1.1                          A bill for an act 
  1.2             relating to taxation; requiring withholding; 
  1.3             conforming with certain federal income tax changes; 
  1.4             prohibiting state contracts with certain vendors; 
  1.5             providing for taxation of liquor and rented vehicles; 
  1.6             modifying certain sales tax exemptions; defining 
  1.7             "direct business" for purposes of insurance taxes; 
  1.8             modifying the homestead market value credit; 
  1.9             appropriating money; amending Minnesota Statutes 2004, 
  1.10            sections 16C.03, by adding a subdivision; 273.1384, 
  1.11            subdivision 1; 289A.20, subdivision 2; 290.01, 
  1.12            subdivisions 19, 19a, 19b, 19c, 19d, 31; 290.06, 
  1.13            subdivision 2c; 290.067, subdivision 2a; 290.091, 
  1.14            subdivision 2; 290.92, by adding a subdivision; 
  1.15            290A.03, subdivisions 3, 15; 297A.68, subdivisions 2, 
  1.16            5; 297I.01, by adding a subdivision; Laws 2001, First 
  1.17            Special Session chapter 5, article 12, section 95; 
  1.18            proposing coding for new law in Minnesota Statutes, 
  1.19            chapter 295. 
  1.20  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.21                             ARTICLE 1
  1.22                INCOME AND CORPORATE FRANCHISE TAXES
  1.23     Section 1.  Minnesota Statutes 2004, section 289A.20, 
  1.24  subdivision 2, is amended to read: 
  1.25     Subd. 2.  [WITHHOLDING FROM WAGES, ENTERTAINER WITHHOLDING, 
  1.26  WITHHOLDING FROM PAYMENTS TO OUT-OF-STATE CONTRACTORS, AND 
  1.27  WITHHOLDING BY PARTNERSHIPS AND SMALL BUSINESS CORPORATIONS.] 
  1.28  (a) A tax required to be deducted and withheld during the 
  1.29  quarterly period must be paid on or before the last day of the 
  1.30  month following the close of the quarterly period, unless an 
  1.31  earlier time for payment is provided.  A tax required to be 
  1.32  deducted and withheld from compensation of an entertainer and 
  2.1   from a payment to an out-of-state contractor must be paid on or 
  2.2   before the date the return for such tax must be filed under 
  2.3   section 289A.18, subdivision 2.  Taxes required to be deducted 
  2.4   and withheld by partnerships ~~and~~, S corporations, and trusts 
  2.5   must be paid on ~~or before the date the return must be filed~~ 
  2.6   ~~under section 289A.18, subdivision 2~~ a quarterly basis as 
  2.7   estimated taxes under section 289A.25 for partnerships and 
  2.8   trusts and under section 289A.26 for S corporations. 
  2.9      (b) An employer who, during the previous quarter, withheld 
  2.10  more than $1,500 of tax under section 290.92, subdivision 2a or 
  2.11  3, or 290.923, subdivision 2, must deposit tax withheld under 
  2.12  those sections with the commissioner within the time allowed to 
  2.13  deposit the employer's federal withheld employment taxes under 
  2.14  Code of Federal Regulations, title 26, section 31.6302-1, as 
  2.15  amended through December 31, 2001, without regard to the safe 
  2.16  harbor or de minimis rules in subparagraph (f) or the one-day 
  2.17  rule in subsection (c), clause (3).  Taxpayers must submit a 
  2.18  copy of their federal notice of deposit status to the 
  2.19  commissioner upon request by the commissioner. 
  2.20     (c) The commissioner may prescribe by rule other return 
  2.21  periods or deposit requirements.  In prescribing the reporting 
  2.22  period, the commissioner may classify payors according to the 
  2.23  amount of their tax liability and may adopt an appropriate 
  2.24  reporting period for the class that the commissioner judges to 
  2.25  be consistent with efficient tax collection.  In no event will 
  2.26  the duration of the reporting period be more than one year. 
  2.27     (d) If less than the correct amount of tax is paid to the 
  2.28  commissioner, proper adjustments with respect to both the tax 
  2.29  and the amount to be deducted must be made, without interest, in 
  2.30  the manner and at the times the commissioner prescribes.  If the 
  2.31  underpayment cannot be adjusted, the amount of the underpayment 
  2.32  will be assessed and collected in the manner and at the times 
  2.33  the commissioner prescribes. 
  2.34     (e) If the aggregate amount of the tax withheld during a 
  2.35  fiscal year ending June 30 under section 290.92, subdivision 2a 
  2.36  or 3, is equal to or exceeds the amounts established for 
  3.1   remitting federal withheld taxes pursuant to the regulations 
  3.2   promulgated under section 6302(h) of the Internal Revenue Code, 
  3.3   the employer must remit each required deposit for wages paid in 
  3.4   the subsequent calendar year by electronic means. 
  3.5      (f) A third-party bulk filer as defined in section 290.92, 
  3.6   subdivision 30, paragraph (a), clause (2), who remits 
  3.7   withholding deposits must remit all deposits by electronic means 
  3.8   as provided in paragraph (e), regardless of the aggregate amount 
  3.9   of tax withheld during a fiscal year for all of the employers.  
  3.10     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
  3.11  beginning after December 31, 2005. 
  3.12     Sec. 2.  Minnesota Statutes 2004, section 290.92, is 
  3.13  amended by adding a subdivision to read: 
  3.14     Subd. 31.  [PAYMENTS TO PERSONS WHO ARE NOT EMPLOYEES; 
  3.15  WITHHOLDING.] Any person engaged in a trade or business who in 
  3.16  the course of such trade or business makes payments to an 
  3.17  individual, who is not an employee of the person, for work 
  3.18  described in industry code numbers 23 through 238990 of the 
  3.19  North American Industry Classification System, shall deduct from 
  3.20  the payment and withhold two percent of the amount as Minnesota 
  3.21  withholding tax when the amount paid to that individual by the 
  3.22  same person during the calendar year exceeds $600.  For purposes 
  3.23  of this section, a payment to any person that is subject to 
  3.24  withholding under this subdivision must be treated as if the 
  3.25  payment was a wage paid by an employer to an employee.  Every 
  3.26  individual who is to receive a payment that is subject to 
  3.27  withholding under this subdivision shall furnish the contracting 
  3.28  person with a statement, containing the name, address, and 
  3.29  Social Security account number of the person receiving the 
  3.30  payment. 
  3.31     <b>[EFFECTIVE DATE.]</b> This section is effective for payments 
  3.32  made after July 31, 2005. 
  3.33                             ARTICLE 2 
  3.34                           FEDERAL UPDATE 
  3.35     Section 1.  Minnesota Statutes 2004, section 290.01, 
  3.36  subdivision 19, is amended to read: 
  4.1      Subd. 19.  [NET INCOME.] The term "net income" means the 
  4.2   federal taxable income, as defined in section 63 of the Internal 
  4.3   Revenue Code of 1986, as amended through the date named in this 
  4.4   subdivision, incorporating any elections made by the taxpayer in 
  4.5   accordance with the Internal Revenue Code in determining federal 
  4.6   taxable income for federal income tax purposes, and with the 
  4.7   modifications provided in subdivisions 19a to 19f. 
  4.8      In the case of a regulated investment company or a fund 
  4.9   thereof, as defined in section 851(a) or 851(g) of the Internal 
  4.10  Revenue Code, federal taxable income means investment company 
  4.11  taxable income as defined in section 852(b)(2) of the Internal 
  4.12  Revenue Code, except that:  
  4.13     (1) the exclusion of net capital gain provided in section 
  4.14  852(b)(2)(A) of the Internal Revenue Code does not apply; 
  4.15     (2) the deduction for dividends paid under section 
  4.16  852(b)(2)(D) of the Internal Revenue Code must be applied by 
  4.17  allowing a deduction for capital gain dividends and 
  4.18  exempt-interest dividends as defined in sections 852(b)(3)(C) 
  4.19  and 852(b)(5) of the Internal Revenue Code; and 
  4.20     (3) the deduction for dividends paid must also be applied 
  4.21  in the amount of any undistributed capital gains which the 
  4.22  regulated investment company elects to have treated as provided 
  4.23  in section 852(b)(3)(D) of the Internal Revenue Code.  
  4.24     The net income of a real estate investment trust as defined 
  4.25  and limited by section 856(a), (b), and (c) of the Internal 
  4.26  Revenue Code means the real estate investment trust taxable 
  4.27  income as defined in section 857(b)(2) of the Internal Revenue 
  4.28  Code.  
  4.29     The net income of a designated settlement fund as defined 
  4.30  in section 468B(d) of the Internal Revenue Code means the gross 
  4.31  income as defined in section 468B(b) of the Internal Revenue 
  4.32  Code. 
  4.33     The provisions of sections 1113(a), 1117, 1206(a), 1313(a), 
  4.34  1402(a), 1403(a), 1443, 1450, 1501(a), 1605, 1611(a), 1612, 
  4.35  1616, 1617, 1704(l), and 1704(m) of the Small Business Job 
  4.36  Protection Act, Public Law 104-188, the provisions of Public Law 
  5.1   104-117, the provisions of sections 313(a) and (b)(1), 602(a), 
  5.2   913(b), 941, 961, 971, 1001(a) and (b), 1002, 1003, 1012, 1013, 
  5.3   1014, 1061, 1062, 1081, 1084(b), 1086, 1087, 1111(a), 1131(b) 
  5.4   and (c), 1211(b), 1213, 1530(c)(2), 1601(f)(5) and (h), and 
  5.5   1604(d)(1) of the Taxpayer Relief Act of 1997, Public Law 
  5.6   105-34, the provisions of section 6010 of the Internal Revenue 
  5.7   Service Restructuring and Reform Act of 1998, Public Law 
  5.8   105-206, the provisions of section 4003 of the Omnibus 
  5.9   Consolidated and Emergency Supplemental Appropriations Act, 
  5.10  1999, Public Law 105-277, and the provisions of section 318 of 
  5.11  the Consolidated Appropriation Act of 2001, Public Law 106-554, 
  5.12  shall become effective at the time they become effective for 
  5.13  federal purposes. 
  5.14     The Internal Revenue Code of 1986, as amended through 
  5.15  December 31, 1996, shall be in effect for taxable years 
  5.16  beginning after December 31, 1996. 
