It’s getting tougher for Minnesotans to avoid the state’s taxes by spending part of the year somewhere else.
Snowbirds and high earners are discovering that they must do more than buy a condo in the Sun Belt and register a vehicle there, after a court decision last year reinforced the state’s ability to use any of more than two dozen criteria to determine who is a Minnesota resident.
“People refer to it as Hotel Minnesota,” said Matt Shea, a lawyer at Gray Plant Mooty. “You can come any time you like, but you can never leave.”
To determine tax residency, the state is looking at such things as where people vote, whether they mostly use Minnesota bank accounts and whether they go to the doctor here or in another state. Accountants and lawyers are advising clients who want to avoid Minnesota tax to sell local property and businesses if possible, and definitely to spend less time here than wherever they plan to claim as their new home state.
While the rules apply to anyone, they present a particular quandary for ultra-affluent people who are more likely to split their time between homes in Minnesota and low-tax Sun Belt states. A new, higher tax bracket for the biggest incomes has increased the incentive for these people to claim an out-of-state home as their primary residence.
But disregard any of the 26 rules set forth by the Department of Revenue, legal and financial advisers say, and would-be Minnesota expatriates risk receiving a tax bill in the mail and likely losing in court if they contest it.
“It’s hard for people who still want to keep some ties to the state they started in,” said John Bedosky, an attorney for Eide Bailly, an accounting and consulting firm. “You’ve got to sever almost all of your ties.”
Attempting to establish residency elsewhere — especially in such states as Nevada, Texas and Florida that have no income or estate tax — is not a new strategy for wealthy Minnesotans. But the creation of the new, higher top income bracket has raised the stakes.
The new bracket, approved last year, raised the income tax rate from 7.85 percent to 9.85 percent for married joint filers who make $250,000 per year and singles who make $150,000. Minnesota, which is already one of 19 states that impose its own estate tax, now has the fourth-highest income taxes for the wealthy in the United States.
Classes in how to switch states
That’s been the final straw for clients of Joel Germershausen, an accountant at Baker Tilly. He and Shea have both been giving presentations on how wealthy clients can switch residency in an orderly, bulletproof way. Both say interest is growing.
“There’s certainly an uptick in the conversation,” Germershausen said. “It’s a disincentive to remain in the state.”
There is no evidence of widespread flight to low-tax states by the wealthy, but the Department of Revenue hasn’t started auditing 2013 tax returns yet. That will begin later this year.
“We haven’t been more aggressive this year compared to previous years,” Ryan Brown, a spokesman for the Department of Revenue, said in an e-mail. “We are always conducting audits, and residency audits are a piece of those.”
The new income tax bracket for the wealthy is projected to generate $1.1 billion in new revenue over two years, 5.4 percent of all individual income tax revenue for the state. In total, the 257,000 households in the top 10 percent for income are projected to pay $4 billion in income taxes in 2015, or 55 percent of all state individual income taxes.
A decision a year ago by the state’s Supreme Court in the case of truck dealership owner William Larson destroyed any illusions that one could easily keep one foot in Minnesota while not paying its taxes.
Larson was audited for the tax years 2002 through 2006, years he filed as a nonresident living in Nevada. The Department of Revenue decided he was instead a Minnesota resident and ruled in 2009 that he owed $2.5 million in income taxes.
Larson owned a network of Peterbilt semitrailer truck dealerships and had lived in Nevada in the 1980s. He bought a condo in Nevada in 1998, and tried to buy a Peterbilt dealership there. He registered to vote there, registered two vehicles and got a Nevada driver’s license. He spent less than 183 days each year in Minnesota — the minimum standard for nonresidency.
A cautionary tale
But the burden in court is on taxpayers to prove their residency in another state if the Department of Revenue disagrees, and the department pointed to the “locus” of Larson’s life, arguing in great detail that it was in Minnesota, not Nevada.
Even though he didn’t spend 183 days in Minnesota any of those years, Larson spent more time in Minnesota than in Nevada, and more time in Mexico than Nevada as well. The sale of his dealerships in Minnesota and Wisconsin fell through, and he was never able to buy the Nevada dealership.
Revenue officials pointed to Larson’s continued business dealings in Minnesota, his several properties and registered vehicles here and the fact that most of his attorneys, accountants, doctors and real estate agents were in Minnesota. They looked at his bank accounts, determining his Minnesota accounts were the most active. He received mail in Minnesota and frequently visited his children and grandchildren here. Even seeking medical care in Minnesota counted against his case.
“When a person avails themselves of the many services, benefits, and protections afforded by Minnesota,” Judge George Perez wrote, “in return, Minnesota requires that person to contribute to the costs associated with providing those services, benefits, and protections by taxing that person as a resident of Minnesota.”
Appeals of the decision wended their way through court for years, but the Supreme Court in 2013 affirmed the Tax Court ruling.
Another case that showed the difficulty of switching residency was that of Kenneth Mauer, an NBA referee and cousin of Twins catcher Joe Mauer, who tried to establish residency in Florida in 2003. Mauer lost in Supreme Court last spring when justices decided he spent more time at his home in Afton than his townhouse in Fort Myers, Fla.
Shea said the Larson case has already had an effect on professionals who work for wealthy clients. Lawyers in Florida and Arizona are using the case to argue that clients should drop their lawyers in Minnesota, since Larson’s professional connections counted against him.
“Clients have fired us,” Shea said. “Frankly I can’t argue with them. It’s unfortunate that we’re losing that client, but it’s one of the factors that the Department of Revenue considers.”
Adam Belz • 612-673-4405 Twitter: @adambelz
No individual state income tax
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire, Tennessee tax only dividend and interest income.
WHAT THE DEPT. OF REVENUE CONSIDERS
If a person spends more than 183 days in Minnesota (any part of a day counts as a full day), and owns, rents or occupies a Minnesota home equipped for year-round living, they are considered a resident. But passing that test doesn’t guarantee a person will no longer be considered a Minnesota resident. Here are a few other things the Department of Revenue considers:
• The address where their mail is received
• Present status of their former living quarters (sold, rented, etc.)
• Information provided to an insurance company about a person’s residency
• Locations of bank accounts
• Location of voter registration
• State that issues a driver’s license
• Where vehicles are registered
• Where vehicles are kept
• Where professional licenses are maintained
• The location of fraternal, social or athletic memberships
• Location of union memberships
• Location of place of worship
• Where a taxpayer’s children or spouse attend school
• Where a spouse or dependent resides
highest TOP income tax brackets
State Rate Income Bracket
California 12.3% >$508,500
Hawaii 11% >$200,000
Oregon 9.9% >$125,000
Minnesota 9.85% >$150,000
Iowa 8.98% >$68,175
Note: Brackets are for single taxpayers, and tax structures vary by state
Source: Tax Foundation