Sales tax rates change, and when they change, businesses may find themselves caught in a transitional period. Transitional periods occur when a billing period for a taxable service begins before but ends after the date of the rate change.
The Minnesota Department of Revenue wants to be certain taxpayers understand which Minnesota sales tax rate to apply during such times. Transitional periods tend to affect the following:
- Businesses selling taxable services;
- Construction contractors; and
- Maintenance agreements.
Different situations call for different responses.
Sales tax rate decrease
When a sales tax rate decreases, “the new rate applies only to bills issued on or after the effective date of the change.” The same is true for new sales tax exemptions: the new exemption applies only to bills issued on or after the effective date of the exemption.
When bills or invoices list service dates separately, the sales tax rate in effect on the date of service may be applied.
Sales tax rate increase
When a sales tax rate increases, “the new rate applies to the first billing period that starts on or after the effective date of the change.” The same is true when a sales tax exemption expires or a new law applies tax to a service—the service is taxable for the billing period that starts on or after the effective date of the change.
When bills or invoices list service dates separately, the sales tax rate in effect on the date of service may be applied.
Transitional periods affect construction contracts and construction bids in a different way. Details are provided on the Minnesota Department of Revenue website.
Sales of tangible personal property aren’t affected by transitional periods, as the sale is taxed at the rate in effect on the date the buyer takes possession (or title) of the property.
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