1.1 	A bill for an act
1.2 	relating to taxation; providing an exemption for pass-through income; expanding 
1.3 	sales tax base; exempting certain purchases from sales tax;amending Minnesota 
1.4 	Statutes 2008, sections 290.01, subdivision 19b; 297A.61, subdivision 3; 
1.5 	297A.67, subdivision 8; 297A.70, subdivision 2.
1.6 	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.7 	Section 1. Minnesota Statutes 2008, section 290.01, subdivision 19b, is amended to 
1.8 	read:
1.9 		Subd. 19b. Subtractions from federal taxable income. For individuals, estates, 
1.10 	and trusts, there shall be subtracted from federal taxable income: 
1.11 	(1) net interest income on obligations of any authority, commission, or 
1.12 	instrumentality of the United States to the extent includable in taxable income for federal 
1.13 	income tax purposes but exempt from state income tax under the laws of the United States; 
1.14 	(2) if included in federal taxable income, the amount of any overpayment of income 
1.15 	tax to Minnesota or to any other state, for any previous taxable year, whether the amount 
1.16 	is received as a refund or as a credit to another taxable year's income tax liability; 
1.17 	(3) the amount paid to others, less the amount used to claim the credit allowed under 
1.18 	section 290.0674, not to exceed $1,625 for each qualifying child in grades kindergarten 
1.19 	to 6 and $2,500 for each qualifying child in grades 7 to 12, for tuition, textbooks, and 
1.20 	transportation of each qualifying child in attending an elementary or secondary school 
1.21 	situated in Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin, wherein a 
1.22 	resident of this state may legally fulfill the state's compulsory attendance laws, which 
1.23 	is not operated for profit, and which adheres to the provisions of the Civil Rights Act 
1.24 	of 1964 and chapter 363A. For the purposes of this clause, "tuition" includes fees or 
1.25 	tuition as defined in section 290.0674, subdivision 1, clause (1). As used in this clause, 
2.1 	"textbooks" includes books and other instructional materials and equipment purchased 
2.2 	or leased for use in elementary and secondary schools in teaching only those subjects 
2.3 	legally and commonly taught in public elementary and secondary schools in this state. 
2.4 	Equipment expenses qualifying for deduction includes expenses as defined and limited in 
2.5 	section 290.0674, subdivision 1, clause (3). "Textbooks" does not include instructional 
2.6 	books and materials used in the teaching of religious tenets, doctrines, or worship, the 
2.7 	purpose of which is to instill such tenets, doctrines, or worship, nor does it include books 
2.8 	or materials for, or transportation to, extracurricular activities including sporting events, 
2.9 	musical or dramatic events, speech activities, driver's education, or similar programs. For 
2.10 	purposes of the subtraction provided by this clause, "qualifying child" has the meaning 
2.11 	given in section 32(c)(3) of the Internal Revenue Code; 
2.12 	(4) income as provided under section 290.0802; 
2.13 	(5) to the extent included in federal adjusted gross income, income realized on 
2.14 	disposition of property exempt from tax under section 290.491; 
2.15 	(6) to the extent not deducted or not deductible pursuant to section 408(d)(8)(E) 
2.16 	of the Internal Revenue Code in determining federal taxable income by an individual 
2.17 	who does not itemize deductions for federal income tax purposes for the taxable year, an 
2.18 	amount equal to 50 percent of the excess of charitable contributions over $500 allowable 
2.19 	as a deduction for the taxable year under section 170(a) of the Internal Revenue Code and 
2.20 	under the provisions of Public Law 109-1; 
2.21 	(7) for taxable years beginning before January 1, 2008, the amount of the federal 
2.22 	small ethanol producer credit allowed under section 40(a)(3) of the Internal Revenue Code 
2.23 	which is included in gross income under section 87 of the Internal Revenue Code; 
2.24 	(8) for individuals who are allowed a federal foreign tax credit for taxes that do not 
2.25 	qualify for a credit under section 290.06, subdivision 22, an amount equal to the carryover 
2.26 	of subnational foreign taxes for the taxable year, but not to exceed the total subnational 
2.27 	foreign taxes reported in claiming the foreign tax credit. For purposes of this clause, 
2.28 	"federal foreign tax credit" means the credit allowed under section 27 of the Internal 
2.29 	Revenue Code, and "carryover of subnational foreign taxes" equals the carryover allowed 
2.30 	under section 904(c) of the Internal Revenue Code minus national level foreign taxes to 
2.31 	the extent they exceed the federal foreign tax credit; 
2.32 	(9) in each of the five tax years immediately following the tax year in which an 
2.33 	addition is required under subdivision 19a, clause (7), or 19c, clause (15), in the case 
2.34 	of a shareholder of a corporation that is an S corporation, an amount equal to one-fifth 