  5.17     The provisions of sections 202(a) and (b), 221(a), 225, 
  5.18  312, 313, 913(a), 934, 962, 1004, 1005, 1052, 1063, 1084(a) and 
  5.19  (c), 1089, 1112, 1171, 1204, 1271(a) and (b), 1305(a), 1306, 
  5.20  1307, 1308, 1309, 1501(b), 1502(b), 1504(a), 1505, 1527, 1528, 
  5.21  1530, 1601(d), (e), (f), and (i) and 1602(a), (b), (c), and (e) 
  5.22  of the Taxpayer Relief Act of 1997, Public Law 105-34, the 
  5.23  provisions of sections 6004, 6005, 6012, 6013, 6015, 6016, 7002, 
  5.24  and 7003 of the Internal Revenue Service Restructuring and 
  5.25  Reform Act of 1998, Public Law 105-206, the provisions of 
  5.26  section 3001 of the Omnibus Consolidated and Emergency 
  5.27  Supplemental Appropriations Act, 1999, Public Law 105-277, the 
  5.28  provisions of section 3001 of the Miscellaneous Trade and 
  5.29  Technical Corrections Act of 1999, Public Law 106-36, and the 
  5.30  provisions of section 316 of the Consolidated Appropriation Act 
  5.31  of 2001, Public Law 106-554, shall become effective at the time 
  5.32  they become effective for federal purposes. 
  5.33     The Internal Revenue Code of 1986, as amended through 
  5.34  December 31, 1997, shall be in effect for taxable years 
  5.35  beginning after December 31, 1997. 
  5.36     The provisions of sections 5002, 6009, 6011, and 7001 of 
  6.1   the Internal Revenue Service Restructuring and Reform Act of 
  6.2   1998, Public Law 105-206, the provisions of section 9010 of the 
  6.3   Transportation Equity Act for the 21st Century, Public Law 
  6.4   105-178, the provisions of sections 1004, 4002, and 5301 of the 
  6.5   Omnibus Consolidation and Emergency Supplemental Appropriations 
  6.6   Act, 1999, Public Law 105-277, the provision of section 303 of 
  6.7   the Ricky Ray Hemophilia Relief Fund Act of 1998, Public Law 
  6.8   105-369, the provisions of sections 532, 534, 536, 537, and 538 
  6.9   of the Ticket to Work and Work Incentives Improvement Act of 
  6.10  1999, Public Law 106-170, the provisions of the Installment Tax 
  6.11  Correction Act of 2000, Public Law 106-573, and the provisions 
  6.12  of section 309 of the Consolidated Appropriation Act of 2001, 
  6.13  Public Law 106-554, shall become effective at the time they 
  6.14  become effective for federal purposes. 
  6.15     The Internal Revenue Code of 1986, as amended through 
  6.16  December 31, 1998, shall be in effect for taxable years 
  6.17  beginning after December 31, 1998.  
  6.18     The provisions of the FSC Repeal and Extraterritorial 
  6.19  Income Exclusion Act of 2000, Public Law 106-519, and the 
  6.20  provision of section 412 of the Job Creation and Worker 
  6.21  Assistance Act of 2002, Public Law 107-147, shall become 
  6.22  effective at the time it became effective for federal purposes. 
  6.23     The Internal Revenue Code of 1986, as amended through 
  6.24  December 31, 1999, shall be in effect for taxable years 
  6.25  beginning after December 31, 1999.  The provisions of sections 
  6.26  306 and 401 of the Consolidated Appropriation Act of 2001, 
  6.27  Public Law 106-554, and the provision of section 632(b)(2)(A) of 
  6.28  the Economic Growth and Tax Relief Reconciliation Act of 2001, 
  6.29  Public Law 107-16, and provisions of sections 101 and 402 of the 
  6.30  Job Creation and Worker Assistance Act of 2002, Public Law 
  6.31  107-147, shall become effective at the same time it became 
  6.32  effective for federal purposes. 
  6.33     The Internal Revenue Code of 1986, as amended through 
  6.34  December 31, 2000, shall be in effect for taxable years 
  6.35  beginning after December 31, 2000.  The provisions of sections 
  6.36  659a and 671 of the Economic Growth and Tax Relief 
  7.1   Reconciliation Act of 2001, Public Law 107-16, the provisions of 
  7.2   sections 104, 105, and 111 of the Victims of Terrorism Tax 
  7.3   Relief Act of 2001, Public Law 107-134, and the provisions of 
  7.4   sections 201, 403, 413, and 606 of the Job Creation and Worker 
  7.5   Assistance Act of 2002, Public Law 107-147, shall become 
  7.6   effective at the same time it became effective for federal 
  7.7   purposes. 
  7.8      The Internal Revenue Code of 1986, as amended through March 
  7.9   15, 2002, shall be in effect for taxable years beginning after 
  7.10  December 31, 2001. 
  7.11     The provisions of sections 101 and 102 of the Victims of 
  7.12  Terrorism Tax Relief Act of 2001, Public Law 107-134, shall 
  7.13  become effective at the same time it becomes effective for 
  7.14  federal purposes. 
  7.15     The Internal Revenue Code of 1986, as amended through June 
  7.16  15, 2003, shall be in effect for taxable years beginning after 
  7.17  December 31, 2002, provided that the provisions of the American 
  7.18  Jobs Creation Act of 2004, Public Law 108-435, are effective at 
  7.19  the same time they became effective for federal income tax 
  7.20  purposes.  The provisions of section 201 of the Jobs and Growth 
  7.21  Tax Relief and Reconciliation Act of 2003, H.R. 2, if it is 
  7.22  enacted into law, are effective at the same time it became 
  7.23  effective for federal purposes. 
  7.24     Except as otherwise provided, references to the Internal 
  7.25  Revenue Code in subdivisions 19a to 19g mean the code in effect 
  7.26  for purposes of determining net income for the applicable year. 
  7.27     Sec. 2.  Minnesota Statutes 2004, section 290.01, 
  7.28  subdivision 19a, is amended to read: 
  7.29     Subd. 19a.  [ADDITIONS TO FEDERAL TAXABLE INCOME.] For 
  7.30  individuals, estates, and trusts, there shall be added to 
  7.31  federal taxable income: 
  7.32     (1)(i) interest income on obligations of any state other 
  7.33  than Minnesota or a political or governmental subdivision, 
  7.34  municipality, or governmental agency or instrumentality of any 
  7.35  state other than Minnesota exempt from federal income taxes 
  7.36  under the Internal Revenue Code or any other federal statute; 
  8.1   and 
  8.2      (ii) exempt-interest dividends as defined in section 
  8.3   852(b)(5) of the Internal Revenue Code, except the portion of 
  8.4   the exempt-interest dividends derived from interest income on 
  8.5   obligations of the state of Minnesota or its political or 
  8.6   governmental subdivisions, municipalities, governmental agencies 
  8.7   or instrumentalities, but only if the portion of the 
  8.8   exempt-interest dividends from such Minnesota sources paid to 
  8.9   all shareholders represents 95 percent or more of the 
  8.10  exempt-interest dividends that are paid by the regulated 
  8.11  investment company as defined in section 851(a) of the Internal 
  8.12  Revenue Code, or the fund of the regulated investment company as 
  8.13  defined in section 851(g) of the Internal Revenue Code, making 
  8.14  the payment; and 
  8.15     (iii) for the purposes of items (i) and (ii), interest on 
  8.16  obligations of an Indian tribal government described in section 
  8.17  7871(c) of the Internal Revenue Code shall be treated as 
  8.18  interest income on obligations of the state in which the tribe 
  8.19  is located; 
  8.20     (2) the amount of income or sales and use taxes paid or 
  8.21  accrued within the taxable year under this chapter and income or 
  8.22  sales and use taxes paid to any other state or to any province 
  8.23  or territory of Canada, to the extent allowed as a deduction 
  8.24  under section 63(d) of the Internal Revenue Code of 1986, as 
  8.25  amended through June 15, 2003, but the addition may not be more 
  8.26  than the amount by which the itemized deductions as allowed 
  8.27  under section 63(d) of the Internal Revenue Code exceeds the 
  8.28  amount of the standard deduction as defined in section 63(c) of 
  8.29  the Internal Revenue Code.  For the purpose of this paragraph, 
  8.30  the disallowance of itemized deductions under section 68 of the 
  8.31  Internal Revenue Code of 1986, income or sales and use tax is 
  8.32  the last itemized deduction disallowed; 
  8.33     (3) the capital gain amount of a lump sum distribution to 
  8.34  which the special tax under section 1122(h)(3)(B)(ii) of the Tax 
  8.35  Reform Act of 1986, Public Law 99-514, applies; 
  8.36     (4) the amount of income taxes paid or accrued within the 
  9.1   taxable year under this chapter and income taxes paid to any 
  9.2   other state or any province or territory of Canada, to the 
  9.3   extent allowed as a deduction in determining federal adjusted 
  9.4   gross income.  For the purpose of this paragraph, income taxes 
  9.5   do not include the taxes imposed by sections 290.0922, 
  9.6   subdivision 1, paragraph (b), 290.9727, 290.9728, and 290.9729; 
  9.7      (5) the amount of expense, interest, or taxes disallowed 
  9.8   pursuant to section 290.10; 
  9.9      (6) the amount of a partner's pro rata share of net income 
  9.10  which does not flow through to the partner because the 
  9.11  partnership elected to pay the tax on the income under section 
  9.12  6242(a)(2) of the Internal Revenue Code; ~~and~~ 
  9.13     (7) 80 percent of the depreciation deduction allowed under 
  9.14  section 168(k) of the Internal Revenue Code.  For purposes of 
  9.15  this clause, if the taxpayer has an activity that in the taxable 
  9.16  year generates a deduction for depreciation under section 168(k) 
  9.17  and the activity generates a loss for the taxable year that the 
  9.18  taxpayer is not allowed to claim for the taxable year, "the 
  9.19  depreciation allowed under section 168(k)" for the taxable year 
  9.20  is limited to excess of the depreciation claimed by the activity 
  9.21  under section 168(k) over the amount of the loss from the 
  9.22  activity that is not allowed in the taxable year.  In succeeding 
  9.23  taxable years when the losses not allowed in the taxable year 
  9.24  are allowed, the depreciation under section 168(k) is allowed; 
  9.25     (8) 80 percent of the amount by which the deduction allowed 
  9.26  by section 179 of the Internal Revenue Code exceeds the 
  9.27  deduction allowable by section 179 of the Internal Revenue Code 
  9.28  of 1986, as amended through December 31, 2003; and 
  9.29     (9) to the extent deducted in computing federal taxable 
  9.30  income, the amount of the deduction allowable under section 199 
  9.31  of the Internal Revenue Code. 
  9.32     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
  9.33  beginning after December 31, 2004, except the changes in clause 
  9.34  (2) are effective for tax years beginning after December 31, 
  9.35  2003. 
