Minnesota Sales and Use Tax Guide: Rates, Nexus & Exemptions

Sales and Use Tax Basics in Minnesota

Sales Tax

As is typically the case for US states, Minnesota applies sales tax to most retail sales of goods and certain specified services. The sales tax applies to the sales price, which is the total of all charges that are part of the sale, including the retail price of goods and services, fabrication labor, delivery charges, installation labor, service charges, and any other charges that are a condition of the sale. 

Generally, if goods and services are subject to sales tax, any other item that is part of the sale is taxable. However, the sales price does not include credit allowed for trade-in, terms or cash discounts, taxes and fees legally imposed directly on the customer, interest charges, or coupons.

Use Tax

The Minnesota use tax applies when businesses or individuals purchase, lease, or rent taxable items or services for their business or personal use, and the seller does not charge Minnesota Sales Tax. The use tax is a complementary tax to sales tax. It is due when individuals or businesses bring items into  Minnesota or when they take them out of inventory for a taxable use. 

Minnesota Sales and Use Tax Rates

The sales and use tax rates in Minnesota are identical. The statewide sales and use tax is 6.875%. In addition to the statewide rate, the final amount of due taxes is combined with all applicable local tax rates. The local rates include the Minneapolis Special Local Taxes and other special local taxes applicable to specific locations. For example, Detroit Lakes has a 1% food and beverage tax, a 6.875% state general rate sales tax, a 0.5% sales and use tax, a 0.5% Becker County Transit Tax, and a 2.5% liquor gross receipts tax, if applicable.

Tax-Exempt Transactions

Knowing when not to charge sales tax is equally important as knowing when businesses need to charge, collect, and remit it. Under the Minnesota rules and regulations, sales tax is not charged when shipping or delivering products to consumers outside of Minnesota, when selling items that are exempt by law, or when providing non-taxable services.

Items or goods that are exempt from sales tax are divided into three categories: clothing for general use, food or grocery items, and prescription and over-the-counter drugs intended for human use. Additionally, since 2023, secure firearm storage units have been exempt from sales tax if they meet the required conditions. Furthermore, most personal and professional services are exempt from sales tax.

Nexus Rules in Minnesota

Taxable persons with physical presence, remote or out-of-state retail sellers, and marketplace providers or facilitators are all liable for registering for, collecting, and remitting sales tax if they meet the specified criteria. In essence, it is essential whether retail sellers, out-of-state retail sellers, or marketplace providers maintain a place of business in Minnesota.

Physical Nexus

Taxable persons with a physical presence in Minnesota must collect and remit sales tax if they maintain a connection to the state, such as having a physical location, like an office or warehouse, or storing inventory in a fulfillment center within Minnesota. Additionally, using employees, agents, or contractors to conduct business in the state, delivering goods with company-owned vehicles, offering taxable services, or owning property is sufficient to establish a physical nexus.

Economic Nexus

Remote or out-of-state retail sellers are required to register for sales tax in Minnesota if their total retail sales over the prior 12-month period exceed USD 100,000 or if they have 200 or more retail sales shipped to consumers in the state.

Marketplace Nexus

Marketplace providers of facilitators whose own and facilitated sales exceed USD 100,000 in retail sales shipped to Minnesota, or if they have 200 or more retail sales shipped to consumers in the Minnesota, must register for, collect, and remit sales tax from the first day of a calendar month that occurs no later than 60 days after they meet the threshold.

Click-Through and Affiliate Nexus

Click-through nexus rules were enacted in 2013, and under these rules, a retailer is presumed to have a taxable presence in a state if it agrees with a resident of that state who refers potential customers to the retailer, either through internet links or other means, in exchange for a commission or similar payment. In addition to the existence of the agreement, the total sales from such referrals to Minnesota customers must exceed USD 10,000 over the prior 12-month period ending with the most recent calendar quarter.

Affiliate nexus arises if the affiliated entity uses a similar business name and sells comparable goods or services in Minnesota. For example, if they have facilities such as offices, warehouses, or distribution centers that help fulfill the retailer’s orders, use trademarks or service marks in the state with the retailer's consent, perform services like delivery, installation, or repair of the retailer’s products in Minnesota, offer in-state pickup for the retailer’s goods, or share management practices, systems, employees, or transactions that help the retailer maintain its Minnesota market.

Taxable Goods and Services in Minnesota

Taxable sales include any retail sales, such as the sale, lease, or rental of tangible personal property or goods for any purpose other than resale, sublease, or subrent. Additionally, retail sales may include certain services. While most retail sales of goods are taxable, only certain personal, recreational, and business-related services are subject to sales tax.

Taxable services include admissions to amusement venues and sporting events, the use of amusement devices such as arcade games, and access to athletic or wellness facilities, including gyms, spas, and tanning salons. Additionally, memberships to sports facilities are also taxable. Furthermore, services such as building cleaning and maintenance, towing, parking, massages, lodging, and telecommunications fall under taxable categories.

Bundled Transactions and the True Object Test 

When a retailer sells two or more distinct and identifiable goods or products together for a single, non-itemized price, it constitutes a bundled transaction. As a general rule, if at least one product in the bundle is taxable, the entire bundled sale is generally subject to sales tax. However, there are some exemptions to this rule.