2.35 	of the delayed depreciation. For purposes of this clause, "delayed depreciation" means 
2.36 	the amount of the addition made by the taxpayer under subdivision 19a, clause (7), or 
3.1 	subdivision 19c, clause (15), in the case of a shareholder of an S corporation, minus the 
3.2 	positive value of any net operating loss under section 172 of the Internal Revenue Code 
3.3 	generated for the tax year of the addition. The resulting delayed depreciation cannot be 
3.4 	less than zero; 
3.5 	(10) job opportunity building zone income as provided under section 469.316; 
3.6 	(11) to the extent included in federal taxable income, the amount of compensation 
3.7 	paid to members of the Minnesota National Guard or other reserve components of the 
3.8 	United States military for active service performed in Minnesota, excluding compensation 
3.9 	for services performed under the Active Guard Reserve (AGR) program. For purposes of 
3.10 	this clause, "active service" means (i) state active service as defined in section 190.05, 
3.11 	subdivision 5a, clause (1); (ii) federally funded state active service as defined in section 
3.12 	190.05, subdivision 5b; or (iii) federal active service as defined in section 190.05, 
3.13 	subdivision 5c, but "active service" excludes service performed in accordance with section 
3.14 	190.08, subdivision 3; 
3.15 	(12) to the extent included in federal taxable income, the amount of compensation 
3.16 	paid to Minnesota residents who are members of the armed forces of the United States or 
3.17 	United Nations for active duty performed outside Minnesota under United States Code, 
3.18 	title 10, section 101(d); United States Code, title 32, section 101(12); or the authority of 
3.19 	the United Nations; 
3.20 	(13) an amount, not to exceed $10,000, equal to qualified expenses related to a 
3.21 	qualified donor's donation, while living, of one or more of the qualified donor's organs 
3.22 	to another person for human organ transplantation. For purposes of this clause, "organ" 
3.23 	means all or part of an individual's liver, pancreas, kidney, intestine, lung, or bone marrow; 
3.24 	"human organ transplantation" means the medical procedure by which transfer of a human 
3.25 	organ is made from the body of one person to the body of another person; "qualified 
3.26 	expenses" means unreimbursed expenses for both the individual and the qualified donor 
3.27 	for (i) travel, (ii) lodging, and (iii) lost wages net of sick pay, except that such expenses 
3.28 	may be subtracted under this clause only once; and "qualified donor" means the individual 
3.29 	or the individual's dependent, as defined in section 152 of the Internal Revenue Code. An 
3.30 	individual may claim the subtraction in this clause for each instance of organ donation for 
3.31 	transplantation during the taxable year in which the qualified expenses occur; 
3.32 	(14) in each of the five tax years immediately following the tax year in which an 
3.33 	addition is required under subdivision 19a, clause (8), or 19c, clause (16), in the case of a 
3.34 	shareholder of a corporation that is an S corporation, an amount equal to one-fifth of the 
3.35 	addition made by the taxpayer under subdivision 19a, clause (8), or 19c, clause (16), in the 
3.36 	case of a shareholder of a corporation that is an S corporation, minus the positive value of 
4.1 	any net operating loss under section 172 of the Internal Revenue Code generated for the 
4.2 	tax year of the addition. If the net operating loss exceeds the addition for the tax year, a 
4.3 	subtraction is not allowed under this clause; 
4.4 	(15) to the extent included in federal taxable income, compensation paid to a service 
4.5 	member as defined in United States Code, title 10, section 101(a)(5), for military service 
4.6 	as defined in the Servicemembers Civil Relief Act, Public Law 108-189, section 101(2); 
4.7 	(16) international economic development zone income as provided under section 
4.8 	469.325; and
4.9 	(17) to the extent included in federal taxable income, the amount of national service 
4.10 	educational awards received from the National Service Trust under United States Code, 
4.11 	title 42, sections 12601 to 12604, for service in an approved Americorps National Service 
4.12 	program.; and 
4.13 	(18) an amount equal to 20 percent of an individual's pass-through income, not 
4.14 	to exceed $500,000. For purposes of this clause, pass-through income means (i) a 
4.15 	partner's or shareholder's total of all nonpassive income as reported on Schedule K-1 
4.16 	from all partnerships, S corporations, or limited liability companies in which the partner 
4.17 	or shareholder shares an ownership interest, reduced by (ii) the total of all nonpassive 
4.18 	losses claimed by the partner or shareholder on Schedule K-1 from all partnerships, S 
4.19 	corporations, or limited liability companies in which the partner or shareholder shares an 
4.20 	ownership interest.

