Minnesota Estate Tax Changes Close the Border on Small Business Investments

Comedian Ron White made famous the phrase “You can’t fix stupid.”  In the film Parental Guidance, Billy Crystal’s character remarked that his mother always told him that “there’s no cure for dumb.”

Either of those phrases are apt descriptions of the 2013 Omnibus Tax Bill that passed the Minnesota Legislature and was signed into law by Governor Mark Dayton on May 23, 2013.  Designed to fuel the current majority party’s zeal for new sources of revenue, the tax bill increases taxes on higher income Minnesotans in almost every way imaginable:  a new fourth tier rate of 9.85% on individual filers with taxable income in excess of $150,000 and joint filers with taxable income in excess of $250,000, a state level gift tax on gifts in excess of $1 million, combined with clawback provisions in the Minnesota estate tax that brings gifts made in the three years prior to a taxpayer’s death back into his/her taxable estate. 

A recent StarTribune Minnesota Poll touts the public’s support for these new taxes.  However, as the saying goes, what you don’t know can hurt you, and the same holds true for this tax bill.  The provision of the tax bill with the most potential for damaging Minnesota business and in turn, its economy, is a change in Minnesota’s estate tax that applies to non-Minnesota residents. 

Under prior law, non-Minnesota residents were required to pay estate tax on real and tangible property which was located within Minnesota.  If, however, such property was owned through a pass-through entity – such as a partnership, limited liability company or Subchapter S corporation – the ownership interest in the pass-through entity (or “PTE”) was deemed to be intangible and the non-resident would not have to pay Minnesota estate tax on the value of such intangible property.

Effective July 1, 2013, however, that’s going to change.  Under the 2013 Omnibus Tax Bill, non-residents will now have to pay Minnesota estate tax on real or tangible personal property owned through a PTE if such property is sitused (i.e., located) in Minnesota. 

The expansion of the Minnesota estate tax to real property owned by non-residents through PTEs is understandable and straightforward.  It is the inclusion of PTEs that own tangible property – such as equipment – that is of concern to me. 

I’ll let you in on a little secret based upon 12+ years of representing Minnesota small businesses:  there is not enough startup equity capital from Minnesota sources only to fund all Minnesota startup businesses.  Entrepreneurs frequently are forced to head to the coasts, or elsewhere in the U.S. where friends and/or family members are located, in order to fund their new venture(s).  As an aside, given how the tax bill sticks it to so called “wealthy” Minnesotans – you know, the folks that have money to invest in small businesses – the need to look beyond Minnesota’s borders for funds is going to grow.  Whether the business is a brewery owning its own tanks, or a medical device manufacturing company, a non-Minnesota resident that is contemplating an investment into these types of companies now has another adverse tax issue to be concerned about, and that might just be the tipping point that causes them to decide against the investment.

Am I being overly alarmist?  Perhaps, but why chance it?  With the need for more jobs in Minnesota, why create barriers to the growth of new and small business that can provide those jobs? 

The Minnesota Legislature is already talking about legislation to repeal and/or modify portions of the 2013 Omnibus Tax Bill based upon unintended consequences, and a repeal of the portion of the estate tax changes that subjects non-residents to Minnesota estate tax for interests in PTEs owning tangible property should be added to the list.  Otherwise, we’ll be closing our borders to potential investors.