  9.36     Sec. 3.  Minnesota Statutes 2004, section 290.01, 
 10.1   subdivision 19b, is amended to read: 
 10.2      Subd. 19b.  [SUBTRACTIONS FROM FEDERAL TAXABLE INCOME.] For 
 10.3   individuals, estates, and trusts, there shall be subtracted from 
 10.4   federal taxable income: 
 10.5      (1) interest income on obligations of any authority, 
 10.6   commission, or instrumentality of the United States to the 
 10.7   extent includable in taxable income for federal income tax 
 10.8   purposes but exempt from state income tax under the laws of the 
 10.9   United States; 
 10.10     (2) if included in federal taxable income, the amount of 
 10.11  any overpayment of income tax to Minnesota or to any other 
 10.12  state, for any previous taxable year, whether the amount is 
 10.13  received as a refund or as a credit to another taxable year's 
 10.14  income tax liability; 
 10.15     (3) the amount paid to others, less the amount used to 
 10.16  claim the credit allowed under section 290.0674, not to exceed 
 10.17  $1,625 for each qualifying child in grades kindergarten to 6 and 
 10.18  $2,500 for each qualifying child in grades 7 to 12, for tuition, 
 10.19  textbooks, and transportation of each qualifying child in 
 10.20  attending an elementary or secondary school situated in 
 10.21  Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin, 
 10.22  wherein a resident of this state may legally fulfill the state's 
 10.23  compulsory attendance laws, which is not operated for profit, 
 10.24  and which adheres to the provisions of the Civil Rights Act of 
 10.25  1964 and chapter 363A.  For the purposes of this clause, 
 10.26  "tuition" includes fees or tuition as defined in section 
 10.27  290.0674, subdivision 1, clause (1).  As used in this clause, 
 10.28  "textbooks" includes books and other instructional materials and 
 10.29  equipment purchased or leased for use in elementary and 
 10.30  secondary schools in teaching only those subjects legally and 
 10.31  commonly taught in public elementary and secondary schools in 
 10.32  this state.  Equipment expenses qualifying for deduction 
 10.33  includes expenses as defined and limited in section 290.0674, 
 10.34  subdivision 1, clause (3).  "Textbooks" does not include 
 10.35  instructional books and materials used in the teaching of 
 10.36  religious tenets, doctrines, or worship, the purpose of which is 
 11.1   to instill such tenets, doctrines, or worship, nor does it 
 11.2   include books or materials for, or transportation to, 
 11.3   extracurricular activities including sporting events, musical or 
 11.4   dramatic events, speech activities, driver's education, or 
 11.5   similar programs.  For purposes of the subtraction provided by 
 11.6   this clause, "qualifying child" has the meaning given in section 
 11.7   32(c)(3) of the Internal Revenue Code; 
 11.8      (4) income as provided under section 290.0802; 
 11.9      (5) to the extent included in federal adjusted gross 
 11.10  income, income realized on disposition of property exempt from 
 11.11  tax under section 290.491; 
 11.12     (6) to the extent included in federal taxable income, 
 11.13  postservice benefits for youth community service under section 
 11.14  124D.42 for volunteer service under United States Code, title 
 11.15  42, sections 12601 to 12604; 
 11.16     (7) to the extent not deducted in determining federal 
 11.17  taxable income by an individual who does not itemize deductions 
 11.18  for federal income tax purposes for the taxable year, an amount 
 11.19  equal to 50 percent of the excess of charitable contributions 
 11.20  allowable as a deduction for the taxable year under section 
 11.21  170(a) of the Internal Revenue Code over $500; 
 11.22     (8) for taxable years beginning before January 1, 2008, the 
 11.23  amount of the federal small ethanol producer credit allowed 
 11.24  under section 40(a)(3) of the Internal Revenue Code which is 
 11.25  included in gross income under section 87 of the Internal 
 11.26  Revenue Code; 
 11.27     (9) for individuals who are allowed a federal foreign tax 
 11.28  credit for taxes that do not qualify for a credit under section 
 11.29  290.06, subdivision 22, an amount equal to the carryover of 
 11.30  subnational foreign taxes for the taxable year, but not to 
 11.31  exceed the total subnational foreign taxes reported in claiming 
 11.32  the foreign tax credit.  For purposes of this clause, "federal 
 11.33  foreign tax credit" means the credit allowed under section 27 of 
 11.34  the Internal Revenue Code, and "carryover of subnational foreign 
 11.35  taxes" equals the carryover allowed under section 904(c) of the 
 11.36  Internal Revenue Code minus national level foreign taxes to the 
 12.1   extent they exceed the federal foreign tax credit; 
 12.2      (10) in each of the five tax years immediately following 
 12.3   the tax year in which an addition is required under subdivision 
 12.4   19a, clause (7), an amount equal to one-fifth of the delayed 
 12.5   depreciation.  For purposes of this clause, "delayed 
 12.6   depreciation" means the amount of the addition made by the 
 12.7   taxpayer under subdivision 19a, clause (7), minus the positive 
 12.8   value of any net operating loss under section 172 of the 
 12.9   Internal Revenue Code generated for the tax year of the 
 12.10  addition.  The resulting delayed depreciation cannot be less 
 12.11  than zero; ~~and~~ 
 12.12     (11) job opportunity building zone income as provided under 
 12.13  section 469.316; and 
 12.14     (12) in each of the five tax years immediately following 
 12.15  the tax year in which an addition is required under subdivision 
 12.16  19a, clause (8), or 19c, clause (17), in the case of a 
 12.17  shareholder of a corporation that is an S corporation, an amount 
 12.18  equal to one-fifth of the addition made by the taxpayer under 
 12.19  subdivision 19a, clause (8), or 19c, clause (17), in the case of 
 12.20  a shareholder of a corporation that is an S corporation, minus 
 12.21  the positive value of any net operating loss under section 172 
 12.22  of the Internal Revenue Code generated for the tax year of the 
 12.23  addition.  If the net operating loss exceeds the addition for 
 12.24  the tax year, a subtraction is not allowed under this clause. 
 12.25     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 12.26  beginning after December 31, 2004. 
 12.27     Sec. 4.  Minnesota Statutes 2004, section 290.01, 
 12.28  subdivision 19c, is amended to read: 
 12.29     Subd. 19c.  [CORPORATIONS; ADDITIONS TO FEDERAL TAXABLE 
 12.30  INCOME.] For corporations, there shall be added to federal 
 12.31  taxable income: 
 12.32     (1) the amount of any deduction taken for federal income 
 12.33  tax purposes for income, excise, or franchise taxes based on net 
 12.34  income or related minimum taxes, including but not limited to 
 12.35  the tax imposed under section 290.0922, paid by the corporation 
 12.36  to Minnesota, another state, a political subdivision of another 
 13.1   state, the District of Columbia, or any foreign country or 
 13.2   possession of the United States; 
 13.3      (2) interest not subject to federal tax upon obligations 
 13.4   of:  the United States, its possessions, its agencies, or its 
 13.5   instrumentalities; the state of Minnesota or any other state, 
 13.6   any of its political or governmental subdivisions, any of its 
 13.7   municipalities, or any of its governmental agencies or 
 13.8   instrumentalities; the District of Columbia; or Indian tribal 
 13.9   governments; 
 13.10     (3) exempt-interest dividends received as defined in 
 13.11  section 852(b)(5) of the Internal Revenue Code; 
 13.12     (4) the amount of any net operating loss deduction taken 
 13.13  for federal income tax purposes under section 172 or 832(c)(10) 
 13.14  of the Internal Revenue Code or operations loss deduction under 
 13.15  section 810 of the Internal Revenue Code; 
 13.16     (5) the amount of any special deductions taken for federal 
 13.17  income tax purposes under sections 241 to 247 of the Internal 
 13.18  Revenue Code; 
 13.19     (6) losses from the business of mining, as defined in 
 13.20  section 290.05, subdivision 1, clause (a), that are not subject 
 13.21  to Minnesota income tax; 
 13.22     (7) the amount of any capital losses deducted for federal 
 13.23  income tax purposes under sections 1211 and 1212 of the Internal 
 13.24  Revenue Code; 
 13.25     (8) the exempt foreign trade income of a foreign sales 
 13.26  corporation under sections 921(a) and 291 of the Internal 
 13.27  Revenue Code; 
 13.28     (9) the amount of percentage depletion deducted under 
 13.29  sections 611 through 614 and 291 of the Internal Revenue Code; 
 13.30     (10) for certified pollution control facilities placed in 
 13.31  service in a taxable year beginning before December 31, 1986, 
 13.32  and for which amortization deductions were elected under section 
 13.33  169 of the Internal Revenue Code of 1954, as amended through 
 13.34  December 31, 1985, the amount of the amortization deduction 
 13.35  allowed in computing federal taxable income for those 
 13.36  facilities; 
 14.1      (11) the amount of any deemed dividend from a foreign 
 14.2   operating corporation determined pursuant to section 290.17, 
 14.3   subdivision 4, paragraph (g); 
 14.4      (12) the amount of any environmental tax paid under section 
 14.5   59(a) of the Internal Revenue Code; 
 14.6      (13) the amount of a partner's pro rata share of net income 
 14.7   which does not flow through to the partner because the 
 14.8   partnership elected to pay the tax on the income under section 
 14.9   6242(a)(2) of the Internal Revenue Code; 
 14.10     (14) the amount of net income excluded under section 114 of 
 14.11  the Internal Revenue Code; 
 14.12     (15) any increase in subpart F income, as defined in 
 14.13  section 952(a) of the Internal Revenue Code, for the taxable 
 14.14  year when subpart F income is calculated without regard to the 
 14.15  provisions of section 614 of Public Law 107-147; ~~and~~ 
 14.16     (16) 80 percent of the depreciation deduction allowed under 
 14.17  section 168(k) of the Internal Revenue Code.  For purposes of 
 14.18  this clause, if the taxpayer has an activity that in the taxable 
 14.19  year generates a deduction for depreciation under section 168(k) 
 14.20  and the activity generates a loss for the taxable year that the 
 14.21  taxpayer is not allowed to claim for the taxable year, "the 
 14.22  depreciation allowed under section 168(k)" for the taxable year 
 14.23  is limited to excess of the depreciation claimed by the activity 
 14.24  under section 168(k) over the amount of the loss from the 
 14.25  activity that is not allowed in the taxable year.  In succeeding 
 14.26  taxable years when the losses not allowed in the taxable year 
 14.27  are allowed, the depreciation under section 168(k) is allowed; 
 14.28     (17) 80 percent of the amount by which the deduction 
 14.29  allowed by section 179 of the Internal Revenue Code exceeds the 
 14.30  deduction allowable by section 179 of the Internal Revenue Code 
 14.31  of 1986, as amended through December 31, 2003; and 
 14.32     (18) to the extent deducted in computing federal taxable 
 14.33  income, the amount of the deduction allowable under section 199 
 14.34  of the Internal Revenue Code. 