4.21 	EFFECTIVE DATE. This section is effective for taxable years beginning after 
4.22 	December 31, 2009. 

4.23 	Sec. 2. Minnesota Statutes 2008, section 297A.61, subdivision 3, is amended to read:
4.24 		Subd. 3. Sale and purchase. (a) "Sale" and "purchase" include, but are not limited 
4.25 	to, each of the transactions listed in this subdivision. 
4.26 	(b) Sale and purchase include: 
4.27 	(1) any transfer of title or possession, or both, of tangible personal property, whether 
4.28 	absolutely or conditionally, for a consideration in money or by exchange or barter; and 
4.29 	(2) the leasing of or the granting of a license to use or consume, for a consideration 
4.30 	in money or by exchange or barter, tangible personal property, other than a manufactured 
4.31 	home used for residential purposes for a continuous period of 30 days or more. 
4.32 	(c) Sale and purchase include the production, fabrication, printing, or processing of 
4.33 	tangible personal property for a consideration for consumers who furnish either directly or 
4.34 	indirectly the materials used in the production, fabrication, printing, or processing. 
5.1 	(d) Sale and purchase include the preparing for a consideration of food. 
5.2 	Notwithstanding section 297A.67, subdivision 2, taxable food includes, but is not limited 
5.3 	to, the following: 
5.4 	(1) prepared food sold by the retailer; 
5.5 	(2) soft drinks; 
5.6 	(3) candy; 
5.7 	(4) dietary supplements; and 
5.8 	(5) all food sold through vending machines. 
5.9 	(e) A sale and a purchase includes the furnishing for a consideration of electricity, 
5.10 	gas, water, or steam for use or consumption within this state. 
5.11 	(f) A sale and a purchase includes the transfer for a consideration of prewritten 
5.12 	computer software whether delivered electronically, by load and leave, or otherwise. 
5.13 	(g) A sale and a purchase includes the furnishing for a consideration of the following 
5.14 	services: 
5.15 	(1) the privilege of admission to places of amusement, recreational areas, or athletic 
5.16 	events, and the making available of amusement devices, tanning facilities, reducing 
5.17 	salons, steam baths, Turkish baths, health clubs, and spas or athletic facilities; 
5.18 	(2) lodging and related services by a hotel, rooming house, resort, campground, 
5.19 	motel, or trailer camp, including furnishing the guest of the facility with access to 
5.20 	telecommunication services, and the granting of any similar license to use real property 
5.21 	in a specific facility, other than the renting or leasing of it for a continuous period of 
5.22 	30 days or more under an enforceable written agreement that may not be terminated 
5.23 	without prior notice; 
5.24 	(3) nonresidential parking services, whether on a contractual, hourly, or other 
5.25 	periodic basis, except for parking at a meter; 
5.26 	(4) the granting of membership in a club, association, or other organization if: 
5.27 	(i) the club, association, or other organization makes available for the use of its 
5.28 	members sports and athletic facilities, without regard to whether a separate charge is 
5.29 	assessed for use of the facilities; and 
5.30 	(ii) use of the sports and athletic facility is not made available to the general public 
5.31 	on the same basis as it is made available to members. 
