Tax Considerations Pertaining to External Sales Transactions

Departments are permitted to engage in activities that generate unrelated business income (UBI). Revenue-generating activities not directly related to the University of Minnesota’s exempt purposes of research and discovery, teaching and learning, and outreach and public service may be subject to federal and state unrelated business income tax (UBIT). Income and expense information for unrelated business activities may be included on the University’s UBIT return and departments must work with the Tax Management Office on an annual basis.

The University of Minnesota must collect and remit Minnesota sales tax on Minnesota sales of taxable goods or services to external customers, including sales to individual students, faculty, and staff. Consider the following when determining whether a sale is subject to sales tax: 1) the customer’s tax status, 2) the destination of the sale, and 3) the tax status of the goods or services being sold. When payment is not collected at the time of sale, the Enterprise Financial System Billing module, point of sale system or financial system approved by the Controller or designee must be utilized to bill for external sales transactions.

Departments may not sell or dispose of capital equipment assets except as provided in the Managing Capital Equipment Policy.  Refer to that policy for tax implications. 

All newly completed managed risk Internal/External Sales Approval Forms are reviewed by the Tax Management Office to determine whether the activity is considered unrelated for UBIT purposes and whether the sales may be subject to sales tax. Units with low risk external sales activities must consult the Tax Management Office regarding unrelated business income tax and sales tax implications. 

Note: If the facts and circumstances of an external sales activity change substantially, consult the Tax Management Office at [email protected] to determine whether an activity should be included on the UBIT return.

See the UBIT and Sales Tax sections below for procedures applicable to unrelated activities or transactions subject to sales tax. Units are responsible for any UBIT due, sales tax imposed, and any taxes, interest and penalties due to noncompliance.

Unrelated Business Income Tax (UBIT)

The University of Minnesota is exempt from federal and state income tax as an integral part of the State of Minnesota. However, revenue-generating activities not substantially related to the University of Minnesota’s exempt purposes of research and discovery, teaching and learning, and outreach and public service may be subject to federal UBIT. Determining whether an activity is considered unrelated for UBIT purposes is based on federal laws, regulations, Internal Revenue Service guidance and other opinions. The Tax Management Office can work with the department to determine when a new activity is generating UBI and when the UBI  is reported on the University’s UBIT return, Form 990-T. For additional background information on UBIT, see the UBIT section of the Tax Management Office’s website.

The following should be done for all revenue generated by an unrelated activity:

• Department records all UBI in revenue account 520620, with the exception of advertising revenue which should be recorded in Revenue Account 520222.
• On an annual basis, the Tax Management Office reviews the revenue accounts 520620 and 520222 to identify activities to report on the UBIT return. Other revenue accounts may also be reviewed as part of the annual UBI review.
• For all unrelated activities to be reported on the UBIT return, the Tax Management Office prepares and sends a fact summary, an annual UBIT income/expense schedule, and other workpapers as needed to the departments undertaking the activities.
• Departments undertaking the activities reported on the UBIT return review and complete the UBIT income/expense schedule and review the fact summary for accuracy.
• Departments submit the UBIT income/expense schedule to the Tax Management Office by the due date identified on the UBIT income/expense schedule.
• Any federal or state income tax owed by the University is charged back to the departments generating the UBIT. Any tax credits are awarded back to the departments generating the credits, upon use.

Sales tax

Sales tax must be collected and remitted on all Minnesota sales of taxable goods or services when the customer is not exempt from tax. The following determinations should be made, both for transactions billed through the Enterprise Financial System (EFS) and sales that are not billed through EFS.

Determine customer’s tax status

Minnesota customers who are tax exempt must provide a copy of a Minnesota Certificate of Exemption, Form ST3. Departments should not collect Minnesota sales tax if the purchaser provides a fully completed Form ST3. Purchases by federal entities are always exempt from Minnesota sales tax. An exception to the requirement to collect the Form ST3 applies when the sale is made to a federal entity. It is not necessary to collect a Form ST3 and no tax should be charged when the customer is a federal entity.