 14.35     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 14.36  beginning after December 31, 2004. 
 15.1      Sec. 5.  Minnesota Statutes 2004, section 290.01, 
 15.2   subdivision 19d, is amended to read: 
 15.3      Subd. 19d.  [CORPORATIONS; MODIFICATIONS DECREASING FEDERAL 
 15.4   TAXABLE INCOME.] For corporations, there shall be subtracted 
 15.5   from federal taxable income after the increases provided in 
 15.6   subdivision 19c:  
 15.7      (1) the amount of foreign dividend gross-up added to gross 
 15.8   income for federal income tax purposes under section 78 of the 
 15.9   Internal Revenue Code; 
 15.10     (2) the amount of salary expense not allowed for federal 
 15.11  income tax purposes due to claiming the federal jobs credit 
 15.12  under section 51 of the Internal Revenue Code; 
 15.13     (3) any dividend (not including any distribution in 
 15.14  liquidation) paid within the taxable year by a national or state 
 15.15  bank to the United States, or to any instrumentality of the 
 15.16  United States exempt from federal income taxes, on the preferred 
 15.17  stock of the bank owned by the United States or the 
 15.18  instrumentality; 
 15.19     (4) amounts disallowed for intangible drilling costs due to 
 15.20  differences between this chapter and the Internal Revenue Code 
 15.21  in taxable years beginning before January 1, 1987, as follows: 
 15.22     (i) to the extent the disallowed costs are represented by 
 15.23  physical property, an amount equal to the allowance for 
 15.24  depreciation under Minnesota Statutes 1986, section 290.09, 
 15.25  subdivision 7, subject to the modifications contained in 
 15.26  subdivision 19e; and 
 15.27     (ii) to the extent the disallowed costs are not represented 
 15.28  by physical property, an amount equal to the allowance for cost 
 15.29  depletion under Minnesota Statutes 1986, section 290.09, 
 15.30  subdivision 8; 
 15.31     (5) the deduction for capital losses pursuant to sections 
 15.32  1211 and 1212 of the Internal Revenue Code, except that: 
 15.33     (i) for capital losses incurred in taxable years beginning 
 15.34  after December 31, 1986, capital loss carrybacks shall not be 
 15.35  allowed; 
 15.36     (ii) for capital losses incurred in taxable years beginning
 16.1   after December 31, 1986, a capital loss carryover to each of the 
 16.2   15 taxable years succeeding the loss year shall be allowed; 
 16.3      (iii) for capital losses incurred in taxable years 
 16.4   beginning before January 1, 1987, a capital loss carryback to 
 16.5   each of the three taxable years preceding the loss year, subject 
 16.6   to the provisions of Minnesota Statutes 1986, section 290.16, 
 16.7   shall be allowed; and 
 16.8      (iv) for capital losses incurred in taxable years beginning
 16.9   before January 1, 1987, a capital loss carryover to each of the 
 16.10  five taxable years succeeding the loss year to the extent such 
 16.11  loss was not used in a prior taxable year and subject to the 
 16.12  provisions of Minnesota Statutes 1986, section 290.16, shall be 
 16.13  allowed; 
 16.14     (6) an amount for interest and expenses relating to income 
 16.15  not taxable for federal income tax purposes, if (i) the income 
 16.16  is taxable under this chapter and (ii) the interest and expenses 
 16.17  were disallowed as deductions under the provisions of section 
 16.18  171(a)(2), 265 or 291 of the Internal Revenue Code in computing 
 16.19  federal taxable income; 
 16.20     (7) in the case of mines, oil and gas wells, other natural 
 16.21  deposits, and timber for which percentage depletion was 
 16.22  disallowed pursuant to subdivision 19c, clause (11), a 
 16.23  reasonable allowance for depletion based on actual cost.  In the 
 16.24  case of leases the deduction must be apportioned between the 
 16.25  lessor and lessee in accordance with rules prescribed by the 
 16.26  commissioner.  In the case of property held in trust, the 
 16.27  allowable deduction must be apportioned between the income 
 16.28  beneficiaries and the trustee in accordance with the pertinent 
 16.29  provisions of the trust, or if there is no provision in the 
 16.30  instrument, on the basis of the trust's income allocable to 
 16.31  each; 
 16.32     (8) for certified pollution control facilities placed in 
 16.33  service in a taxable year beginning before December 31, 1986, 
 16.34  and for which amortization deductions were elected under section 
 16.35  169 of the Internal Revenue Code of 1954, as amended through 
 16.36  December 31, 1985, an amount equal to the allowance for 
 17.1   depreciation under Minnesota Statutes 1986, section 290.09, 
 17.2   subdivision 7; 
 17.3      (9) amounts included in federal taxable income that are due 
 17.4   to refunds of income, excise, or franchise taxes based on net 
 17.5   income or related minimum taxes paid by the corporation to 
 17.6   Minnesota, another state, a political subdivision of another 
 17.7   state, the District of Columbia, or a foreign country or 
 17.8   possession of the United States to the extent that the taxes 
 17.9   were added to federal taxable income under section 290.01, 
 17.10  subdivision 19c, clause (1), in a prior taxable year; 
 17.11     (10) 80 percent of royalties, fees, or other like income 
 17.12  accrued or received from a foreign operating corporation or a 
 17.13  foreign corporation which is part of the same unitary business 
 17.14  as the receiving corporation; 
 17.15     (11) income or gains from the business of mining as defined 
 17.16  in section 290.05, subdivision 1, clause (a), that are not 
 17.17  subject to Minnesota franchise tax; 
 17.18     (12) the amount of handicap access expenditures in the 
 17.19  taxable year which are not allowed to be deducted or capitalized 
 17.20  under section 44(d)(7) of the Internal Revenue Code; 
 17.21     (13) the amount of qualified research expenses not allowed 
 17.22  for federal income tax purposes under section 280C(c) of the 
 17.23  Internal Revenue Code, but only to the extent that the amount 
 17.24  exceeds the amount of the credit allowed under section 290.068; 
 17.25     (14) the amount of salary expenses not allowed for federal 
 17.26  income tax purposes due to claiming the Indian employment credit 
 17.27  under section 45A(a) of the Internal Revenue Code; 
 17.28     (15) the amount of any refund of environmental taxes paid 
 17.29  under section 59A of the Internal Revenue Code; 
 17.30     (16) for taxable years beginning before January 1, 2008, 
 17.31  the amount of the federal small ethanol producer credit allowed 
 17.32  under section 40(a)(3) of the Internal Revenue Code which is 
 17.33  included in gross income under section 87 of the Internal 
 17.34  Revenue Code; 
 17.35     (17) for a corporation whose foreign sales corporation, as 
 17.36  defined in section 922 of the Internal Revenue Code, constituted 
 18.1   a foreign operating corporation during any taxable year ending 
 18.2   before January 1, 1995, and a return was filed by August 15, 
 18.3   1996, claiming the deduction under section 290.21, subdivision 
 18.4   4, for income received from the foreign operating corporation, 
 18.5   an amount equal to 1.23 multiplied by the amount of income 
 18.6   excluded under section 114 of the Internal Revenue Code, 
 18.7   provided the income is not income of a foreign operating 
 18.8   company; 
 18.9      (18) any decrease in subpart F income, as defined in 
 18.10  section 952(a) of the Internal Revenue Code, for the taxable 
 18.11  year when subpart F income is calculated without regard to the 
 18.12  provisions of section 614 of Public Law 107-147; ~~and~~ 
 18.13     (19) in each of the five tax years immediately following 
 18.14  the tax year in which an addition is required under subdivision 
 18.15  19c, clause (16), an amount equal to one-fifth of the delayed 
 18.16  depreciation.  For purposes of this clause, "delayed 
 18.17  depreciation" means the amount of the addition made by the 
 18.18  taxpayer under subdivision 19c, clause (16).  The resulting 
 18.19  delayed depreciation cannot be less than zero; and 
 18.20     (20) in each of the five tax years immediately following 
 18.21  the tax year in which an addition is required under subdivision 
 18.22  19c, clause (17), an amount equal to one-fifth of the amount of 
 18.23  the addition. 
 18.24     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 18.25  beginning after December 31, 2004. 
 18.26     Sec. 6.  Minnesota Statutes 2004, section 290.01, 
 18.27  subdivision 31, is amended to read: 
 18.28     Subd. 31.  [INTERNAL REVENUE CODE.] Unless specifically 
 18.29  defined otherwise, "Internal Revenue Code" means the Internal 
 18.30  Revenue Code of 1986, as amended through June 15, 2003, and as 
 18.31  further amended by the American Jobs Creation Act of 2004, 
 18.32  Public Law 108-435. 
 18.33     <b>[EFFECTIVE DATE.]</b> This section is effective the day 
 18.34  following final enactment except the changes incorporated by 
 18.35  federal changes are effective at the same times as the changes 
 18.36  were effective for federal purposes. 
 19.1      Sec. 7.  Minnesota Statutes 2004, section 290.06, 
 19.2   subdivision 2c, is amended to read: 
 19.3      Subd. 2c.  [SCHEDULES OF RATES FOR INDIVIDUALS, ESTATES, 
 19.4   AND TRUSTS.] (a) The income taxes imposed by this chapter upon 
 19.5   married individuals filing joint returns and surviving spouses 
 19.6   as defined in section 2(a) of the Internal Revenue Code must be 
 19.7   computed by applying to their taxable net income the following 
 19.8   schedule of rates: 
 19.9      (1) On the first $25,680, 5.35 percent; 
 19.10     (2) On all over $25,680, but not over $102,030, 7.05 
 19.11  percent; 
 19.12     (3) On all over $102,030, 7.85 percent. 
 19.13     Married individuals filing separate returns, estates, and 
 19.14  trusts must compute their income tax by applying the above rates 
 19.15  to their taxable income, except that the income brackets will be 
 19.16  one-half of the above amounts.  
 19.17     (b) The income taxes imposed by this chapter upon unmarried 
 19.18  individuals must be computed by applying to taxable net income 
 19.19  the following schedule of rates: 
 19.20     (1) On the first $17,570, 5.35 percent; 
 19.21     (2) On all over $17,570, but not over $57,710, 7.05 
 19.22  percent; 
 19.23     (3) On all over $57,710, 7.85 percent. 
