Minnesota small business, request additional
information from the business, or reject the application for certification. If the commissioner
requests additional information from the business, the commissioner must either certify the
business or reject the application within 30 days of receiving the additional information. If
the commissioner neither certifies the business nor rejects the application within 30 days
of receiving the original application or within 30 days of receiving the additional information
requested, whichever is later, then the application is deemed rejected, and the commissioner
must refund the $150 application fee. A business that applies for certification and is rejected
may reapply.

(c) To receive certification as a qualified small business, a business must satisfy all of
the following conditions:

(1) the business has its headquarters in Minnesota;

(2) at least: (i) 51 percent of the business's employees are employed in Minnesota; (ii)
51 percent of the business's total payroll is paid or incurred in the state; and (iii) 51 percent
of the total value of all contractual agreements to which the business is a party in connection
with its primary business activity is for services performed under contract in Minnesota,
unless the business obtains a waiver under paragraph (i);

(3) the business is engaged in, or is committed to engage in, innovation in Minnesota in
one of the following as its primary business activity:

(i) using proprietary technology to add value to a product, process, or service in a qualified
high-technology field;

(ii) researching or developing a proprietary product, process, or service in a qualified
high-technology field;

(iii) researching or developing a proprietary product, process, or service in the fields of
agriculture, tourism, forestry, mining, manufacturing, or transportation; or

(iv) researching, developing, or producing a new proprietary technology for use in the
fields of agriculture, tourism, forestry, mining, manufacturing, or transportation;

(4) other than the activities specifically listed in clause (3), the business is not engaged
in real estate development, insurance, banking, lending, lobbying, political consulting,
information technology consulting, wholesale or retail trade, leisure, hospitality,
transportation, construction, ethanol production from corn, or professional services provided
by attorneys, accountants, business consultants, physicians, or health care consultants;

(5) the business has fewer than 25 employees;

(6) the business must pay its employees annual wages of at least 175 percent of the
federal poverty guideline for the year for a family of four and must pay its interns annual
wages of at least 175 percent of the federal minimum wage used for federally covered
employers, except that this requirement must be reduced proportionately for employees and
interns who work less than full-time, and does not apply to an executive, officer, or member
of the board of the business, or to any employee who owns, controls, or holds power to vote
more than 20 percent of the outstanding securities of the business;

(7) the business has (i) not been in operation for more than ten years, or (ii) not been in
operation for more than 20 years if the business is engaged in the research, development,
or production of medical devices or pharmaceuticals for which United States Food and Drug
Administration approval is required for use in the treatment or diagnosis of a disease or
condition;

(8) the business has not previously received private equity investments of more than
$4,000,000;

(9) the business is not an entity disqualified under section 80A.50, paragraph (b), clause
(3); and

(10) the business has not issued securities that are traded on a public exchange.

(d) In applying the limit under paragraph (c), clause (5), the employees in all members
of the unitary business, as defined in section 290.17, subdivision 4, must be included.

(e) In order for a qualified investment in a business to be eligible for tax credits:

(1) the business must have applied for and received certification for the calendar year
in which the investment was made prior to the date on which the qualified investment was
made;

(2) the business must not have issued securities that are traded on a public exchange;

(3) the business must not issue securities that are traded on a public exchange within
180 days after the date on which the qualified investment was made; and

(4) the business must not have a liquidation event within 180 days after the date on
which the qualified investment was made.

(f) The commissioner must maintain a list of qualified small businesses and qualified
greater Minnesota businesses certified under this subdivision for the calendar yearnew text begin,new text end andnew text begin
must indicate on the list if a business is a priority business. The commissioner must
new text end make
the list accessible to the public on the department's Web site.

(g) For purposes of this subdivision, the following terms have the meanings given:

(1) "qualified high-technology field" includes aerospace, agricultural processing,
renewable energy, energy efficiency and conservation, environmental engineering, food
technology, cellulosic ethanol, information technology, materials science technology,
nanotechnology, telecommunications, biotechnology, medical device products,
pharmaceuticals, diagnostics, biologicals, chemistry, veterinary science, and similar fields;

(2) "proprietary technology" means the technical innovations that are unique and legally
owned or licensed by a business and includes, without limitation, those innovations that are
patented, patent pending, a subject of trade secrets, or copyrighted; and

(3) "greater Minnesota" means the area of Minnesota located outside of the metropolitan
area as defined in section 473.121, subdivision 2.

