Use Tax Collection on Income Tax Returns | Options for Minnesota

This section discusses three options that could increase use tax collections in Minnesota:

  • Eliminate the $770 de minimis exemption and provide for use tax reporting on the income tax return (either with or without a lookup table)
  • Eliminate the $770 de minimis exemption and require taxpayers with purchases below that amount to file use tax returns
  • Retain the de minimis exemption and provide for use tax reporting on the income tax return

Option #1: Eliminate de minimis exemption and require reporting on the income tax return

Experience in other states suggests that Minnesota could increase use tax collections by repealing its de minimis exemption requirements and placing a use tax reporting line on the individual income tax return. Additional collections could equal about $4.6 million if Minnesota included a lookup table for taxpayers to use in estimating liability, and about $1.6 million without a lookup table. Estimates depend on Minnesota taxpayers reporting use tax liability at similar rates to taxpayers in other states. Use tax collected in other states was divided by the state’s typical combined state and local sales/use tax rate to determine total purchases subject to use tax, and then the total from other states that apply the sales tax to clothing was adjusted to reflect Minnesota’s exclusion of clothing from the sales tax base.20

Table 3 shows the participation rate and average purchases reported per return (adjusted for states that apply the sales/use tax to clothing) for each state collecting use tax on its income tax return, with the exception of Connecticut.21 The final column shows the amount of use tax that Minnesota would collect through the income tax system if it experienced the same participation rate and average amount of purchases in each of the states listed. The estimated collections for Minnesota assume 2.6 million returns filed annually by resident taxpayers, the total for tax year 2009.

Table 3
Estimated Use Tax Collected on Income Tax Returns in Minnesota
if de minimis exemption repealed and income tax reporting implemented
(based on data from other states)

Estimated Use Tax Collected on Income Tax Returns in Minnesota

The final rows of Table 3 show the aggregate results for all states with use tax reporting on the income tax return, and the aggregates for states that do and do not provide a lookup table. While average purchases per return is higher in states without a lookup table—$1,064 compared with $795—participation rates are higher in states that do provide a lookup table—3.1 percent of returns, compared with 0.6 percent.

Applying experience in other states to Minnesota gives a wide range of estimates. Use tax collections in Minnesota would equal $15.3 million if Minnesota’s experience corresponded to Maine’s with 9.8 percent of returns reporting average purchases of about $869. However, collections would only equal about $400,000 if Minnesotans behaved more like Alabamans with only 1.3 percent of returns reporting average purchases of $175. What would actually happen in Minnesota would depend on how many Minnesotans make purchases subject to use tax, how much they purchase, and how well they comply with reporting use tax liability on the income tax return. To the extent those factors vary with geography, Minnesota results might be expected to be similar to the experience in Michigan and Wisconsin. Applying participation rates and average purchases from these two states suggests collections of between $1.8 million and $3.0 million in Minnesota.

Repealing the de minimis exemption and placing a reporting line on the income tax return, but not providing a lookup table for estimating use tax liability, could result in an additional $1.1 million in use tax collections in Minnesota. The amount of revenue Minnesota would collect by repealing the use tax de minimis exemption and placing a use tax reporting line on its income tax return would depend on the participation rate and the average amount of use tax purchases reported by return.22 If Minnesota’s experience was like that of the 13 states listed in Table 2 without lookup tables, collections would be close to the estimated $1.1 million per year.
Use tax collections could be higher—up to $4.4 million—if Minnesota provided a lookup table for taxpayers to use in estimating liability. States with lookup tables tend to experience a higher participation rate and higher overall collections than states without lookup tables. If Minnesota were to employ a lookup table for use tax liability in the income tax instructions, collections could reach $4.4 million if Minnesota taxpayers behaved similarly to taxpayers in other states with lookup tables. The actual amount collected would depend on whether Minnesota taxpayers complied with the reporting requirement at a similar rate to taxpayers in other states.

Option #2: Eliminate the de minimis exemption and require taxpayers to file use tax returns

Simply repealing the exemption without requiring reporting on the income tax return could result in about $100,000 per year in additional use tax collections. This would be a return to individual use tax reporting requirements as they existed prior to enactment of the de minimis exemption. Each individual would be required to file a use tax return if he or she made any purchases subject to use tax—through a catalog, on-line, or while traveling out of state. Many taxpayers would remain unaware of the use tax obligation, though technically even those with only small amounts of purchases would owe the tax. At the time the exemption was enacted, the Department of Revenue estimated the loss of about $100,000 annually through exempting the first $770 of purchases from the tax.23

Option #3: Retain the de minimis exemption and allow for use tax payment on the income tax return

Minnesota would not be likely to collect much additional use tax by placing a line on the income tax return if the de minimis exemption provision were retained. House File 2682, introduced during the 1998 legislative session, proposed adding a line to the income tax return for use tax reporting, but left the exemption in place. The Department of Revenue estimate for this bill indicated that the revenue gain was “indeterminable, [but] it appears any impact would be small.”24 The same is likely to be true today.

Revenue gains from adding a use tax line to the income tax return would be offset by administrative costs to the Department of Revenue. Inclusion of the use tax line would require an additional line on the individual income tax return and additional instructions in the booklet. The change would also require programming changes to account for the amount of use tax paid via the income tax return.25 Earlier estimates prepared by the department did not detail the amount of these administrative costs.

Use Tax Collection on Income Tax Returns | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, Use Tax Collection on Income Tax Returns in Other States, written by legislative analyst Nina Manzi.

20 Average purchases reported in states that tax clothing were adjusted downward by 11.1 percent, to reflect Minnesota’s exclusion of clothing from the tax base. The adjustment was calculated based on the share that clothing makes up of e-commerce, as reported by U.S. Census Bureau’s 2009 E-Stats report.

21 See footnote 11, supra.

22 Connecticut is omitted from the analysis (see footnote 11, supra).

23 Minnesota Department of Revenue, Analysis of 1996 Tax Conference Committee Report, April 11, 1996; see footnote 4, supra.

24 Minnesota Department of Revenue, Analysis of House File 2682, January 29, 1998.

25 Ibid.