1. Obtain a fully completed Minnesota Certificate of Exemption, Form ST3, from any Minnesota customer who is exempt from tax on the purchase. Without proof of exempt status on file, the University is obligated to collect sales tax unless the purchaser is a federal entity.
2. For transactions billed through EFS, submit all completed customer Form ST3s to Accounts Receivable Services. Accounts Receivable Services attaches the completed Minnesota Certificate of Exemption to the customer record in the Enterprise Financial System. Unless the FormST3 indicates it covers a one-time purchase or is limited to a particular University department, the Form ST3 applies to future sales to that customer by any University department.
3. For sales that are not billed through EFS, the department making the sale must maintain the fully completed Form ST3.
4. When preparing a bill in EFS for a tax-exempt customer, view the Form ST3 attached to the EFS customer record to determine if it covers the specific type of sale being made (confirm that the Form ST3 is not limited to a one-time purchase or a particular University department).

Determine tax status of goods or services sold

Taxability of the actual goods or services being sold is controlled by Minnesota Statutes. For transactions billed through EFS, the department must code the taxability of each line item. Sales tax should be listed separately whenever practicable. To determine if items are taxable, use the following resources:

1. Consult with the University’s Tax Management Office at [email protected] or 612-624-1053.
2. Research the State of Minnesota Department of Revenue web site under the sales tax section. Fact Sheets and Industry Guides issued by the DOR provide guidance on the taxability of various transactions, or
3. Review the University tax web site

Determine tax rate based on destination

Minnesota laws impose a sales tax rate based on the destination of the sale. If the items are shipped out of Minnesota, Minnesota sales tax does not apply. In addition to the Minnesota state sales tax rate, local taxes may also be imposed. When the destination jurisdiction of the sale imposes a local tax, the local rate in addition to the Minnesota state rate must be charged. Following is information about applying the correct tax rate to taxable sales.

1. Accounts Receivable Services enters the tax code based on the ship-to address provided when the customer is set up.
2. The ship to address location drives the tax rate in the Enterprise Financial System billing module. If the goods or services change hands on campus, the campus location should be selected as the ship to address.
3. The tax code associated with the location provides the tax rate that is used to calculate tax when taxable items are identified as being shipped to that location.
4. For sales that are not billed through EFS, the Department must identify the sales tax rate imposed on the sale. A rate calculator is available on the Department of Revenue website to identify the applicable tax rate.

Using a mathematical formula to determine gross sales

When it is not practicable to separately state the sales tax, such as when items are sold in a vending machine, the tax on the sale is included in the sales price of the goods. The seller should communicate that tax is included in the sales price. Sellers that cannot separately state the sales tax must identify the amount of tax on the sale by using a mathematical formula to determine the amount of the sales price that is subject to sales tax.

To calculate the tax portion when it is not separately stated:

1. Determine the applicable tax rate.
2. Divide the total receipts by (1 + the tax rate) to get the taxable revenue, or the amount subject to tax.
3. The remaining amount collected is the tax obligation that is to be remitted to the Minnesota Department of Revenue.

Collecting and remitting sales tax

General information

The procedures for collecting and remitting sales taxes vary depending upon the type of sales tax reporting system used by the department.  The three systems available to departments are 1) the Enterprise Financial System billing module, 2) point of sale activity and/or non-EFS billing system approved by the Controller or designee, and 2) Centralized Annual Reporting of sales taxes. Procedures for each of these three types of  systems are outlined below.

Collecting sales tax through Enterprise Financial System Billing module

When payment is not collected at the time of sale, the Enterprise Financial System Billing module or financial system approved by the Controller or designee must be utilized to bill external sales transactions. Sales tax accruals and payments are recorded in the Enterprise Financial System in account code 200152. The Chartstring associated with the invoice when it was entered into EFS is also associated with the tax liability in account code 200152. For any activity billed through the Enterprise Financial System, sales tax is calculated, charged and remitted, and a Sales and Use Tax Return is completed and filed by Accounts Receivable Services.

