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What did, didn’t happen at the Capitol

Advocacy

Geno Fragnito, MNCPA director of government relations | August 2021 Footnote

Editor's note: Updated July 29, 2021

It’s always expected there will be twists, turns and a few outright curveballs each legislative session at the Minnesota Capitol. The 2021 legislative session proved no different when it kicked off in January and wrapped up, officially, six weeks after initially expected.

Contributing to the Capitol consternation is that Minnesota is, once again, the only state with divided control of its Legislature, with the DFL holding the reins of the House and Republicans overseeing the Senate.

If you followed the daily (and often more frequent) news of the goings-on, you know that Minnesota, once again, was at risk for a partial government shutdown if the Legislature and Gov. Tim Walz did not agree to a two-year budget by July 1. In part, this is why the constitutional deadline to adjourn the regular session was set to May 17: extra time to complete the process if not all agreements were made by then.

Add in the ongoing ramifications of the COVID-19 pandemic, and we had a banner year of unknowns and uncertainties. A tax bill passed in the early hours of July 1, and the final piece of legislation approved in the special session was completed just in time to avoid a partial government shutdown. This is par for the course these days as we’ve learned that special sessions are more of a regular occurrence than an exception. Since 1981, Minnesota has had 36 special sessions compared to 23 from 1857–1980.

MNCPA issues review

The MNCPA remains committed to advocating for policy that reflects the needs of Minnesota CPAs and the clients you serve and businesses for which you work. Here’s a look at top issues from this legislative session.

Federal conformity

Federal conformity remains a perennial issue at the Minnesota Capitol. Prior to the 2021 legislative session, Minnesota had not conformed to federal acts since December 2018.

Here are the pieces of legislation Minnesota considered conforming to this session:
  • Taxpayer Certainty and Disaster Tax Relief (TCDTR) Act of 2019
  • Families First Coronavirus Response Act (FFCRA) Act of 2020
  • Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020
  • Paycheck Protection Program Flexibility Act (PPPFA) of 2020
  • Public Law No. 116-147 (S.4116) of 2020
  • Taxpayer Certainty and Disaster Tax Relief (TCDTR20) Act of 2020
  • COVID Tax Relief Act (COVIDTRA) of 2020
  • American Rescue Plan Act of 2021
Several of these items were related to assistance to help with the economic recovery from the effects of COVID-19, which created a new sense of urgency.

The Legislature passed a tax bill containing many items for which the MNCPA and its members advocated, but the bill didn’t fully conform and left some items for the 2022 session.

Highlights from the tax bill include many issues the MNCPA advocated for and include the following:
  • PPP loan forgiveness conformity.
  • Unemployment insurance (UI) compensation exclusion conformity.
  • Economic injury disaster loans (EIDL) exclusion.
  • SBA loan assistance exclusion.
  • Passthrough entities are allowed to file as C Corporations as a SALT cap workaround.
  • Partnership audit regulation conformity.
Had Minnesota not conformed with the items included in the tax bill, taxpayers already under financial stress and facing economic hardship would have seen additional costs and additional compliance burdens. The MNCPA will continue advocating for conformity and continue meeting with legislators and the Minnesota Department of Revenue (DOR) as they debate future changes.

Partnership audits

In 2015, Congress passed changes to the partnership audit rules included in the Internal Revenue Code. These new changes, allowing the IRS to assess and collect audit adjustments at the entity level, were effective Jan. 1, 2018. As a result of the 2015 changes, the Multistate Tax Commission developed model legislation for states to follow.

Minnesota was one of the states needing to make statutory changes in order for Minnesota partnerships to also choose the entity pay option for any Minnesota adjustments resulting from IRS adjustments.

After many years of discussion, in 2021 the Legislature passed changes supported by the MNCPA. These changes create a system that is easier to comply with, more efficient to administer and will reduce cost for both partnerships and tax administrators.

Taxpayer bill of rights

Authoritative guidance from tax administrators is very important for taxpayers and tax preparers as they file returns and comply with tax laws. This guidance is also vital in determining what, if any, tax may be owed to the state. The taxpayer bill of rights legislation supported by the MNCPA includes many important changes that would help ensure this happens.