5.32 	Granting of membership means both onetime initiation fees and periodic membership 
5.33 	dues. Sports and athletic facilities include golf courses; tennis, racquetball, handball, and 
5.34 	squash courts; basketball and volleyball facilities; running tracks; exercise equipment; 
5.35 	swimming pools; and other similar athletic or sports facilities; 
6.1 	(5) delivery of aggregate materials by a third party, excluding delivery of aggregate 
6.2 	material used in road construction, and delivery of concrete block by a third party if 
6.3 	the delivery would be subject to the sales tax if provided by the seller of the concrete 
6.4 	block; and 
6.5 	(6) services as provided in this clause: 
6.6 	(i) laundry and dry cleaning services including cleaning, pressing, repairing, altering, 
6.7 	and storing clothes, linen services and supply, cleaning and blocking hats, and carpet, 
6.8 	drapery, upholstery, and industrial cleaning. Laundry and dry cleaning services do not 
6.9 	include services provided by coin operated facilities operated by the customer; 
6.10 	(ii) motor vehicle washing, waxing, and cleaning services, including services 
6.11 	provided by coin operated facilities operated by the customer, and rustproofing, 
6.12 	undercoating, and towing of motor vehicles; 
6.13 	(iii) building and residential cleaning, maintenance, and disinfecting services and 
6.14 	pest control and exterminating services; 
6.15 	(iv) detective, security, burglar, fire alarm, and armored car services; but not 
6.16 	including services performed within the jurisdiction they serve by off-duty licensed peace 
6.17 	officers as defined in section 626.84, subdivision 1, or services provided by a nonprofit 
6.18 	organization for monitoring and electronic surveillance of persons placed on in-home 
6.19 	detention pursuant to court order or under the direction of the Minnesota Department 
6.20 	of Corrections; 
6.21 	(v) pet grooming services; 
6.22 	(vi) lawn care, fertilizing, mowing, spraying and sprigging services; garden planting 
6.23 	and maintenance; tree, bush, and shrub pruning, bracing, spraying, and surgery; indoor 
6.24 	plant care; tree, bush, shrub, and stump removal, except when performed as part of a land 
6.25 	clearing contract as defined in section 297A.68, subdivision 40; and tree trimming for 
6.26 	public utility lines. Services performed under a construction contract for the installation of 
6.27 	shrubbery, plants, sod, trees, bushes, and similar items are not taxable; 
6.28 	(vii) massages, except when provided by a licensed health care facility or 
6.29 	professional or upon written referral from a licensed health care facility or professional for 
6.30 	treatment of illness, injury, or disease; and
6.31 	(viii) the furnishing of lodging, board, and care services for animals in kennels and 
6.32 	other similar arrangements, but excluding veterinary and horse boarding services.;
6.33 	(ix) accounting, financial planning, and brokerage services; and 
6.34 	(x) legal services.
6.35 	In applying the provisions of this chapter, the terms "tangible personal property" 
6.36 	and "retail sale" include taxable services listed in clause (6), items (i) to (vi) and (viii), 
7.1 	and the provision of these taxable services, unless specifically provided otherwise. 
7.2 	Services performed by an employee for an employer are not taxable. Services performed 
7.3 	by a partnership or association for another partnership or association are not taxable if 
7.4 	one of the entities owns or controls more than 80 percent of the voting power of the 
7.5 	equity interest in the other entity. Services performed between members of an affiliated 
7.6 	group of corporations are not taxable. For purposes of the preceding sentence, "affiliated 
7.7 	group of corporations" means those entities that would be classified as members of an 
7.8 	affiliated group as defined under United States Code, title 26, section 1504, disregarding 
7.9 	the exclusions in section 1504(b). 
7.10 	For purposes of clause (5), "road construction" means construction of (1) public 
7.11 	roads, (2) cartways, and (3) private roads in townships located outside of the seven-county 
7.12 	metropolitan area up to the point of the emergency response location sign. 