 19.24     (c) The income taxes imposed by this chapter upon unmarried 
 19.25  individuals qualifying as a head of household as defined in 
 19.26  section 2(b) of the Internal Revenue Code must be computed by 
 19.27  applying to taxable net income the following schedule of rates: 
 19.28     (1) On the first $21,630, 5.35 percent; 
 19.29     (2) On all over $21,630, but not over $86,910, 7.05 
 19.30  percent; 
 19.31     (3) On all over $86,910, 7.85 percent. 
 19.32     (d) In lieu of a tax computed according to the rates set 
 19.33  forth in this subdivision, the tax of any individual taxpayer 
 19.34  whose taxable net income for the taxable year is less than an 
 19.35  amount determined by the commissioner must be computed in 
 19.36  accordance with tables prepared and issued by the commissioner 
 20.1   of revenue based on income brackets of not more than $100.  The 
 20.2   amount of tax for each bracket shall be computed at the rates 
 20.3   set forth in this subdivision, provided that the commissioner 
 20.4   may disregard a fractional part of a dollar unless it amounts to 
 20.5   50 cents or more, in which case it may be increased to $1. 
 20.6      (e) An individual who is not a Minnesota resident for the 
 20.7   entire year must compute the individual's Minnesota income tax 
 20.8   as provided in this subdivision.  After the application of the 
 20.9   nonrefundable credits provided in this chapter, the tax 
 20.10  liability must then be multiplied by a fraction in which:  
 20.11     (1) the numerator is the individual's Minnesota source 
 20.12  federal adjusted gross income as defined in section 62 of the 
 20.13  Internal Revenue Code and increased by the additions required 
 20.14  under section 290.01, subdivision 19a, clauses (1), (5), ~~and~~ 
 20.15  (6), (7), (8), and (9), and reduced by the subtraction under 
 20.16  section 290.01, subdivision 19b, clause (11), and the Minnesota 
 20.17  assignable portion of the subtraction for United States 
 20.18  government interest under section 290.01, subdivision 19b, 
 20.19  clause (1), and the subtractions under clauses (10), (11), and 
 20.20  (12), after applying the allocation and assignability provisions 
 20.21  of section 290.081, clause (a), or 290.17; and 
 20.22     (2) the denominator is the individual's federal adjusted 
 20.23  gross income as defined in section 62 of the Internal Revenue 
 20.24  Code of 1986, increased by the amounts specified in section 
 20.25  290.01, subdivision 19a, clauses (1), (5), ~~and~~ (6), (7), (8), 
 20.26  and (9), and reduced by the amounts specified in section 290.01, 
 20.27  subdivision 19b, clauses (1) ~~and~~, (10), (11), and (12). 
 20.28     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 20.29  beginning after December 31, 2004. 
 20.30     Sec. 8.  Minnesota Statutes 2004, section 290.067, 
 20.31  subdivision 2a, is amended to read: 
 20.32     Subd. 2a.  [INCOME.] (a) For purposes of this section, 
 20.33  "income" means the sum of the following: 
 20.34     (1) federal adjusted gross income as defined in section 62 
 20.35  of the Internal Revenue Code; and 
 20.36     (2) the sum of the following amounts to the extent not 
 21.1   included in clause (1): 
 21.2      (i) all nontaxable income; 
 21.3      (ii) the amount of a passive activity loss that is not 
 21.4   disallowed as a result of section 469, paragraph (i) or (m) of 
 21.5   the Internal Revenue Code and the amount of passive activity 
 21.6   loss carryover allowed under section 469(b) of the Internal 
 21.7   Revenue Code; 
 21.8      (iii) an amount equal to the total of any discharge of 
 21.9   qualified farm indebtedness of a solvent individual excluded 
 21.10  from gross income under section 108(g) of the Internal Revenue 
 21.11  Code; 
 21.12     (iv) cash public assistance and relief; 
 21.13     (v) any pension or annuity (including railroad retirement 
 21.14  benefits, all payments received under the federal Social 
 21.15  Security Act, supplemental security income, and veterans 
 21.16  benefits), which was not exclusively funded by the claimant or 
 21.17  spouse, or which was funded exclusively by the claimant or 
 21.18  spouse and which funding payments were excluded from federal 
 21.19  adjusted gross income in the years when the payments were made; 
 21.20     (vi) interest received from the federal or a state 
 21.21  government or any instrumentality or political subdivision 
 21.22  thereof; 
 21.23     (vii) workers' compensation; 
 21.24     (viii) nontaxable strike benefits; 
 21.25     (ix) the gross amounts of payments received in the nature 
 21.26  of disability income or sick pay as a result of accident, 
 21.27  sickness, or other disability, whether funded through insurance 
 21.28  or otherwise; 
 21.29     (x) a lump sum distribution under section 402(e)(3) of the 
 21.30  Internal Revenue Code of 1986, as amended through December 31, 
 21.31  1995; 
 21.32     (xi) contributions made by the claimant to an individual 
 21.33  retirement account, including a qualified voluntary employee 
 21.34  contribution; simplified employee pension plan; self-employed 
 21.35  retirement plan; cash or deferred arrangement plan under section 
 21.36  401(k) of the Internal Revenue Code; or deferred compensation 
 22.1   plan under section 457 of the Internal Revenue Code; ~~and~~ 
 22.2      (xii) nontaxable scholarship or fellowship grants; and 
 22.3      (xiii) the amount of deduction allowed under section 199 of 
 22.4   the Internal Revenue Code. 
 22.5      In the case of an individual who files an income tax return 
 22.6   on a fiscal year basis, the term "federal adjusted gross income" 
 22.7   means federal adjusted gross income reflected in the fiscal year 
 22.8   ending in the next calendar year.  Federal adjusted gross income 
 22.9   may not be reduced by the amount of a net operating loss 
 22.10  carryback or carryforward or a capital loss carryback or 
 22.11  carryforward allowed for the year. 
 22.12     (b) "Income" does not include: 
 22.13     (1) amounts excluded pursuant to the Internal Revenue Code, 
 22.14  sections 101(a) and 102; 
 22.15     (2) amounts of any pension or annuity that were exclusively 
 22.16  funded by the claimant or spouse if the funding payments were 
 22.17  not excluded from federal adjusted gross income in the years 
 22.18  when the payments were made; 
 22.19     (3) surplus food or other relief in kind supplied by a 
 22.20  governmental agency; 
 22.21     (4) relief granted under chapter 290A; 
 22.22     (5) child support payments received under a temporary or 
 22.23  final decree of dissolution or legal separation; and 
 22.24     (6) restitution payments received by eligible individuals 
 22.25  and excludable interest as defined in section 803 of the 
 22.26  Economic Growth and Tax Relief Reconciliation Act of 2001, 
 22.27  Public Law 107-16. 
 22.28     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 22.29  beginning after December 31, 2003. 
 22.30     Sec. 9.  Minnesota Statutes 2004, section 290.091, 
 22.31  subdivision 2, is amended to read: 
 22.32     Subd. 2.  [DEFINITIONS.] For purposes of the tax imposed by 
 22.33  this section, the following terms have the meanings given: 
 22.34     (a) "Alternative minimum taxable income" means the sum of 
 22.35  the following for the taxable year: 
 22.36     (1) the taxpayer's federal alternative minimum taxable 
 23.1   income as defined in section 55(b)(2) of the Internal Revenue 
 23.2   Code; 
 23.3      (2) the taxpayer's itemized deductions allowed in computing 
 23.4   federal alternative minimum taxable income, but excluding: 
 23.5      (i) the charitable contribution deduction under section 170 
 23.6   of the Internal Revenue Code to the extent that the deduction 
 23.7   exceeds 1.0 percent of adjusted gross income, as defined in 
 23.8   section 62 of the Internal Revenue Code; 
 23.9      (ii) the medical expense deduction; 
 23.10     (iii) the casualty, theft, and disaster loss deduction; and 
 23.11     (iv) the impairment-related work expenses of a disabled 
 23.12  person; 
 23.13     (3) for depletion allowances computed under section 613A(c) 
 23.14  of the Internal Revenue Code, with respect to each property (as 
 23.15  defined in section 614 of the Internal Revenue Code), to the 
 23.16  extent not included in federal alternative minimum taxable 
 23.17  income, the excess of the deduction for depletion allowable 
 23.18  under section 611 of the Internal Revenue Code for the taxable 
 23.19  year over the adjusted basis of the property at the end of the 
 23.20  taxable year (determined without regard to the depletion 
 23.21  deduction for the taxable year); 
 23.22     (4) to the extent not included in federal alternative 
 23.23  minimum taxable income, the amount of the tax preference for 
 23.24  intangible drilling cost under section 57(a)(2) of the Internal 
 23.25  Revenue Code determined without regard to subparagraph (E); 
 23.26     (5) to the extent not included in federal alternative 
 23.27  minimum taxable income, the amount of interest income as 
 23.28  provided by section 290.01, subdivision 19a, clause (1); and 
 23.29     (6) the amount of addition required by section 290.01, 
 23.30  subdivision 19a, ~~clause~~ clauses (7), (8), and (9); 
 23.31     less the sum of the amounts determined under the following: 
 23.32     (1) interest income as defined in section 290.01, 
 23.33  subdivision 19b, clause (1); 
 23.34     (2) an overpayment of state income tax as provided by 
 23.35  section 290.01, subdivision 19b, clause (2), to the extent 
 23.36  included in federal alternative minimum taxable income; 
 24.1      (3) the amount of investment interest paid or accrued 
 24.2   within the taxable year on indebtedness to the extent that the 
 24.3   amount does not exceed net investment income, as defined in 
 24.4   section 163(d)(4) of the Internal Revenue Code.  Interest does 
 24.5   not include amounts deducted in computing federal adjusted gross 
 24.6   income; and 
 24.7      (4) amounts subtracted from federal taxable income as 
 24.8   provided by section 290.01, subdivision 19b, clauses (10) ~~and~~, 
 24.9   (11), and (12). 
 24.10     In the case of an estate or trust, alternative minimum 
 24.11  taxable income must be computed as provided in section 59(c) of 
 24.12  the Internal Revenue Code. 
 24.13     (b) "Investment interest" means investment interest as 
 24.14  defined in section 163(d)(3) of the Internal Revenue Code. 
 24.15     (c) "Tentative minimum tax" equals 6.4 percent of 
 24.16  alternative minimum taxable income after subtracting the 
 24.17  exemption amount determined under subdivision 3. 
