Q: When a company sells and ships goods from outside Minnesota into Minnesota, does the seller collect the local sales tax from his own state, or the local Minnesota sales tax?
A: The seller collects sales tax according to the local Minnesota sales tax when the seller is registered with the Minnesota Department of Revenue. Seller does not collect local taxes from his own state.
Q: If the seller does not charge the local Minnesota sales tax, is the buyer required to pay tax on the goods?
A: Yes. If the seller is not registered to collect local Minnesota sales tax, the buyer in Minnesota must pay a Minnesota use tax.
Minnesota Out-of-State Sales Tax Law Analysis
A seller from out of state who ships product to a buyer in Minnesota will collect sales tax at the local Minnesota rate.(1) For the purposes of this post, both “seller” and “buyer” refer to companies, not individuals. The selling company will not collect sales tax at the rate of its home state. Collecting Minnesota local sales tax as an out-of-state company is allowed only when the out-of-state company is registered to collect local Minneapolis sales tax with the Minnesota Department of Revenue.(2) In some instances an out-of-state company is required to register and collect Minnesota sales tax, and in others registering and collecting Minnesota sales tax is voluntary.(3) When the seller does not collect a sales tax from the buyer, the buyer is required to pay the Minnesota use tax on the product.(4)
Out-of-State Companies Charge the Local Minnesota Sales Tax
Minnesota Statute § 297A.62 imposes a sales tax on sales made in Minnesota as well as sales made “to a destination in [Minnesota] by a person who is required to have or voluntarily obtains a permit.” In the case of a seller outside Minnesota making shipments to a buyer in Minnesota, the seller will either be required to collect Minnesota sales tax, or can choose to collect Minnesota sales tax.(5) According to the Minnesota Revenue Fact Sheet 164 on Local Sales and Use Taxes
[a]ll retailers who are registered to collect Minnesota sales tax and are doing business in an area with a local tax must be registered with the Minnesota Department of Revenue to collect that local tax. This includes sellers from outside the locality who . . . ship or deliver tangible personal property to the local area.
The Fact Sheet is explaining that an outside seller who ships products to Minnesota and is not already required to do so, can choose to register with the Department of Revenue and begin to collect local Minnesota sales taxes from buyers.
There are many situations in which an out-of-state seller is required to register with the department of revenue and collect Minnesota sales taxes. Minnesota Statute § 297A.66 explains that if a seller is “maintaining a place of business” in the state the seller is required to register to collect sales tax in Minnesota.(6) The statute defines “maintaining a place of business” as an out-of-state seller that has the following: an office, distribution center, warehouse or the like in Minnesota or has a representative, agent, salesperson, solicitor or the like working in Minnesota.(7) Additionally, a retailer which conducts business outside of the state and sends products to a destination within the state who does not maintain a place of business in Minnesota will be required to collect Minnesota sales taxes under certain conditions.(8) If the outside seller is not “maintaining a place of business” in the state and does any of the following eight actions, the seller must likewise register with the Department of Revenue. Section 297A.66 states that if the seller engages in the regular or systematic soliciting of sales from potential customers in this state by:
- distribution, by mail or otherwise, of catalogs, periodicals, advertising flyers, or other written solicitations of business to customers in this state;
- display of advertisements on billboards or other outdoor advertising in this state;
- advertisements in newspapers published in this state;
- advertisements in trade journals or other periodicals the circulation of which is primarily within this state;
- advertisements in a Minnesota edition of a national or regional publication or a limited regional edition in which this state is included as part of a broader regional or national publication which are not placed in other geographically defined editions of the same issue of the same publication;
- advertisements in regional or national publications in an edition which is not by its contents geographically targeted to Minnesota but which is sold over the counter in Minnesota or by subscription to Minnesota residents;
- advertisements broadcast on a radio or television station located in Minnesota; or
- any other solicitation by telegraphy, telephone, computer database, cable, optic, microwave, or other communication system
The seller is required to collect Minnesota sales tax from the purchaser.(9) Sellers that not only ship goods to Minnesota, but that are further involved in Minnesota and drawing business from Minnesota, need to collect the Minnesota sales tax. If a seller does none of these things, keeps out of Minnesota, and is contacted separately by a Minnesota purchaser, there is no requirement to collect Minnesota sales tax; however, the seller still can if previously registered to do so.
There is an exemption to charging local sales tax according to the Minnesota Revenue Fact Sheet 164. This exemption states “[d]o not charge local sales tax on sales of taxable items when . . . you ship or deliver items to your customer outside the local area.” It is important to note that this does not address sellers from outside Minnesota who ship to Minnesota. Rather, this exemption addresses Minnesota sellers that ship out-of-state to other purchasers, in which case, Minnesota local sales tax would not be charged. The outside buyer state may have different tax laws, but most likely will be similar to Minnesota tax laws, in that the Minnesota seller would have to abide by the buyer’s state sales tax laws.