7.13 	(h) A sale and a purchase includes the furnishing for a consideration of tangible 
7.14 	personal property or taxable services by the United States or any of its agencies or 
7.15 	instrumentalities, or the state of Minnesota, its agencies, instrumentalities, or political 
7.16 	subdivisions. 
7.17 	(i) A sale and a purchase includes the furnishing for a consideration of 
7.18 	telecommunications services, ancillary services associated with telecommunication 
7.19 	services, cable television services, direct satellite services, and ring tones. 
7.20 	Telecommunication services include, but are not limited to, the following services, 
7.21 	as defined in section 297A.669: air-to-ground radiotelephone service, mobile 
7.22 	telecommunication service, postpaid calling service, prepaid calling service, prepaid 
7.23 	wireless calling service, and private communication services. The services in this 
7.24 	paragraph are taxed to the extent allowed under federal law. 
7.25 	(j) A sale and a purchase includes the furnishing for a consideration of installation if 
7.26 	the installation charges would be subject to the sales tax if the installation were provided 
7.27 	by the seller of the item being installed. 
7.28 	(k) A sale and a purchase includes the rental of a vehicle by a motor vehicle dealer 
7.29 	to a customer when (1) the vehicle is rented by the customer for a consideration, or (2) 
7.30 	the motor vehicle dealer is reimbursed pursuant to a service contract as defined in section 
7.31 	65B.29, subdivision 1, clause (1). 

7.32 	EFFECTIVE DATE. This section is effective for sales and purchases made on 
7.33 	or after January 1, 2010. 

7.34 	Sec. 3. Minnesota Statutes 2008, section 297A.67, subdivision 8, is amended to read:
8.1 		Subd. 8. Clothing. (a) Certain clothing is exempt. For purposes of this subdivision, 
8.2 	"clothing" means all human wearing apparel suitable for general use that has a retail 
8.3 	value of less than $100. 
8.4 	(b) Clothing includes, but is not limited to, aprons, household and shop; athletic 
8.5 	supporters; baby receiving blankets; bathing suits and caps; beach capes and coats; belts 
8.6 	and suspenders; boots; coats and jackets; costumes; children and adult diapers, including 
8.7 	disposable; ear muffs; footlets; formal wear; garters and garter belts; girdles; gloves and 
8.8 	mittens for general use; hats and caps; hosiery; insoles for shoes; lab coats; neckties; 
8.9 	overshoes; pantyhose; rainwear; rubber pants; sandals; scarves; shoes and shoe laces; 
8.10 	slippers; sneakers; socks and stockings; steel-toed boots; underwear; uniforms, athletic 
8.11 	and nonathletic; and wedding apparel. 
8.12 	(c) Clothing does not include the following: 
8.13 	(1) belt buckles sold separately; 
8.14 	(2) costume masks sold separately; 
8.15 	(3) patches and emblems sold separately; 
8.16 	(4) sewing equipment and supplies, including but not limited to, knitting needles, 
8.17 	patterns, pins, scissors, sewing machines, sewing needles, tape measures, and thimbles; 
8.18 	(5) sewing materials that become part of clothing, including but not limited to, 
8.19 	buttons, fabric, lace, thread, yarn, and zippers; 
8.20 	(6) clothing accessories or equipment; 
8.21 	(7) sports or recreational equipment; and 
8.22 	(8) protective equipment. 
8.23 	Clothing also does not include "fur clothing" as defined in section 297A.61, subdivision 46. 
8.24 	For purposes of this subdivision, "clothing accessories or equipment" means 
8.25 	incidental items worn on the person or in conjunction with clothing. Clothing accessories 
8.26 	and equipment include, but are not limited to, briefcases; cosmetics; hair notions, including 
8.27 	barrettes, hair bows, and hairnets; handbags; handkerchiefs; jewelry; nonprescription 
8.28 	sunglasses; umbrellas; wallets; watches; and wigs and hairpieces. "Sports or recreational 
8.29 	equipment" means items designed for human use and worn in conjunction with an athletic 
8.30 	or recreational activity that are not suitable for general use. Sports and recreational 
8.31 	equipment includes, but is not limited to, ballet and tap shoes; cleated or spiked athletic 
8.32 	shoes; gloves, including, but not limited to, baseball, bowling, boxing, hockey, and golf 
8.33 	gloves; goggles; hand and elbow guards; life preservers and vests; mouth guards; roller 
8.34 	and ice skates; shin guards; shoulder pads; ski boots; waders; and wetsuits and fins. 