Highlights include:

Establishing a private letter ruling program to address unique tax situations that may not fit perfectly with the way a tax law is written.

Limiting the DOR’s authority to make sales tax assessments that are inconsistent with prior audit positions taken by the department.

Expanding the DOR’s authority to abate penalties and allowing a taxpayer to choose a dual audit if the DOR is auditing both sales and use tax and either individual income or corporate franchise tax.

In 2021, the MNCPA’s focus was to establish a private letter ruling program. This would provide certainty for taxpayers and businesses when they are taking a tax position and for tax preparers when they are advising. The Senate included private letter rulings in its tax bill, but a new program was not included in the final tax bill.

Minnesota is one of two states currently without some form of private letter ruling program. Voluntary compliance is more cost-effective for all and easier to accomplish with guidance from those charged with enforcing the tax code. The conversation will continue in the 2022 session.

Occupational licensing

Anti-licensing initiatives around the country continue to challenge the need and value of licensing. A bill was introduced again in Minnesota in 2021, but no action was taken.

The proposals vary from state to state. Options include licensure reduction or elimination, eliminating barriers to entry, requiring a sunset review of existing regulations, and implementing a sunrise system to prevent existing occupations from expanding oversight. The legislation introduced in Minnesota follows the most expansive model and simply states, “The state must not enforce any statute, session law, or administrative rule that relates to an occupational licensing requirement.”

Changes in CPA licensure requirements could affect substantial equivalency and mobility and could affect CPA licensure. Changes could also make it difficult, if not impossible, for Minnesota CPAs to work in other states without first obtaining a license in each state.

The MNCPA continues to work with bill authors and advocate for an exemption for CPA licensure requirements.

Tax on professional (accounting) services

The state’s financial position and stability was unknown when the 2021 legislative session started in January. As in the past, a tax on professional services was one of the many proposals discussed to raise revenue. As the session progressed, the state’s finances improved, and a surplus was forecast in February. This allowed legislative leaders to consider a budget without new revenue.

The surplus was also good news for businesses. No tax on services proposals were introduced and no new taxes were included in the final tax bill passed in the closing hours of the special session.

Other issues

The MNCPA legislative agenda included additional items that were not addressed by the Legislature this year. The pandemic, like the 2020 legislative session, transformed this year’s discussion and limited the number of bills legislative leaders were willing to consider.
These items will carry over to future years:
  • Debt settlement regulations. Legislation has been introduced to clarify what services fall under the debt settlement statutes. The MNCPA opposes any changes that affect services CPAs currently provide in the normal course of business.
  • Trust residency factors. Recent guidance and questionnaires from DOR have indicated the location of a trust’s adviser could be a determining factor to establish Minnesota nexus. This factor is prohibited for individuals, and the MNCPA supports extending the prohibition to trusts. Without policy changes, there would be a disincentive for out-of-state trusts to use Minnesota advisers.
  • Tax Court decisions. The Minnesota Tax Court in a couple recent cases ruled in favor of the taxpayers. The DOR didn’t appeal the verdicts, but it also isn’t following the court’s rulings. Businesses rely on court decisions when assessing their own tax positions, and consistent application of the law helps ensure voluntary compliance.

Thank you for your efforts

As we look to 2022, I cannot underscore the importance and difference your meetings, phone calls and emails made with legislators, not only this year, but in the past. Establishing those relationships, particularly in a time when we don’t have a “big” issue to hammer home, aids in having our voices heard when it’s most crucial.

We saw that work play out this year. Some of the items on the 2021 MNCPA agenda were included in the tax bill and passed in “only” one year of effort, while others have taken many years to cross the finish line. Others, as you know, remain unresolved.

Now is the time to get involved. Legislators are in their home districts in the summer and fall and, in most cases, are available, both in public and private, to hear from you. Legislators want to know how issues affect you and the businesses and clients you represent. Share your insight and lay that groundwork now so they see a familiar face when you reach out during future legislative sessions.