The 2018 legislative session: What could have been
August 2018 Footnote
After an eventful end to the 2017 legislative session, legislators were faced with an abbreviated 2018 session that didn't convene until Feb. 20. Sessions in even-numbered years -- the second of the biennium -- tend to be shorter and generally focus on capital bonding, supplemental budget requests and addressing hot topics that developed between sessions. The state's budget is set in odd-year legislative sessions so, in theory, less time is needed to conduct business in even-year sessions.
If only -- the 2018 session was a little different.
As you're aware, the Tax Cuts and Jobs Act (TCJA) passed in December 2017 -- only two months before the Legislature convened. Traditionally, tax bills are passed in odd-year sessions, but the federal changes created an opportunity -- and need -- for another tax bill. Ultimately, the Legislature passed two tax bills and a supplemental state government finance bill in 2018, but all three were either vetoed or line-item vetoed by Gov. Mark Dayton.
Other issues rising to the top of the debate included the failed roll out of the new Minnesota Licensing and Registration (MNLARS) system, school safety, gun laws, education funding, opioids and elder abuse. Like the tax bills, many of these also went unaddressed or vetoed by Dayton.
Barring a special session, the 2018 regular session was the last one for Dayton, who retires at the end of the year.
Status of MNCPA priorities
Federal conformity remains a perennial issue on the MNCPA legislative agenda. Some years, policymakers act fast and pass an early conformity bill. Other years, policymakers don't agree what conformity should look like and changes aren't signed into law. This year, the Legislature passed two tax bills that would have conformed to many changes created by the TCJA but, as previously noted, both were vetoed.
The 2019 session begins in January, and legislators have indicated conformity can be addressed early in the next session.
The following provisions were included in the two vetoed tax bills:
- A change to Minnesota's tax basis from federal taxable income (FTI) to federal adjusted gross income (AGI).
- Full conformity for Section 179.
- An allowance for more businesses to use cash-based accounting.
- An individual income tax rate reduction for the two lowest rates -- a reduction from 5.35 percent to 5.25 percent, and 7.05 percent to 6.85 percent.
- A corporate rate reduction and corporate repeal AMT.
- $50 million for school funding.
Items not included in either vetoed tax bill:
- A repeal of any changes passed in the 2017 tax bill.
- The 20-percent federal pass-through deduction.
- Full conformity to bonus depreciation.
Conformity would have provided clear guidance for tax planning. Minnesota businesses and individuals now face additional uncertainty and complexity when filing their Minnesota 2018 tax returns. Because of the growing uncertainty around filing, the MNCPA public relations team experienced -- and continues to see -- an increase in media placements of our members to discuss what nonconformity means for Minnesotans.
Tax on professional services (accounting services)
You may recall that legislation proposing a new tax on professional and accounting services was introduced in the final week of the 2017 session, with legislators planning to debate its merits in 2018. Luckily, the Legislature's priorities and resources were instead shifted to the TCJA.
There continues to be many potential problems with a tax on services, including:
- Multiple points of delivery and use.
- Definition of an accounting service.
- Multiple points of creation of the service.
- Multiple taxing jurisdictions.
- Consumers being encouraged to shop for services out of state.
The Wayfair v. South Dakota ruling adds a new dynamic to future tax on professional services conversations and could result in more proposals than in previous years.
Estimated revenue generated from a professional services sales tax
*Data taken from 2016 Minnesota Department of Revenue Tax Expenditure Budget
Should this debate come up next session, the MNCPA will continue to oppose a tax on professional services.
County government audit reviews
Earlier this year, the Office of the Legislative Auditor published a report that was critical of the lack of due process the Office of the State Auditor (OSA) afforded CPA firms whose work was reviewed by the OSA. The report was also critical of the OSA for not thoroughly supporting its findings.
Currently, there isn't a published set of guidelines used by the OSA when conducting reviews of county government audits performed by CPA firms. The Legislature considered a bill to create new guidelines and provide a process for CPA firms, so they know what to expect when working with the OSA. The legislation passed the Senate 67--0, and it was included in the House omnibus state government finance bill that was ultimately vetoed by Dayton.
The vetoed bill included:
- A new requirement to provide a 30-day notice before beginning a review.
- Allowing CPA firms 30 days to respond to OSA inquiries requesting information.
- Requiring the OSA to provide a draft 30 days prior to issuing a final report.
- Requiring the OSA to conduct an exit conference with the CPA firm 20 days before issuing the final report.
- Requiring written comments be part of the final report if a CPA firm chooses to submit comments.
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 grow your business, work with clients or recruit prospective clients.
Tort law changes supported by the MNCPA last year were again included as part of the MNCPA 2018 legislative agenda. The House included pre-judgment interest rate changes in its omnibus public safety bill, but this change was not included as part of the final conference committee report negotiated between the House and Senate.
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.
Taxpayer bill of rights
In an ever-changing economy and an increasingly complex tax system, consistent guidance from tax administrators is an integral part of ensuring taxpayer and tax preparer compliance with tax laws.
The 2018 MNCPA legislative agenda included supporting updates to the taxpayer bill of rights. This issue was debated last year, and changes were included in the 2017 tax bill that Dayton vetoed. This year, the Legislature focused on other priorities (such as the TCJA) and changes to the taxpayer bill of rights were not debated.
The proposed changes would have provided additional protections and certainty for those trying to comply with the law.
The proposed changes included:
- A requirement for the Minnesota Department of Revenue (DOR) to establish a private letter ruling program like 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.
The MNCPA continues to support resources and regulations to make compliance easier for businesses and individuals.
Planning has started for 2019 and your ideas are important. If there are topics you would like the Legislative Issues Committee to consider, please contact any of the committee members or Geno Fragnito at email@example.com.