An out-of-state seller must register to collect Minnesota sales tax under two circumstances. First, when the seller ships goods to a Minnesota purchaser and maintains a place of business in Minnesota. Second, when the seller does not maintain a place of business but has some sort of involvement in Minnesota, usually relating to advertising and soliciting sales from a Minnesota market. It is clear that a seller from out-of-state does not collect sales tax from its own state on the sale in Minnesota. If the seller chooses not to register in Minnesota and does not collect the sales tax, the buyer becomes responsible for the tax on the goods in Minnesota.
When Seller Does Not Collect Minnesota Sales Tax, Buyer Must Pay Minnesota Use Tax
As mentioned, an out-of-state seller is not always required to collect Minnesota sales tax and may choose not to do so. The purchaser of the goods is not off the hook, and is responsible for paying the use tax on the goods.(10) Section 297A.63 explains that when a buyer purchases goods to be used in the state of Minnesota and does not pay the sales tax, the state imposes a use tax on the goods.(11) The use tax is the same amount as the Minnesota sales tax.(12)
Minnesota imposes a use tax for several reasons. Primarily, a use tax prevents buyers from Minnesota who travel to a different state with lower or no sales tax, and who bring the goods back to Minnesota to use.(13) This is particularly a problem when a buyer could purchase the same goods in Minnesota including the Minnesota sales tax, but chooses to avoid doing so. When a buyer does go to a different state to try and pay a lower sales tax, he still must pay a use tax in Minnesota. This tax is then the difference between the sales tax rate of the lower state and the sales tax rate of Minnesota.(14) When an outside seller fails to collect sales tax from the Minnesota purchaser, and that purchaser uses the goods in Minnesota, the purchaser then has an obligation to pay a use tax. If no use tax is imposed in Minnesota, and no sales tax paid to Minnesota from the purchase, it would be a way for a buyer to avoid paying taxes on the goods altogether, which is inherently contradictory to the sales tax system.
When seller does not collect sales tax when the buyer purchases goods from him, Minnesota local taxes govern the goods. The buyer will be required to pay a use tax on the items purchased.
In conclusion, companies that ship products from one state into Minnesota will have to follow the sales tax rate from Minnesota. These companies will either be required to collect Minnesota sales tax with the purchase, or can choose to do so. A company is required to collect Minnesota sales tax at the local rate when they maintain a place of business in Minnesota, or try to market and get business directly from Minnesota. If a company chooses to voluntarily collect Minnesota sales tax on the purchase, it must register with the Minnesota Department of Revenue. When a company decides not to collect sales tax on the purchase, the buyer in Minnesota becomes responsible for paying the use tax on the goods.
- Minn. Stat. § 297A.62 subdiv. 1 (2011).
- Minn. Stat. § 297A.83 subdiv. 1 (2011); see Minnesota Revenue, Local Sales and Use Taxes: Sales Tax Fact Sheet 164 (Dec. 2011), http://www.revenue.state.mn.us/businesses/sut/factsheets/FS164.pdf.
- Minn. Stat. § 297A.62 subdiv. 1.
- Minn. Stat. § 297A.63 subdiv. 1(a)-(b) (2011).
- Minn. Stat. § 297A.83 subdiv. 1. (directing those retailers that are required to collect Minnesota sales tax to Minn. Stat. § 297A.66 and further stating “(b) A retailer making retail sales from outside this state to a destination within this state who is not required to obtain a permit under paragraph (a) may nevertheless voluntarily file an application for a permit.”)
- Minn. Stat. § 279A.66 subdiv. 2.
- Id. subdiv. 1(a)(1)-(2).
- Id. subdiv. 3
- Id. subdiv. 3(a)(1)-(8).
- Minn. Stat. § 297A.63 subdiv. 1(a)-(b).
- Id. See also Minnesota Revenue, Minnesota Sales and Use Tax Instruction Booklet, 3 (Oct. 2011), http://www.revenue.state.mn.us/Forms_and_Instructions/sales_tax_booklet.pdf (stating that the current sales tax rate is 6.875 percent and that the rate is the same for both sales tax and use tax).
- Minneapolis Star & Tribune Co. v. Minn. Comm’r of Revenue, 460 U.S. 575, 577 (1983) (“[T]his use tax protects the state’s sale tax by eliminating the residents’ incentive to travel to states with lower sales taxes to buy goods rather than buying them in Minnesota.”); See also Morton Bldgs., Inc. v. C.I.R., 488 N.W.2d 254, 257 (Minn.1992) (explaining that use tax is in place to put in-state and out-of-state sellers on the same playing field); Dahlberg Hearing Sys., Inc. v. Comm’r of Revenue, 546 N.W.2d 739 (Minn. 1996) (holding that bringing goods purchased out of states for use in Minnesota were subject to a use tax if actually used in Minnesota).
- Minnesota Sales and Use Tax Instruction Booklet at 3.