The 2017 legislative session: some good, some interesting and some bizarre
Andrew Seifert, JD, tax consultant, Wipfli LLP | August 2017 Footnote
Flashback to January: The U.S. just elected Donald Trump as its next president, Republicans gained control of the Minnesota Legislature for only the second time in more than 40 years, Gov. Mark Dayton began his last two years in office, and there were many first-time legislators in the Capitol halls eager to understand what being an elected official was all about.
Months later, the interest didn't wane as the Minnesota legislative session ended with unforeseen twists and turns.
Legislators needed a special session to reach agreement with Dayton, and even that agreement turned out to be contentious. Since the close of session, Dayton has said he reluctantly signed the tax bill because not doing so could have caused the Minnesota Department of Revenue (DOR) to shut down. In addition, he took the unprecedented step of vetoing the Legislature's operating funding, hoping to force legislative leaders back to the bargaining table. In response, legislators filed a lawsuit claiming Dayton's actions are unconstitutional because the Legislature is a separate and equal branch of government. On July 19, a Ramsey County judge found Dayton's veto unconstitutional. Dayton will appeal to the Supreme Court.
There's never a dull moment at the Capitol.
Multiple wins for the MNCPA
Amid the unpredictability at the Capitol were many wins for the MNCPA. Many items on our legislative agenda were passed, including some that had been worked on for many years. Most notably, a 400-page tax bill was passed and signed, creating new opportunities for CPAs to serve as advisers to individuals and small businesses looking to understand the latest tax changes.
Shortly after session convened, legislators addressed and unanimously passed limited federal conformity. It was the earliest conformity has passed in at least 12 years. Federal conformity is a perennial issue on the MNCPA legislative agenda. After not having a tax bill in 2015 and 2016, legislators heard the concerns of taxpayers and CPAs and moved quickly to provide tax relief early before the filing season began. I'm hopeful early conformity will continue in future years.
The first conformity bill of 2017 did not address estate tax, Section 179 or bonus depreciation, but it did address many changes Congress made between Dec. 31, 2014, and Nov. 15, 2016.
Activity slowed significantly after the early passage of the conformity bill as legislators worked to develop the 2017 omnibus tax bill. Dayton vetoed the first tax bill that included significant additional federal conformity, including full conformity to Section 179 and the estate tax. Neither made the final cut in the tax bill that was passed during the special session.
Estate tax threshold increase
In the final tax bill signed into law, language was included that increases the estate tax exemption threshold to $3 million by 2020.
Department of Revenue residency factors
The 2017 tax bill did more than just address tax policy changes affecting state revenues; it also made changes to the DOR's 26 residency factors used when determining if a taxpayer is domiciled in Minnesota -- factors that were adopted in the 1980s and not updated since.
Two 2013 Minnesota Supreme Court cases cited the location of a taxpayer's professional advisers as one of the criteria that can be used to determine domicile in Minnesota. Because of these court decisions, clients of Minnesota-based financial advisers were encouraged by professionals in other states to sever all ties with their advisers in Minnesota. The result has been a loss of business for Minnesota CPAs.
Your clients in other states most likely shared concerns about having a Minnesota-based professional adviser and the potential for that business relationship to be used against them in a DOR audit. The MNCPA position was that professional advisers in other states should not be allowed to use the court cases as a marketing tool to encourage your clients to transfer their business out of Minnesota.
Beginning Jan. 1, 2017, both the DOR and Minnesota courts are prohibited from using the location of an individual's CPA, attorney or financial adviser when determining if that individual is domiciled in Minnesota. The new law also prohibits using the location of a financial institution in determining domicile in Minnesota.
Taxpayer bill of rights -- vetoed
In an ever-changing economy, consistent guidance from tax administrators is an integral part of ensuring taxpayer and tax preparer compliance with tax laws.
The MNCPA supported legislation to update the current taxpayer bill of rights and make several administrative tax law changes. The changes were part of the first tax bill that Dayton vetoed. These changes would have provided additional protections and certainty for those trying to comply with the law. Unfortunately, the updates did not make it into the final tax bill passed during the special session.
