Taxes and Operating Expenses
Minnesota's business taxes are very competitive and give companies a distinct advantage when it comes to the costs of doing business.
Considering business taxes as a share of private sector gross state product, Minnesota typically ranks in the middle of the pack, according to annual reports by Ernst & Young and the Council on State Taxation.
Corporate Income Tax
Minnesota only considers sales in-state when it apportions corporate income, meaning lower taxes for businesses whose property and payroll in the state is higher than the share of total sales in-state.
Minnesota's lack of a throwback rule (sales to states without income taxes "thrown back" to the taxing state for apportionment purposes) reduces net income, and a generous carry-forward period helps reduce tax liabilities. States such as California and North Dakota have throwback for sales to the U.S. government.
Breakdown of Corporate Income Taxes
- Corporate Income Tax Rate: 9.8 percent
- Apportionment Formula (sales/property/payroll): 100 percent sales
- R&D Credit: 10 percent of first $2 million of qualified expenses and 2.5 percent thereafter
- Throwback Rule: No
- Sales to U.S. Government Throwback: No
- Carry Forward: Yes (zero back, 15 taxable years forward)
Sales and Use Tax
Minnesota exempts capital equipment (machinery and equipment) used in the manufacturing process from the sales tax. There are several other major exemptions for businesses, including fees for equipment, installation and many other services. Utilities, chemicals, and gases used in industrial production are also exempt.
For qualified data centers, the following purchases are exempt:
- Enterprise information technology equipment
- Electricity used in the operation of the center
- Computer software (refund)
A qualified data center is a facility in Minnesota that consist of at least 25,000 square feet, where the total cost of construction or refurbishment, investment in information technology equipment and computer software is at least $30 million within a period of 48 months.
Breakdown of Sales and Use Taxes
- State Sales and Use Tax Rate: 6.875 percent
- Local Sales Tax Rate Range: 0.00 percent to 1.00 percent
- Tax on Manufacturing Machinery: No
- Tax on Utilities: No
Industrial Property Taxes
Minnesota exempts personal property like machinery and inventory from the property tax, producing a lower effective tax rate for real and personal property.
As a result, businesses whose equipment and inventory values are high relative to their real estate value pay a lower effective tax rate than in states that impose such taxes.
According to the Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence, Minnesota's net tax for a $2.5 million urban industrial property is $41,401; lower than in states such as Michigan ($71,677), Indiana ($57,002) and Missouri ($51,897). For a $2.5 million rural industrial property, the estimated tax is $39,356, lower than Indiana ($54,900), Kansas ($48,954) and Florida ($43,083).
Unemployment Insurance Tax
In Minnesota, the taxable wage base is set in statute as 60 percent of the state's average annual wage. Minnesota's taxable wage base for 2015 is $30,000. The minimum tax rate is 0.2 percent and the new employer rate either is 1.86 percent (non-high experience rating) or 9.1 percent (high experience rating). New employers can get an experience rating in 18 to 24 months.
Workers Compensation Insurance
Employers generally arrange workers' compensation coverage with private insurers at a market rate. Minnesota's insurance industry is very competitive, allowing for substantially reduced market-rate premiums.
Average Workers Compensation Premium Rates in 2014
- Average Premium Rates per $100 of Payroll: $1.99
- Ranking: 20th-highest
Source: State of Oregon, October 2014.
Minnesota's energy services are extremely reliable and cost less than the national average. According to 2014 data from the Edison Electric Institute, Minnesota's typical electric bill for medium-size industrial users ($31,307) is 22 percent lower than the national rate ($40,093). The state's typical electric bill for medium-size commercial users ($1,225) is 24 percent lower than the national rate ($1,620).
Data from the Energy Information Administration reveals that in 2014 Minnesota's average industrial price of electricity ($.0703 per kilowatt/hour) was comparable than the national rate ($.0701 per kilowatt/hour) and the state's average commercial price of electricity ($.0961 per kilowatt/hour) was 14 percent lower than the national rate ($.1075 per kilowatt/hour). Minnesota had the 19th lowest average price for natural gas ($6.57 per thousand cubic feet) among industrial users nationwide. The state also had the 20th lowest average price for natural gas ($8.66 per thousand cubic feet) among commercial users in the country.
Select the links below to use our Compare Minnesota tool to see how we stack-up with other states and how Minneapolis-St. Paul compares with major metropolitan areas in taxes and operating expenses.