(h) To receive certification as a qualified greater Minnesota business, a business must
satisfy all of the requirements of paragraph (c) and must satisfy the following conditions:

(1) the business has its headquarters in greater Minnesota; and

(2) at least: (i) 51 percent of the business's employees are employed in greater Minnesota;
(ii) 51 percent of the business's total payroll is paid or incurred in greater Minnesota; and
(iii) 51 percent of the total value of all contractual agreements to which the business is a
party in connection with its primary business activity is for services performed under contract
in greater Minnesota, unless the business obtains a waiver under paragraph (i).

(i) The commissioner must exempt a business from the requirement under paragraph
(c), clause (2), item (iii), if the business certifies to the commissioner that the services
required under a contract in connection with the primary business activity cannot be
performed in Minnesota if the business otherwise qualifies as a qualified small business, or
in greater Minnesota if the business otherwise qualifies as a qualified greater Minnesota
business. The business must submit the certification required under this paragraph every
six months from the month the exemption was granted. The exemption allowed under this
paragraph must be submitted in a form and manner prescribed by the commissioner.

new text begin EFFECTIVE DATE. new text end

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

Sec. 3.

Minnesota Statutes 2016, section 116J.8737, is amended by adding a subdivision
to read:


new text begin Subd. 2a. new text end

new text begin Certification of local government aid to cities. new text end

new text begin By October 1 of each year,
the commissioner of revenue must provide the commissioner with a list of municipalities
certified to receive local government aid for the following calendar year.
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. 4.

Minnesota Statutes 2016, section 116J.8737, subdivision 5, is amended to read:


Subd. 5.

Credit allowed.

(a)deleted text begin(1)deleted text end A qualified investor or qualified fund is eligible for a
credit equal to 25 percent of the qualified investment in a qualified small business.
Investments made by a pass-through entity qualify for a credit only if the entity is a qualified
fund. The commissioner must not allocate more than deleted text begin$15,000,000deleted text endnew text begin $20,000,000 per taxable
year
new text end in credits to qualified investors or qualified funds deleted text beginfor taxable years beginning after
December 31, 2013, and before January 1, 2017, and must not allocate more than $10,000,000
in credits to qualified investors or qualified funds for taxable years beginning after December
31, 2016, and before January 1, 2018; and
deleted text endnew text begin.
new text end

deleted text begin (2) for taxable years beginning after December 31, 2014, and before January 1, 2018,deleted text end
deleted text begin 50deleted text endnew text begin (b) Fiftynew text end percent must be allocated to credits for qualifying investments in qualified
greater Minnesota businesses and minority- or women-owned qualified small businesses
in Minnesota. new text beginCredits that are reserved for qualifying investments in greater Minnesota
businesses and minority- or women-owned qualified small businesses in Minnesota are
allocated as follows:
new text end

new text begin (1) from January 1 to August 31, only to qualifying investments in priority businesses;
and
new text end

new text begin (2) from September 1 to September 30, to qualifying investments in other qualified
greater Minnesota businesses and minority- or women-owned qualified small businesses
in Minnesota.
new text end

Any portion of a taxable year's credits that is reserved for qualifying investments in
greater Minnesota businesses and minority- or women-owned qualified small businesses
in Minnesota that is not allocated by September 30 of the taxable year is available for
allocation to other credit applications beginning on October 1.

new text begin (c) The 50 percent of credits that is not reserved for qualifying investments in greater
Minnesota businesses and minority- or women-owned qualified small businesses in
Minnesota must be allocated as follows:
new text end

new text begin (1) from January 1 to September 30, only to qualifying investments in priority businesses;
and
new text end

new text begin (2) beginning on October 1, to other qualifying investments.
new text end

Any portion of a taxable year's credits that is not allocated by the commissioner does
not cancel and may be carried forward to subsequent taxable years until all credits have
been allocated.

deleted text begin (b)deleted text endnew text begin (d)new text end The commissioner may not allocate more than a total maximum amount in credits
for a taxable year to a qualified investor for the investor's cumulative qualified investments
as an individual qualified investor and as an investor in a qualified fund; for married couples
filing joint returns the maximum is $250,000, and for all other filers the maximum is
$125,000. The commissioner may not allocate more than a total of $1,000,000 in credits
over all taxable years for qualified investments in any one qualified small business.

deleted text begin (c)deleted text endnew text begin (e)new text end The commissioner may not allocate a credit to a qualified investor either as an
individual qualified investor or as an investor in a qualified fund if, at the time the investment
is proposed:

(1) the investor is an officer or principal of the qualified small business; or

(2) the investor, either individually or in combination with one or more members of the
investor's family, owns, controls, or holds the power to vote 20 percent or more of the
outstanding securities of the qualified small business.