Departments with point-of-sale activity and/or non-EFS billing

For departments with point-of-sale activity, calculating, collecting, and remitting sales tax and related returns remains a departmental responsibility (unless the department qualifies for the central annual filing option set out below).

Steps for filing and remitting University department sales tax returns:

1. Determine what University sales tax identification number is used to report and remit the sales tax. If a new identification number is needed, contact the Tax Management Office at [email protected]
2. Determine how frequently withheld sales tax must be reported and remitted (i.e., monthly, quarterly, annually).
   • Annual Filing – Tax must average less than $100 per month. Due Date: February 5
   • Quarterly Filing – Tax must average less than $500 per month. Due Dates: April 20, July 20, October 20 and January 20
   • Monthly Filing – Tax averages more than $500 per month. Due Dates: 20th day of the following month

When the due date falls on a Saturday, Sunday or legal holiday, the due date becomes the next business day.

At the required interval, the amount of sales tax collected must be reported and remitted to the Minnesota Department of Revenue. All sales tax returns and payments are required to be made electronically to the State of Minnesota. See the Minnesota Department of Revenue Sales Tax Rate Calculator for information on electronically filing and paying Minnesota sales tax.

Contact the Office of Investments and Banking at 621-624-5558 for the bank routing number (RTN/ABA) and bank account number. The University bank routing number (RTN/ABA) and bank account number must be entered on the Minnesota Department of Revenue electronic filing system the first time it is used. The system stores the banking information for future payments.

After filing and initiating the electronic payment, email the following information to both the Office of Investments and Banking at  [email protected] and Treasury Accounting at [email protected]:

• The scheduled payment date the funds are be withdrawn from the bank account
• The dollar amount of the payment
• The sales tax ID number
• The University department/area making the payment
• Contact information of the individual making the payment, and
• Journal Entry in PeopleSoft to record sales tax payment.

For help with entering a tax payment into the Minnesota Department of Revenue’s online filing system, contact the Office of Investment and Banking at 612-624-5558.

Journal Entry (JE) instructions:

The credit side of the JE is to fund 1000, DeptID 12000, no program and account 100200. The debit side is to the department fund, DeptID, program if any and then the account number that houses the departmental sales tax, which is account 200150. The JE would be completed in the same month that the payment is made. The JE would be for the same amount that is listed on the payment confirmation statement printed from the State of MN Department of Revenue website. The Department of Revenue requires that all payments be rounded to the nearest dollar. Therefore, the amount posted to the cash account above would also be rounded and odd cents would be posted to the following chart string: 1000-12000-21578-200150.

Centralized reporting:

Centralized filing is available to University departments that are eligible to file on an annual reporting basis (calendar year) to the State of Minnesota. University departments must average less than $100 in monthly sales tax collections to qualify for the annual centralized filing.

Eligible departments that would like to participate in the centralized University sales tax return must charge the sales tax at the time of sale to account 200153. At the end of the year the department needs to complete the “Centralized Annual Sales Tax Reporting Form” (UM 1604), available on the U-wide forms library and submit the form to Accounting Services by January 10. The information provided on the form is used to file an annual centralized sales tax return. Sales tax that was collected during the year is remitted to the state, county or city as indicated on the Centralized Annual Sales Tax Reporting Form provided by the department.

In addition to the above, all sales taxes charged to account 200153 is reviewed annually by the Accounting Services Department to make sure that all taxes collected are remitted to the Minnesota Department of Revenue in a timely manner.

Document retention

It is the responsibility of the University department making the sale to retain supporting documentation. This requirement applies regardless of the tax filing system used by the department. Generally, for sales tax purposes, documentation should be retained at least four years.