As an eCommerce business owner, understanding which states your business has to pay income tax is super important. Unfortunately, it can also be super complex, not to mention boring.
For a state to require you to pay state income tax or to register with their state authorities, your business would need to have a significant connection, or 'nexus' to that state.
There are two types of nexus - (1) Physical - where you have some kind of physical connection to the state, such as a warehouse or an office, or (2) Economic - a certain threshold of transactions occurred in the state.
The definition and threshold for creating nexus in a state may be different for state income tax purposes and state sales tax purposes and differs amongst the states.
For Minnesota, what generates state income tax nexus?
When it comes to Minnesota income tax, what generates state income tax nexus?
Minnesota imposes a tax on any entity that conducts a business that:
- Has an office or other place of business in their state,
- Obtains or regularly solicits business from within Minnesota,
- Regularly has employees or independent contractors doing business on its behalf in Minnesota, or
- Owns or leases property located in Minnesota.
How do I determine if I solicit business from within Minnesota?
As discussed above, you may be required to pay tax in Minnesota if you obtain or regularly solicit business from within Minnesota. "Business from within Minnesota" includes, but is not limited to:
- Sales of products or services of any kind to customers in MN who receive the product or service in MN;
- Sales of services which are performed from outside MN but received in MN;
- Leases of tangible personal property located in MN;
- Sales and leases of real property located in MN;
- Regularly having employees or independent contractors conducting business in MN.
"Solicitation" in Minnesota includes various types of display of advertisements in Minnesota and solicitation by phone, internet, or other communication systems.
Minnesota provides a business activities questionnaire that can assist you in determining if you have nexus.
An important exception to income tax
There is an important exception that applies to many states, including Minnesota, that has been a real lifeline for eCommerce businesses.
Under Pub. L. 86-272, you are not subject to income tax in Minnesota if you are in the business of selling tangible personal property and your activities in Minnesota are limited to activities protected under this law.
Examples of these protected activities include:
- Regular and systematic solicitation of orders in Minnesota for the sale of products, where each order is subject to acceptance, filling, and delivery outside of Minnesota;
- Employee travel to Minnesota for meetings with distributors on a non-regular basis,
- Storage of property in a Minnesota-licensed facility
Examples of activities that are not protected under this law include:
- Submitting of reports or photos for inventory management or quality control purposes,
- Product training for sales associates designed to increase sales, rather than facilitate requests for orders.
Do I have to register to do business in Minnesota?
Minnesota does not define what qualifies as doing business in Minnesota for the purpose of registering in the state. Before transacting business in Minnesota, an out-of-state corporation must register in Minnesota.
As a general rule of thumb, the following are likely to indicate you are doing business in most states.
- A warehouse in the state
- A store in the state
- An office in the state, or
- An employee or sales representative in the state.
Minnesota does provide a list of activities not considered as doing business. Below are some examples and guidelines that are most relevant for many eCommerce companies:
- Handling legal disputes in the state;
- Holding director or shareholder meetings;
- Maintaining bank accounts;
- Making, participating in, or investing in loans or creating, as borrower or lender, or otherwise acquiring debt or mortgages or other security interests in real or personal property;
- Conducting an isolated transaction completed within 30 days and not in the course of several repeated similar transactions.
State income tax can be pretty complex. Unless the answer is a no-brainer for you, we highly recommend you speak to a tax advisor or CPA to ensure your business is compliant with state tax requirements.
We are a technology company providing automated end-to-end accounting service to eCommerce businesses. Our system connects to your apps, syncs all your data, and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.