 24.18     (d) "Regular tax" means the tax that would be imposed under 
 24.19  this chapter (without regard to this section and section 
 24.20  290.032), reduced by the sum of the nonrefundable credits 
 24.21  allowed under this chapter.  
 24.22     (e) "Net minimum tax" means the minimum tax imposed by this 
 24.23  section. 
 24.24     <b>[EFFECTIVE DATE.]</b> This section is effective for tax years 
 24.25  beginning after December 31, 2004. 
 24.26     Sec. 10.  Minnesota Statutes 2004, section 290A.03, 
 24.27  subdivision 3, is amended to read: 
 24.28     Subd. 3.  [INCOME.] (1) "Income" means the sum of the 
 24.29  following:  
 24.30     (a) federal adjusted gross income as defined in the 
 24.31  Internal Revenue Code; and 
 24.32     (b) the sum of the following amounts to the extent not 
 24.33  included in clause (a):  
 24.34     (i) all nontaxable income; 
 24.35     (ii) the amount of a passive activity loss that is not 
 24.36  disallowed as a result of section 469, paragraph (i) or (m) of 
 25.1   the Internal Revenue Code and the amount of passive activity 
 25.2   loss carryover allowed under section 469(b) of the Internal 
 25.3   Revenue Code; 
 25.4      (iii) an amount equal to the total of any discharge of 
 25.5   qualified farm indebtedness of a solvent individual excluded 
 25.6   from gross income under section 108(g) of the Internal Revenue 
 25.7   Code; 
 25.8      (iv) cash public assistance and relief; 
 25.9      (v) any pension or annuity (including railroad retirement 
 25.10  benefits, all payments received under the federal Social 
 25.11  Security Act, supplemental security income, and veterans 
 25.12  benefits), which was not exclusively funded by the claimant or 
 25.13  spouse, or which was funded exclusively by the claimant or 
 25.14  spouse and which funding payments were excluded from federal 
 25.15  adjusted gross income in the years when the payments were made; 
 25.16     (vi) interest received from the federal or a state 
 25.17  government or any instrumentality or political subdivision 
 25.18  thereof; 
 25.19     (vii) workers' compensation; 
 25.20     (viii) nontaxable strike benefits; 
 25.21     (ix) the gross amounts of payments received in the nature 
 25.22  of disability income or sick pay as a result of accident, 
 25.23  sickness, or other disability, whether funded through insurance 
 25.24  or otherwise; 
 25.25     (x) a lump sum distribution under section 402(e)(3) of the 
 25.26  Internal Revenue Code of 1986, as amended through December 31, 
 25.27  1995; 
 25.28     (xi) contributions made by the claimant to an individual 
 25.29  retirement account, including a qualified voluntary employee 
 25.30  contribution; simplified employee pension plan; self-employed 
 25.31  retirement plan; cash or deferred arrangement plan under section 
 25.32  401(k) of the Internal Revenue Code; or deferred compensation 
 25.33  plan under section 457 of the Internal Revenue Code; ~~and~~ 
 25.34     (xii) nontaxable scholarship or fellowship grants; and 
 25.35     (xiii) the amount of deduction allowed under section 199 of 
 25.36  the Internal Revenue Code. 
 26.1      In the case of an individual who files an income tax return 
 26.2   on a fiscal year basis, the term "federal adjusted gross income" 
 26.3   shall mean federal adjusted gross income reflected in the fiscal 
 26.4   year ending in the calendar year.  Federal adjusted gross income 
 26.5   shall not be reduced by the amount of a net operating loss 
 26.6   carryback or carryforward or a capital loss carryback or 
 26.7   carryforward allowed for the year.  
 26.8      (2) "Income" does not include:  
 26.9      (a) amounts excluded pursuant to the Internal Revenue Code, 
 26.10  sections 101(a) and 102; 
 26.11     (b) amounts of any pension or annuity which was exclusively 
 26.12  funded by the claimant or spouse and which funding payments were 
 26.13  not excluded from federal adjusted gross income in the years 
 26.14  when the payments were made; 
 26.15     (c) surplus food or other relief in kind supplied by a 
 26.16  governmental agency; 
 26.17     (d) relief granted under this chapter; 
 26.18     (e) child support payments received under a temporary or 
 26.19  final decree of dissolution or legal separation; or 
 26.20     (f) restitution payments received by eligible individuals 
 26.21  and excludable interest as defined in section 803 of the 
 26.22  Economic Growth and Tax Relief Reconciliation Act of 2001, 
 26.23  Public Law 107-16.  
 26.24     (3) The sum of the following amounts may be subtracted from 
 26.25  income:  
 26.26     (a) for the claimant's first dependent, the exemption 
 26.27  amount multiplied by 1.4; 
 26.28     (b) for the claimant's second dependent, the exemption 
 26.29  amount multiplied by 1.3; 
 26.30     (c) for the claimant's third dependent, the exemption 
 26.31  amount multiplied by 1.2; 
 26.32     (d) for the claimant's fourth dependent, the exemption 
 26.33  amount multiplied by 1.1; 
 26.34     (e) for the claimant's fifth dependent, the exemption 
 26.35  amount; and 
 26.36     (f) if the claimant or claimant's spouse was disabled or 
 27.1   attained the age of 65 on or before December 31 of the year for 
 27.2   which the taxes were levied or rent paid, the exemption amount.  
 27.3      For purposes of this subdivision, the "exemption amount" 
 27.4   means the exemption amount under section 151(d) of the Internal 
 27.5   Revenue Code for the taxable year for which the income is 
 27.6   reported.  
 27.7      <b>[EFFECTIVE DATE.]</b> This section is effective for property 
 27.8   tax refunds based on household income for 2004 and thereafter. 
 27.9      Sec. 11.  Minnesota Statutes 2004, section 290A.03, 
 27.10  subdivision 15, is amended to read: 
 27.11     Subd. 15.  [INTERNAL REVENUE CODE.] "Internal Revenue Code" 
 27.12  means the Internal Revenue Code of 1986, as amended through June 
 27.13  15, 2003, and as further amended by the American Jobs Creation 
 27.14  Act of 2004, Public Law 108-435. 
 27.15     <b>[EFFECTIVE DATE.]</b> This section is effective for property 
 27.16  tax refunds based on property taxes payable on or after December 
 27.17  31, 2004, and rent paid on or after December 31, 2003. 
 27.18                             ARTICLE 3 
 27.19                   SALES, USE, AND SPECIAL TAXES 
 27.20     Section 1.  Minnesota Statutes 2004, section 16C.03, is 
 27.21  amended by adding a subdivision to read: 
 27.22     Subd. 18.  [CONTRACTS WITH FOREIGN VENDORS.] (a) The 
 27.23  commissioner and other agencies to which this section applies 
 27.24  and the legislative branch of government shall, subject to 
 27.25  paragraph (d), cancel a contract for goods or services from a 
 27.26  vendor or an affiliate of a vendor or suspend or debar a vendor 
 27.27  or an affiliate of a vendor from future contracts upon 
 27.28  notification from the commissioner of revenue that the vendor or 
 27.29  an affiliate of the vendor has not registered to collect the 
 27.30  sales and use tax imposed under chapter 297A on its sales in 
 27.31  Minnesota or to a destination in Minnesota.  This subdivision 
 27.32  shall not apply to state colleges and universities, the courts, 
 27.33  and any agency in the judicial branch of government.  For 
 27.34  purposes of this subdivision, the term "affiliate" means any 
 27.35  person or entity that is controlled by, or is under common 
 27.36  control of, a vendor through stock ownership or other 
 28.1   affiliation. 
 28.2      (b) Beginning January 1, 2006, each vendor or affiliate of 
 28.3   a vendor selling goods or services, subject to tax under chapter 
 28.4   297A, to an agency or the legislature must provide its Minnesota 
 28.5   sales and use tax business identification number, upon request, 
 28.6   to show that the vendor is registered to collect Minnesota sales 
 28.7   or use tax. 
 28.8      (c) The commissioner of revenue shall periodically provide 
 28.9   to the commissioner and the legislative branch a list of vendors 
 28.10  who have not registered to collect Minnesota sales and use tax 
 28.11  and who are subject to being suspended or debarred as vendors or 
 28.12  having their contracts canceled. 
 28.13     (d) The provisions of this subdivision may be waived by the 
 28.14  commissioner or the legislative branch when the vendor is the 
 28.15  single source of such goods or services, in the event of an 
 28.16  emergency, or when it is in the best interests of the state as 
 28.17  determined by the commissioner in consultation with the 
 28.18  commissioner of revenue.  Such consultation is not a disclosure 
 28.19  violation under chapter 270B. 
 28.20     <b>[EFFECTIVE DATE.]</b> This section is effective for all 
 28.21  contracts entered into after December 31, 2005. 
 28.22     Sec. 2.  [295.75] [LIQUOR GROSS RECEIPTS TAX.] 
 28.23     Subdivision 1.  [DEFINITIONS.] (a) For purposes of this 
 28.24  section, the following terms have the meanings given. 
 28.25     (b) "Commissioner" means the commissioner of revenue.  
 28.26     (c) "Gross receipts" means the total amount received, in 
 28.27  money or by barter or exchange, for all liquor sales at retail 
 28.28  as measured by the sales price, but does not include any taxes 
 28.29  imposed directly on the consumer that are separately stated on 
 28.30  the invoice, bill of sale, or similar document given to the 
 28.31  purchaser. 
 28.32     (d) "Liquor" means:  
 28.33     (1) intoxicating liquor, as defined in section 340A.101, 
 28.34  subdivision 14; 
 28.35     (2) beverage containing intoxicating liquor; and 
 28.36     (3) 3.2 percent malt liquor, as defined in section 
 29.1   340A.101, subdivision 19, when sold at an on-sale or off-sale 
 29.2   municipal liquor store or other establishment licensed to sell 
 29.3   any type of intoxicating liquor. 
 29.4      (e) "Liquor retailer" means a retailer that sells liquor.  
 29.5      (f) "Retail sale" has the meaning given in section 297A.61, 
 29.6   subdivision 4.  
 29.7      Subd. 2.  [GROSS RECEIPTS TAX IMPOSED.] A tax is imposed on 
 29.8   each liquor retailer equal to 2.5 percent of gross receipts from 
 29.9   retail sales in Minnesota of liquor.  