The proposed changes included:
- A requirement for the DOR to establish a private letter ruling program similar to the Internal Revenue Service's private letter program. The guidance would provide a taxpayer a rationale and explanation of DOR positions on specific tax laws.
- A limitation of DOR authority to make tax assessments that are inconsistent with prior DOR written positions established in previous audits.
- An expansion of the DOR commissioner's authority to abate penalties.
- A new law allowing taxpayers the ability to request a dual audit if the taxpayer is being audited for sales and use tax, or individual income or corporate franchise tax.
Unlicensed tax preparer regulations
After nearly a 10-year absence, the regulation of unlicensed tax preparers found its way back into conversations at the Capitol and changes were included in the special session tax bill.
Previous proposals to regulate this group of preparers focused on creating a new licensing or registration system. This year was different. Legislators focused on providing new regulation to increase the DOR's authority over unlicensed tax preparers.
New tax preparer standards of conduct were added and penalties were created if a preparer engages in the following actions:1
- Failing to provide the preparer's identification number on the return if otherwise required under state or federal law
- Reporting household income on homestead credit state refund or renter property tax refund returns that the preparer knows or should know is inaccurate
- Engaging in conduct subject to civil penalty
- Failing to conform to the standards of conduct for preparers in administrative rules
- Engaging in incompetent or disreputable conduct as provided in administrative rules
CPAs, attorneys, enrolled agents or employees acting at a tax preparer's directions are exempt from the new unlicensed tax preparer regulations. However, there are a limited number of situations where this group of professionals would not be exempt. Those include:1
- An individual who has had his or her professional license suspended for cause (other than failure to pay a professional license fee)
- An individual who has been convicted of a crime involving dishonesty or breach of trust
- An individual who has been censured, suspended or disbarred under U.S. Treasury Department Circular 230, governing practice before the IRS
- An individual who has been sanctioned by a civil or criminal court
- An individual who has demonstrated a pattern of willful disreputable conduct
Tort reform - vetoed
Whether you are a CPA working in business and industry or public practice, tort reform and accountant liability statutes affect the way the CPA profession operates. These laws can also impact your ability to work with clients or recruit prospective clients.
The 2017 legislative session presented an opportunity for change that would benefit Minnesota businesses and CPAs working in public accounting. House and Senate committees held favorable hearings on many proposals. Changes to judgment interest rates were included in the first public safety bill that was vetoed by Dayton.
Unfortunately, the changes were not part of the bill passed during the special session and tort reform will continue to be a part of future legislative debates.
Specific changes sought by the MNCPA included:
- Reducing the statute of limitations from six years to possibly four years.
- Reducing pre- and post-judgment interest rates on judgments awarded by the courts. The current rate is 10 percent. Proposed changes would have reduced the rate to a market-based rate with a bottom rate of 4 percent.
- Changes to appeal bond statutes.
Other notable items in the tax bill
The 2017 tax bill was more than 400 pages and filled with many significant tax changes. The bill summary provides a great analysis of the changes.
A few highlights include:
- A new refundable credit for contributions to 529 college savings plans
- A new refundable credit for principal and interest payments on student loans
- A property tax exemption from the state general tax for the first $100,000 of commercial industrial property
- The state general tax is frozen at the 2018 level
- Beginning July 1, 2019, market place providers not located in Minnesota will be required to collect and remit sales tax; this could begin sooner if the U.S. Supreme Court or Congress allow for the collection of sales tax by remote sellers
- A new school building bond agricultural credit equal to 40 percent of the school district debt levy on agricultural property
What we learned
You may not agree with everything that passed in 2017, but by most accounts, it was a productive session that resulted in significant legislation. More often than not, conformity bills are passed later in session usually resulting in taxpayer and CPA frustration. Hopefully, legislators have a better understanding of early conformity and will continue what they started in 2017. It's also important to remember that a tax bill hadn't been signed into law in three years, so there were many changes queued up.
Other notable bills passed this year include:
- Transportation funding
- Capital bonding funding
- Health care reform
- Real ID
And, because of the progress made between Dayton and the Legislature, they wrapped things up in a short special session and avoided another government shutdown.