A member of the family of an individual disqualified by this paragraph is not eligible for a
credit under this section. For a married couple filing a joint return, the limitations in this
paragraph apply collectively to the investor and spouse. For purposes of determining the
ownership interest of an investor under this paragraph, the rules under section 267(c) and
267(e) of the Internal Revenue Code apply.

deleted text begin (d)deleted text endnew text begin (f)new text end Applications for tax credits for 2010 must be made available on the department's
Web site by September 1, 2010, and the department must begin accepting applications by
September 1, 2010. Applications for subsequent years must be made available by November
1 of the preceding year.

deleted text begin (e)deleted text endnew text begin (g)new text end Qualified investors and qualified funds must apply to the commissioner for tax
credits. Tax credits must be allocated to qualified investors or qualified funds in the order
that the tax credit request applications are filed with the department. The commissioner
must approve or reject tax credit request applications within 15 days of receiving the
application. The investment specified in the application must be made within 60 days of
the allocation of the credits. If the investment is not made within 60 days, the credit allocation
is canceled and available for reallocation. A qualified investor or qualified fund that fails
to invest as specified in the application, within 60 days of allocation of the credits, must
notify the commissioner of the failure to invest within five business days of the expiration
of the 60-day investment period.

deleted text begin (f)deleted text endnew text begin (h)new text end All tax credit request applications filed with the department on the same day must
be treated as having been filed contemporaneously. If two or more qualified investors or
qualified funds file tax credit request applications on the same day, and the aggregate amount
of credit allocation claims exceeds the aggregate limit of credits under this section or the
lesser amount of credits that remain unallocated on that day, then the credits must be allocated
among the qualified investors or qualified funds who filed on that day on a pro rata basis
with respect to the amounts claimed. The pro rata allocation for any one qualified investor
or qualified fund is the product obtained by multiplying a fraction, the numerator of which
is the amount of the credit allocation claim filed on behalf of a qualified investor and the
denominator of which is the total of all credit allocation claims filed on behalf of all
applicants on that day, by the amount of credits that remain unallocated on that day for the
taxable year.

deleted text begin (g)deleted text endnew text begin (i)new text end A qualified investor or qualified fund, or a qualified small business acting on their
behalf, must notify the commissioner when an investment for which credits were allocated
has been made, and the taxable year in which the investment was made. A qualified fund
must also provide the commissioner with a statement indicating the amount invested by
each investor in the qualified fund based on each investor's share of the assets of the qualified
fund at the time of the qualified investment. After receiving notification that the investment
was made, the commissioner must issue credit certificates for the taxable year in which the
investment was made to the qualified investor or, for an investment made by a qualified
fund, to each qualified investor who is an investor in the fund. The certificate must state
that the credit is subject to revocation if the qualified investor or qualified fund does not
hold the investment in the qualified small business for at least three years, consisting of the
calendar year in which the investment was made and the two following years. The three-year
holding period does not apply if:

(1) the investment by the qualified investor or qualified fund becomes worthless before
the end of the three-year period;

(2) 80 percent or more of the assets of the qualified small business is sold before the end
of the three-year period;

(3) the qualified small business is sold before the end of the three-year period;

(4) the qualified small business's common stock begins trading on a public exchange
before the end of the three-year period; or

(5) the qualified investor dies before the end of the three-year period.

deleted text begin (h)deleted text endnew text begin (j)new text end The commissioner must notify the commissioner of revenue of credit certificates
issued under this section.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable years beginning after December
31, 2017.
new text end

Sec. 5.

Minnesota Statutes 2016, section 116J.8737, subdivision 6, is amended to read:


Subd. 6.

Annual reports.

(a) By February 1 of each year each qualified small business
that received an investment that qualified for a credit, and each qualified investor and
qualified fund that made an investment that qualified for a credit, must submit an annual
report to the commissioner and pay a filing fee of $100 as required under this subdivision.
Each qualified investor and qualified fund must submit reports for three years following
each year in which it made an investment that qualified for a credit, and each qualified small
business must submit reports for five years following the year in which it received an
investment qualifying for a credit. Reports must be made in the form required by the
commissioner. All filing fees collected are deposited in the small business investment tax
credit administration account in the special revenue fund.