 29.10     Subd. 3.  [USE TAX IMPOSED; CREDIT FOR TAXES PAID.] (a) A 
 29.11  person that receives liquor for use or storage in Minnesota, 
 29.12  other than from a liquor retailer that paid the tax under 
 29.13  subdivision 2, is subject to tax at the rate imposed under 
 29.14  subdivision 2.  Liability for the tax is incurred when the 
 29.15  person has possession of the liquor in Minnesota.  The tax must 
 29.16  be remitted to the commissioner in the same manner prescribed 
 29.17  for the taxes imposed under chapter 297A. 
 29.18     (b) A person that has paid taxes to another jurisdiction on 
 29.19  the same transaction and is subject to tax under this section is 
 29.20  entitled to a credit for the tax legally due and paid to another 
 29.21  jurisdiction to the extent of the lesser of (1) the tax actually 
 29.22  paid to the other jurisdiction, or (2) the amount of tax imposed 
 29.23  by Minnesota on the transaction subject to tax in the other 
 29.24  jurisdiction. 
 29.25     Subd. 4.  [TAX COLLECTION REQUIRED.] A liquor retailer with 
 29.26  nexus in Minnesota, who is not subject to tax under subdivision 
 29.27  2, is required to collect the tax imposed under subdivision 3 
 29.28  from the purchaser of the liquor and give the purchaser a 
 29.29  receipt for the tax paid.  The tax collected must be remitted to 
 29.30  the commissioner in the same manner prescribed for the taxes 
 29.31  imposed under chapter 297A.  
 29.32     Subd. 5.  [TAXES PAID TO ANOTHER JURISDICTION; CREDIT.] A 
 29.33  liquor retailer that has paid taxes to another jurisdiction 
 29.34  measured by gross receipts and is subject to tax under this 
 29.35  section on the same gross receipts is entitled to a credit for 
 29.36  the tax legally due and paid to another jurisdiction to the 
 30.1   extent of the lesser of (1) the tax actually paid to the other 
 30.2   jurisdiction, or (2) the amount of tax imposed by Minnesota on 
 30.3   the gross receipts subject to tax in the other taxing 
 30.4   jurisdictions. 
 30.5      Subd. 6.  [EXEMPTIONS.] All of the exemptions applicable to 
 30.6   the taxes imposed under chapter 297A are applicable to the taxes 
 30.7   imposed under this section. 
 30.8      Subd. 7.  [SOURCING OF SALES.] All of the provisions of 
 30.9   section 297A.668 apply to the taxes imposed by this section. 
 30.10     Subd. 8.  [PAYMENT; REPORTING.] A liquor retailer shall 
 30.11  report the tax on a return prescribed by the commissioner of 
 30.12  revenue, and shall remit the tax with the return.  The return 
 30.13  and the tax must be filed and paid using the filing cycle and 
 30.14  due dates provided for taxes imposed under chapter 297A. 
 30.15     Subd. 9.  [ADMINISTRATION.] Unless specifically provided 
 30.16  otherwise by this section, the audit, assessment, refund, 
 30.17  penalty, interest, enforcement, collection remedies, appeal, and 
 30.18  administrative provisions of chapters 270 and 289A that are 
 30.19  applicable to taxes imposed under chapter 297A apply to taxes 
 30.20  imposed under this section.  
 30.21     Subd. 10.  [INTEREST ON OVERPAYMENTS.] Interest must be 
 30.22  paid on an overpayment refunded or credited to the taxpayer from 
 30.23  the date of payment of the tax until the date the refund is paid 
 30.24  or credited.  For purposes of this subdivision, the date of 
 30.25  payment is the due date of the return or the date of actual 
 30.26  payment of the tax, whichever is later. 
 30.27     Subd. 11.  [DEPOSIT OF REVENUES.] The commissioner shall 
 30.28  deposit all revenues, including penalties and interest, derived 
 30.29  from the tax imposed by this section in the general fund. 
 30.30     <b>[EFFECTIVE DATE.]</b> This section is effective for sales and 
 30.31  purchases occurring on or after January 1, 2006. 
 30.32     Sec. 3.  Minnesota Statutes 2004, section 297A.68, 
 30.33  subdivision 2, is amended to read: 
 30.34     Subd. 2.  [MATERIALS CONSUMED IN INDUSTRIAL PRODUCTION.] 
 30.35  (a) Materials stored, used, or consumed in industrial production 
 30.36  of personal property intended to be sold ultimately at retail 
 31.1   are exempt, whether or not the item so used becomes an 
 31.2   ingredient or constituent part of the property produced.  
 31.3   Materials that qualify for this exemption include, but are not 
 31.4   limited to, the following: 
 31.5      (1) chemicals, including chemicals used for cleaning food 
 31.6   processing machinery and equipment; 
 31.7      (2) materials, including chemicals, fuels, and electricity 
 31.8   purchased by persons engaged in industrial production to treat 
 31.9   waste generated as a result of the production process; 
 31.10     (3) fuels, electricity, gas, and steam used or consumed in 
 31.11  the production process, except that electricity, gas, or steam 
 31.12  used for space heating, cooling, or lighting is exempt if (i) it 
 31.13  is in excess of the average climate control or lighting for the 
 31.14  production area, and (ii) it is necessary to produce that 
 31.15  particular product; 
 31.16     (4) petroleum products and lubricants; 
 31.17     (5) packaging materials, including returnable containers 
 31.18  used in packaging food and beverage products; 
 31.19     (6) accessory tools, equipment, and other items that are 
 31.20  separate detachable units with an ordinary useful life of less 
 31.21  than 12 months used in producing a direct effect upon the 
 31.22  product; and 
 31.23     (7) the following materials, tools, and equipment used in 
 31.24  metalcasting:  crucibles, thermocouple protection sheaths and 
 31.25  tubes, stalk tubes, refractory materials, molten metal filters 
 31.26  and filter boxes, degassing lances, and base blocks. 
 31.27     (b) This exemption does not include: 
 31.28     (1) machinery, equipment, implements, tools, accessories, 
 31.29  appliances, contrivances and furniture and fixtures, except 
 31.30  those listed in paragraph (a), clause (6); and 
 31.31     (2) petroleum and special fuels used in producing or 
 31.32  generating power for propelling ready-mixed concrete trucks on 
 31.33  the public highways of this state. 
 31.34     (c) Industrial production includes, but is not limited to, 
 31.35  research, development, design or production of any tangible 
 31.36  personal property, manufacturing, processing (other than by 
 32.1   restaurants and consumers) of agricultural products (whether 
 32.2   vegetable or animal), commercial fishing, refining, smelting, 
 32.3   reducing, brewing, distilling, printing, mining, quarrying, 
 32.4   lumbering, generating electricity, the production of road 
 32.5   building materials, and the research, development, design, or 
 32.6   production of computer software.  Industrial production does not 
 32.7   include painting, cleaning, repairing or similar processing of 
 32.8   property except as part of the original manufacturing process.  
 32.9   Industrial production does not include the transportation, 
 32.10  transmission, or distribution of petroleum, liquefied gas, 
 32.11  natural gas, water, or steam, in, by, or through pipes, lines, 
 32.12  tanks, mains, or other means of transporting those products.  
 32.13  For purposes of this paragraph, "transportation, transmission, 
 32.14  or distribution" does not include blending of petroleum or 
 32.15  biodiesel fuel as defined in section 239.77. 
 32.16     <b>[EFFECTIVE DATE.]</b> This section is effective for sales and 
 32.17  purchases made after June 30, 2005. 
 32.18     Sec. 4.  Minnesota Statutes 2004, section 297A.68, 
 32.19  subdivision 5, is amended to read: 
 32.20     Subd. 5.  [CAPITAL EQUIPMENT.] (a) Capital equipment is 
 32.21  exempt.  The tax must be imposed and collected as if the rate 
 32.22  under section 297A.62, subdivision 1, applied, and then refunded 
 32.23  in the manner provided in section 297A.75. 
 32.24     "Capital equipment" means machinery and equipment purchased 
 32.25  or leased, and used in this state by the purchaser or lessee 
 32.26  primarily for manufacturing, fabricating, mining, or refining 
 32.27  tangible personal property to be sold ultimately at retail if 
 32.28  the machinery and equipment are essential to the integrated 
 32.29  production process of manufacturing, fabricating, mining, or 
 32.30  refining.  Capital equipment also includes machinery and 
 32.31  equipment used to electronically transmit results retrieved by a 
 32.32  customer of an on-line computerized data retrieval system. 
 32.33     (b) Capital equipment includes, but is not limited to: 
 32.34     (1) machinery and equipment used to operate, control, or 
 32.35  regulate the production equipment; 
 32.36     (2) machinery and equipment used for research and 
 33.1   development, design, quality control, and testing activities; 
 33.2      (3) environmental control devices that are used to maintain 
 33.3   conditions such as temperature, humidity, light, or air pressure 
 33.4   when those conditions are essential to and are part of the 
 33.5   production process; 
 33.6      (4) materials and supplies used to construct and install 
 33.7   machinery or equipment; 
 33.8      (5) repair and replacement parts, including accessories, 
 33.9   whether purchased as spare parts, repair parts, or as upgrades 
 33.10  or modifications to machinery or equipment; 
 33.11     (6) materials used for foundations that support machinery 
 33.12  or equipment; 
 33.13     (7) materials used to construct and install special purpose 
 33.14  buildings used in the production process; 
 33.15     (8) ready-mixed concrete equipment in which the ready-mixed 
 33.16  concrete is mixed as part of the delivery process regardless if 
 33.17  mounted on a chassis and leases of ready-mixed concrete trucks; 
 33.18  and 
 33.19     (9) machinery or equipment used for research, development, 
 33.20  design, or production of computer software.  
 33.21     (c) Capital equipment does not include the following: 
 33.22     (1) motor vehicles taxed under chapter 297B; 
 33.23     (2) machinery or equipment used to receive or store raw 
 33.24  materials; 
 33.25     (3) building materials, except for materials included in 
 33.26  paragraph (b), clauses (6) and (7); 
 33.27     (4) machinery or equipment used for nonproduction purposes, 
 33.28  including, but not limited to, the following:  plant security, 
 33.29  fire prevention, first aid, and hospital stations; support 
 33.30  operations or administration; pollution control; and plant 
 33.31  cleaning, disposal of scrap and waste, plant communications, 
 33.32  space heating, cooling, lighting, or safety; 
 33.33     (5) farm machinery and aquaculture production equipment as 
 33.34  defined by section 297A.61, subdivisions 12 and 13; 
 33.35     (6) machinery or equipment purchased and installed by a 
 33.36  contractor as part of an improvement to real property; ~~or~~ 
 34.1      (7) machinery or equipment used in the transportation, 
 34.2   transmission, or distribution of petroleum, liquefied gas, 
 34.3   natural gas, water, or steam, in, by, or through pipes, lines, 
 34.4   tanks, mains, or other means of transporting those products.  