Nevertheless, even in situations where the sale may not be taxed, the seller may still owe use tax on the taxable items included in the bundle if the cost of those taxable components exceeds USD 100.

E-Commerce Framework

As the e-commerce sector grew, so did the number of remote or out-of-state sellers offering and selling goods and services to consumers across the US. Following the Wayfair ruling, Minnesota introduced economic nexus rules, which specifically target remote sellers selling to consumers within the state.

According to these rules, if the total sales over the prior 12-month period exceed USD 100,000 in retail sales or if they have 200 or more retail sales to consumers located in Minnesota, they must register for sales tax and start charging, collecting, and remitting tax to the Minnesota Department of Revenue.

However, these rules may differ for remote sellers that offer and sell goods and services through multiple channels, including online marketplaces.

Marketplace Rules

Remote sellers that sell goods and services through their website, online marketplaces, and other channels must determine their total retail sales made in Minnesota. If their total retail sales to Minnesota consumers exceed the threshold, they must collect and remit sales tax. 

However, remote sellers are only responsible for collecting and remitting sales tax on taxable sales made through their website and other channels. In contrast, marketplace providers are responsible for reporting sales made through online marketplaces. Nevertheless, if marketplace providers are not liable for sales tax, remote sellers must also collect and remit Minnesota sales tax on those taxable sales.

Digital Goods and Services

The retail sale, lease, or license to use a canned or prewritten computer software program is subject to sales tax, regardless of the method of delivery. These methods of delivery include, but are not limited to, electronic delivery, download, load and leave, and USB. On the other hand, custom computer software, created to meet a customer's specific needs, is exempt from sales tax.

Subscriptions to online hosted software accessed through the Internet, installed at and hosted from a remote server, and owned by the manufacturer or third-party vendor, for which users do not take any ownership or possession of the software, are not taxable.

Digital products, including digital audio and audiovisual works such as music, audiobooks, and movies, are subject to taxation. Additionally, retail sales of e-books, digital codes that provide purchasers with access to taxable digital products, e-greeting cards, and online video or computer gaming services are all subject to sales tax. In contrast, access to digital news articles, charts and graphs, data or financial reports, and digital photos and drawings is exempt from sales tax.

Digital Marketplace

Digital or online marketplaces offer sellers a unique opportunity to sell their goods and services to multiple customers across various states without the need to invest in developing their online stores and websites. However, these marketplaces are not exempt from sales and use tax rules and regulations if they meet the defined requirements. 

These requirements are known as the marketplace facilitator rules, in most US states, and in Minnesota, they are referred to as marketplace providers. For a marketplace provider to be liable for sales tax, it must facilitate a retail sale by listing and advertising the goods and services of its sellers. As an additional condition, marketplace providers must process payments from customers, either directly or indirectly through a third party, regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services.

Digital Platform Operator

Marketplace providers that meet all the specified conditions must register for sales tax if they exceed the USD 100,000 threshold or have 200 or more retail sales in Minnesota during a 12-month period. Both the marketplace providers' sales and the sales they facilitate on behalf of remote or online marketplace sellers are calculated for the threshold.

Marketplace providers may file separate sales tax returns for any facilitated sales on behalf of marketplace sellers. Although they are liable for reporting, collecting, and remitting sales tax, there are specific situations in which marketplace providers may be relieved of liability for not collecting the correct amount of tax.

The obligation to collect and remit sales tax lasts until the last day of the 12th calendar month following the calendar month in which the collection and remittance began. For marketplace providers to stop collecting and remitting sales tax, they must notify the Minnesota Commissioner of Revenue that they have stopped soliciting sales from customers in Minnesota and verify that they did not meet the thresholds during the 12 calendar months following the calendar month in which they were required to collect and remit sales tax.

Therefore, marketplace providers that comply with the reporting requirement, prove that the error was based on incorrect information from the seller, and are not affiliated with the seller, are relieved of liability for not collecting the correct amount.

Filing and Payment Requirements in Minnesota

Sales and use tax return filing and payment frequency depend on the monthly tax liabilities. If the average tax reported is less than USD 100 per month, taxable persons may file an annual tax return. When the average tax reported is between USD 100 and USD 500 per month, quarterly tax returns are required. Finally, monthly tax returns and payments are mandatory for taxable persons whose average reported tax is above USD 500 per month. In either case, the tax return must be filed online through the Minnesota e-Services system.

Penalties for Non-Compliance with Sales and Use Tax Requirements

There are several types of penalties defined for non-compliance with sales and use tax requirements in Minnesota. These penalties include a 5% late filing penalty and a penalty of 5% to 15% for late payment. Additionally, a 5% tax not paid, or USD 100, whichever is higher, may be imposed as an extended delinquency penalty for missing returns on taxable persons who receive a Demand to File letter.

If a taxable person is required to make payments of due tax electronically but fails to do so, a 5% payment method penalty is imposed. Taxable persons who do not file or make alternate payments more than 3 times within 25 months will face a 25% penalty of the tax not timely paid for each period they file or pay after the due date, also known as the Repeat Late Filing or Late Payment penalty.