8.35 	"Protective equipment" means items for human wear and designed as protection of the 
8.36 	wearer against injury or disease or as protection against damage or injury of other persons 
9.1 	or property but not suitable for general use. Protective equipment includes, but is not 
9.2 	limited to, breathing masks; clean room apparel and equipment; ear and hearing protectors; 
9.3 	face shields; finger guards; hard hats; helmets; paint or dust respirators; protective gloves; 
9.4 	safety glasses and goggles; safety belts; tool belts; and welders gloves and masks. 

9.5 	EFFECTIVE DATE. This section is effective for sales and purchases made on 
9.6 	or after January 1, 2010. 

9.7 	Sec. 4. Minnesota Statutes 2008, section 297A.70, subdivision 2, is amended to read:
9.8 		Subd. 2.Sales to government. (a) All sales, except those listed in paragraph (b), 
9.9 	to the following governments and political subdivisions, or to the listed agencies or 
9.10 	instrumentalities of governments and political subdivisions, are exempt:
9.11 	(1) the United States and its agencies and instrumentalities;
9.12 	(2) school districts, the University of Minnesota, state universities, community 
9.13 	colleges, technical colleges, state academies, the Perpich Minnesota Center for Arts 
9.14 	Education, and an instrumentality of a political subdivision that is accredited as an 
9.15 	optional/special function school by the North Central Association of Colleges and Schools;
9.16 	(3) hospitals and nursing homes owned and operated by political subdivisions of the 
9.17 	state of tangible personal property and taxable services used at or by hospitals and nursing 
9.18 	homes all political subdivisions of the state;
9.19 	(4) the Metropolitan Council, for its purchases of vehicles and repair parts to equip 
9.20 	operations provided for in section 473.4051;
9.21 	(5)(4) other states or political subdivisions of other states, if the sale would be 
9.22 	exempt from taxation if it occurred in that state; and
9.23 	(6)(5) sales to public libraries, public library systems, multicounty, multitype library 
9.24 	systems as defined in section 134.001, county law libraries under chapter 134A, state 
9.25 	agency libraries, the state library under section 480.09, and the Legislative Reference 
9.26 	Library. 
9.27 	(b) This exemption does not apply to the sales of the following products and services:
9.28 	(1) building, construction, or reconstruction materials purchased by a contractor 
9.29 	or a subcontractor as a part of a lump-sum contract or similar type of contract with a 
9.30 	guaranteed maximum price covering both labor and materials for use in the construction, 
9.31 	alteration, or repair of a building or facility;
9.32 	(2) construction materials purchased by tax exempt entities or their contractors to 
9.33 	be used in constructing buildings or facilities which will not be used principally by the 
9.34 	tax exempt entities;
10.1 	(3)(1) the leasing of a motor vehicle as defined in section 297B.01, subdivision 11, 
10.2 	except for leases entered into by the United States or its agencies or instrumentalities; or 
10.3 	(4)(2) lodging as defined under section 297A.61, subdivision 3, paragraph (g), clause 
10.4 	(2), and prepared food, candy, and soft drinks, except for lodging, prepared food, candy, 
10.5 	and soft drinks purchased directly by the United States or its agencies or instrumentalities. 
10.6 	(c) As used in this subdivision, "school districts" means public school entities and 
10.7 	districts of every kind and nature organized under the laws of the state of Minnesota, and 
10.8 	any instrumentality of a school district, as defined in section 471.59. 

10.9 	EFFECTIVE DATE. This section is effective for sales and purchases made after 
10.10 	June 30, 2009.