(b) A report from a qualified small business must certify that the business satisfies the
following requirements:

(1) the business has its headquarters in Minnesota;

(2) at least 51 percent of the business's employees are employed in Minnesota, and 51
percent of the business's total payroll is paid or incurred in the state;

(3) that the business is engaged in, or is committed to engage in, innovation in Minnesota
as defined under subdivision 2; and

(4) that the business meets the payroll requirements in subdivision 2, paragraph (c),
clause (6).

(c) Reports from qualified investors must certify that the investor remains invested in
the qualified small business as required by subdivision 5, paragraph deleted text begin(g)deleted text endnew text begin (i)new text end.

(d) Reports from qualified funds must certify that the fund remains invested in the
qualified small business as required by subdivision 5, paragraph deleted text begin(g)deleted text endnew text begin (i)new text end.

(e) A qualified small business that ceases all operations and becomes insolvent must file
a final annual report in the form required by the commissioner documenting its insolvency.
In following years the business is exempt from the annual reporting requirement, the report
filing fee, and the fine for failure to file a report.

(f) A qualified small business, qualified investor, or qualified fund that fails to file an
annual report as required under this subdivision is subject to a $500 fine.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable years beginning after December
31, 2017.
new text end

Sec. 6.

Minnesota Statutes 2016, section 116J.8737, subdivision 7, is amended to read:


Subd. 7.

Revocation of credits.

(a) If the commissioner determines that a qualified
investor or qualified fund did not meet the three-year holding period required in subdivision
5, paragraph deleted text begin(g)deleted text endnew text begin (i)new text end, any credit allocated and certified to the investor or fund is revoked and
must be repaid by the investor.

(b) If the commissioner determines that a business did not meet the employment and
payroll requirements in subdivision 2, paragraph (c), clause (2), or paragraph (h), as
applicable, in any of the five calendar years following the year in which an investment in
the business that qualified for a tax credit under this section was made, the business must
repay the following percentage of the credits allowed for qualified investments in the
business:

Year following the year in which
Percentage of credit required
the investment was made:
to be repaid:
First
100%
Second
80%
Third
60%
Fourth
40%
Fifth
20%
Sixth and later
0

(c) The commissioner must notify the commissioner of revenue of every credit revoked
and subject to full or partial repayment under this section.

(d) For the repayment of credits allowed under this section and section 290.0692, a
qualified small business, qualified investor, or investor in a qualified fund must file an
amended return with the commissioner of revenue and pay any amounts required to be
repaid within 30 days after becoming subject to repayment under this section.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable years beginning after December
31, 2017.
new text end

Sec. 7.

Minnesota Statutes 2016, section 116J.8737, subdivision 9, is amended to read:


Subd. 9.

Report to legislature.

Beginning in 2011, the commissioner must annually
report by March 15 to the chairs and ranking minority members of the legislative committees
having jurisdiction over taxes and economic development in the senate and the house of
representatives, in compliance with sections 3.195 and 3.197, on the tax credits issued under
this section. The report must include:

(1) the number and amount of the credits issued;

(2) the recipients of the credits;

(3) for each qualified small business or qualified greater Minnesota business, its location,
line of business, and if it received an investment resulting in certification of tax credits;

(4) the total amount of investment in each qualified small business resulting in
certification of tax credits;

(5) for each qualified small business that received investments resulting in tax credits,
the total amount of additional investment that did not qualify for the tax credit;

(6) the number and amount of credits revoked under subdivision 7;

(7) the number and amount of credits that are no longer subject to the three-year holding
period because of the exceptions under subdivision 5, paragraph deleted text begin(g)deleted text endnew text begin (i)new text end, clauses (1) to (4);
and

(8) any other information relevant to evaluating the effect of these credits.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable years beginning after December
31, 2017.
new text end

Sec. 8. new text begin REPEALER.
new text end

new text begin Minnesota Statutes 2016, section 116J.8737, subdivision 12, new text end new text begin is repealed.
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

APPENDIX

Repealed Minnesota Statutes: 17-1229

116J.8737 SMALL BUSINESS INVESTMENT TAX CREDIT.

Subd. 12.

Sunset.

This section expires for taxable years beginning after December 31, 2017, except that reporting requirements under subdivision 6 and revocation of credits under subdivision 7 remain in effect through 2019 for qualified investors and qualified funds, and through 2021 for qualified small businesses, reporting requirements under subdivision 9 remain in effect through 2022, and the appropriation in subdivision 11 remains in effect through 2021.