 34.5   This clause does not apply to machinery or equipment used to 
 34.6   blend petroleum or biodiesel fuel as defined in section 239.77; 
 34.7   or 
 34.8      (8) any other item that is not essential to the integrated 
 34.9   process of manufacturing, fabricating, mining, or refining. 
 34.10     (d) For purposes of this subdivision: 
 34.11     (1) "Equipment" means independent devices or tools separate 
 34.12  from machinery but essential to an integrated production 
 34.13  process, including computers and computer software, used in 
 34.14  operating, controlling, or regulating machinery and equipment; 
 34.15  and any subunit or assembly comprising a component of any 
 34.16  machinery or accessory or attachment parts of machinery, such as 
 34.17  tools, dies, jigs, patterns, and molds.  
 34.18     (2) "Fabricating" means to make, build, create, produce, or 
 34.19  assemble components or property to work in a new or different 
 34.20  manner. 
 34.21     (3) "Integrated production process" means a process or 
 34.22  series of operations through which tangible personal property is 
 34.23  manufactured, fabricated, mined, or refined.  For purposes of 
 34.24  this clause, (i) manufacturing begins with the removal of raw 
 34.25  materials from inventory and ends when the last process prior to 
 34.26  loading for shipment has been completed; (ii) fabricating begins 
 34.27  with the removal from storage or inventory of the property to be 
 34.28  assembled, processed, altered, or modified and ends with the 
 34.29  creation or production of the new or changed product; (iii) 
 34.30  mining begins with the removal of overburden from the site of 
 34.31  the ores, minerals, stone, peat deposit, or surface materials 
 34.32  and ends when the last process before stockpiling is completed; 
 34.33  and (iv) refining begins with the removal from inventory or 
 34.34  storage of a natural resource and ends with the conversion of 
 34.35  the item to its completed form. 
 34.36     (4) "Machinery" means mechanical, electronic, or electrical 
 35.1   devices, including computers and computer software, that are 
 35.2   purchased or constructed to be used for the activities set forth 
 35.3   in paragraph (a), beginning with the removal of raw materials 
 35.4   from inventory through completion of the product, including 
 35.5   packaging of the product. 
 35.6      (5) "Machinery and equipment used for pollution control" 
 35.7   means machinery and equipment used solely to eliminate, prevent, 
 35.8   or reduce pollution resulting from an activity described in 
 35.9   paragraph (a).  
 35.10     (6) "Manufacturing" means an operation or series of 
 35.11  operations where raw materials are changed in form, composition, 
 35.12  or condition by machinery and equipment and which results in the 
 35.13  production of a new article of tangible personal property.  For 
 35.14  purposes of this subdivision, "manufacturing" includes the 
 35.15  generation of electricity or steam to be sold at retail. 
 35.16     (7) "Mining" means the extraction of minerals, ores, stone, 
 35.17  or peat. 
 35.18     (8) "On-line data retrieval system" means a system whose 
 35.19  cumulation of information is equally available and accessible to 
 35.20  all its customers. 
 35.21     (9) "Primarily" means machinery and equipment used 50 
 35.22  percent or more of the time in an activity described in 
 35.23  paragraph (a). 
 35.24     (10) "Refining" means the process of converting a natural 
 35.25  resource to an intermediate or finished product, including the 
 35.26  treatment of water to be sold at retail. 
 35.27     <b>[EFFECTIVE DATE.]</b> This section is effective for sales and 
 35.28  purchases made after June 30, 2005. 
 35.29     Sec. 5.  Minnesota Statutes 2004, section 297I.01, is 
 35.30  amended by adding a subdivision to read: 
 35.31     Subd. 6a.  [DIRECT BUSINESS.] (a) "Direct business" means 
 35.32  all insurance provided by an insurance company or its agents, 
 35.33  and specifically includes stop-loss insurance purchased in 
 35.34  connection with a self-insurance plan for employee health 
 35.35  benefits or for other purposes, but excludes: 
 35.36     (1) reinsurance in which an insurance company assumes the 
 36.1   liability of another insurance company; and 
 36.2      (2) self-insurance. 
 36.3      (b) For purposes of this subdivision, an insurance company 
 36.4   includes a nonprofit health service corporation, health 
 36.5   maintenance organization, and community integrated service 
 36.6   network. 
 36.7      <b>[EFFECTIVE DATE.]</b> This section is effective for insurance 
 36.8   premiums received after December 31, 2005. 
 36.9      Sec. 6.  Laws 2001, First Special Session chapter 5, 
 36.10  article 12, section 95, is amended to read:  
 36.11     Sec. 95.  [REPEALER.] 
 36.12     (a) Minnesota Statutes 2000, sections 297A.61, subdivision 
 36.13  16; 297A.68, subdivision 21; and 297A.71, subdivisions 2 and 16, 
 36.14  are repealed effective for sales and purchases occurring after 
 36.15  June 30, 2001, except that the repeal of section 297A.61, 
 36.16  subdivision 16, paragraph (d), is effective for sales and 
 36.17  purchases occurring after July 31, 2001. 
 36.18     (b) Minnesota Statutes 2000, ~~sections~~ section 297A.62, 
 36.19  subdivision 2, ~~and 297A.64, subdivision 1, are~~ is repealed 
 36.20  effective for sales and purchases made after December 31, 2005. 
 36.21     (c) Minnesota Statutes 2000, section 297A.71, subdivision 
 36.22  15, is repealed effective for sales and purchases made after 
 36.23  June 30, 2002. 
 36.24     (d) Minnesota Statutes 2000, section 289A.60, subdivision 
 36.25  15, is repealed effective for liabilities after January 1, 2003. 
 36.26     <b>[EFFECTIVE DATE.]</b> This section is effective the day 
 36.27  following final enactment. 
 36.28                             ARTICLE 4
 36.29                           MISCELLANEOUS
 36.30     Section 1.  Minnesota Statutes 2004, section 273.1384, 
 36.31  subdivision 1, is amended to read: 
 36.32     Subdivision 1.  [RESIDENTIAL HOMESTEAD MARKET VALUE 
 36.33  CREDIT.] Each county auditor shall determine a homestead credit 
 36.34  for each class 1a, 1b, 1c, and 2a homestead property within the 
 36.35  county equal to 0.4 percent of the first $76,000 of market value 
 36.36  of the property~~.  The amount of homestead credit for a homestead~~ 
 37.1   ~~may not exceed $304 and is reduced by~~ minus .09 percent of the 
 37.2   market value in excess of $76,000.  The credit amount may not be 
 37.3   less than zero.  In the case of an agricultural or resort 
 37.4   homestead, only the market value of the house, garage, and 
 37.5   immediately surrounding one acre of land is eligible in 
 37.6   determining the property's homestead credit.  In the case of a 
 37.7   property which is classified as part homestead and part 
 37.8   nonhomestead, (i) the credit shall apply only to the homestead 
 37.9   portion of the property~~.~~, but (ii) if a portion of a property is 
 37.10  classified as nonhomestead solely because not all the owners 
 37.11  occupy the property, or solely because both spouses do not 
 37.12  occupy the property, the credit amount shall be initially 
 37.13  computed as if that nonhomestead portion were also in the 
 37.14  homestead class and then prorated to the owner-occupant's 
 37.15  percentage of ownership or prorated to one-half if both spouses 
 37.16  do not occupy the property. 
 37.17     <b>[EFFECTIVE DATE.]</b> This section is effective for taxes 
 37.18  payable in 2006 and thereafter. 
 37.19     Sec. 2.  [APPROPRIATION TO DEPARTMENT OF REVENUE FOR 
 37.20  COMPLIANCE ACTIVITIES.] 
 37.21     (a) $5,786,000 is appropriated from the general fund to the 
 37.22  commissioner of revenue for fiscal year 2006 and $7,510,000 is 
 37.23  appropriated from the general fund to the commissioner of 
 37.24  revenue for fiscal year 2007. 
 37.25     (b) $5,096,000 the first year and $6,190,000 the second 
 37.26  year are for additional activities to identify and collect tax 
 37.27  liabilities from individuals and businesses that currently do 
 37.28  not pay all taxes owed.  This initiative is expected to result 
 37.29  in new general fund revenues of $42,800,000 for the biennium 
 37.30  ending June 30, 2007. 
 37.31     (c) The department must report to the chairs of the house 
 37.32  Ways and Means and senate Finance Committees by March 1, 2006, 
 37.33  and January 15, 2007, on the following performance indicators: 
 37.34     (1) the number of corporations noncompliant with the 
 37.35  corporate tax system each year and the percentage and dollar 
 37.36  amounts of valid tax liabilities collected; 
 38.1      (2) the number of businesses noncompliant with the sales 
 38.2   and use tax system and the percentage and dollar amount of the 
 38.3   valid tax liabilities collected; and 
 38.4      (3) the number of individual noncompliant cases resolved 
 38.5   and the percentage and dollar amounts of valid tax liabilities 
 38.6   collected. 
 38.7      The report must also identify base level expenditures and 
 38.8   staff positions related to compliance and audit activities, 
 38.9   including baseline information as of January 1, 2004.  The 
 38.10  information must be provided at the budget activity level. 
 38.11     (d) Of the amounts appropriated under paragraph (a), 
 38.12  $690,000 the first year and $1,320,000 the second year are for 
 38.13  additional activities to identify and collect tax liabilities 
 38.14  from individuals and businesses that currently do not pay all 
 38.15  taxes owed.  This initiative is expected to result in new 
 38.16  general revenues of $25,200,000 for the biennium ending June 30, 
 38.17  2007. 
 38.18     Sec. 3.  [CITY AID PAYMENTS.] 
 38.19     In 2005 and subsequent years, market value credit 
 38.20  reimbursements for each city payable under Minnesota Statutes, 
 38.21  section 273.1384, are reduced by the dollar amount of the 2003 
 38.22  reduction in market value credit reimbursements for that city 
 38.23  due to Laws 2003, First Special Session chapter 21, article 5, 
 38.24  section 12.  No city's market value credit reimbursements are 
 38.25  reduced to less than zero under this section.  To the extent 
 38.26  sufficient information is available on each payment date, the 
 38.27  commissioner shall pay the annual 2005 and subsequent year 
 38.28  market value credit reimbursement amounts, after reduction under 
 38.29  this section, to cities in equal installments on the dates 
 38.30  specified in Minnesota Statutes, section 273.1384. 
 38.31     <b>[EFFECTIVE DATE.]</b> This section is effective the day 
 38.32  following final enactment.