Unrelated Business Income Tax Procedures, and Collecting and Remitting Minnesota Sales Tax on External Sales Transactions
Departments are permitted to engage in activities that generate unrelated business income. 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 unrelated business income tax (UBIT). Income and expense information for unrelated business activities included on the University’s UBIT return must be reported to the Tax Management Office on an annual basis.
Departments planning to sell goods or services to external customers (purchasers other than the University of Minnesota, including sales to individual students, faculty, and staff) have a legal obligation to collect Minnesota sales tax on taxable sales. The need to subject the sale of the goods or services to sales tax is determined with consideration of all of the following criteria: 1) the customer’s tax status, 2) the destination of the sales, 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 should be utilized to bill for external sales transactions.
Departments may not sell or dispose of capital equipment assets without prior approval from Inventory Services on UM 1393 - Capital Equipment Assets Disposal form. Generally, sales tax must be charged on the disposal of capital equipment.
All newly completed 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. See the UBIT and Sales Tax sections below for procedures applicable to unrelated activities or transactions subject to sales tax. Units that do not follow the guidelines set forth in this policy will be held responsible for any UBIT due, sales tax imposed, or penalties assessed.
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 unrelated business income tax (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 will work with the department to determine when a new activity is generating unrelated business income (UBI) and when the UBI must be 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 at http://tax.umn.edu.
The following should be done for all revenue generated by an unrelated activity:
- Department records all unrelated business income (UBI) in Revenue Account 520620. This includes both UBI reported on the UBIT return and UBI that is not reported on the UBIT return.
- On an annual basisthe Tax Management Office reviews the revenue Account 520620 to identify activities to report on the UBIT return.
- 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. Note: If the facts and circumstances of an external sales activity change substantially, consult the Tax Management Office at email@example.com to determine whether an activity should be included on the UBIT return.
- Any tax owed by the University will be charged back to the departments generating the UBIT. Any tax credits generated and used will also be charged back to the departments generating the credits.
Sales tax must be charged 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
NOTE: 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.
- Obtain a fully completed Minnesota Certificate of Exemption, Form ST3, for any Minnesota customer who is tax exempt (either blanket or single item.) Without proof of exempt status on file, the University is obligated to collect sales tax.
- For transactions billed through EFS, submit all completed customer Form ST3s Accounts Receivable Services. Accounts Receivable Services will attach the completed Minnesota Certificate of Exemption to the customer record in the Enterprise Financial System. Unless the ST3 indicates it covers a one-time purchase or is limited to a particular University department, the ST3 will apply to future sales by any University department.
- For sales that are not billed through EFS, the department making the sale must maintain the fully completed ST3.
- When preparing a bill in EFS for a tax exempt customer, view the ST3 Form attached to the EFS customer record to determine if it covers the specific type of sale being made (the 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 enter the taxability of each line item. To determine if items are taxable, consult the following resources:
- The State of Minnesota Department of Revenue web site at www.taxes.state.mn.us under the sales tax section. Fact Sheets issued by the DOR provide guidance on the taxability of various transactions.
- The University tax web site at http://tax.umn.edu
- If additional clarification is needed, contact the University’s Tax Management Office at firstname.lastname@example.org.
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. If the destination jurisdiction of the sale imposes a local tax, the department must collect the local rate in addition to the Minnesota state rate. The Minnesota Department of Revenue provides information on local tax rates on the tax web site at www.taxes.state.mn.us. Please consult this resource for updated rates. For sales billed through EFS:
- Accounts Receivable Services enters the tax code based on the “ship-to” address provided when the customer is set up.
- The ship-to 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.
- The tax code associated with the location provides the tax rate that is used to calculate tax when items are identified as being shipped to that location.
- 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 DOR website to identify the applicable tax rate. www.taxes.state.mn.us.
Collecting and remitting sales tax
The procedures for collecting and remitting sales taxes will vary depending upon the type of sales tax reporting system used by the department. The three systems available to departments are a) the Enterprise Financial System Billing module, b) point of sale activity and/or non-EFS billing system, and c) Centralized Annual Reporting of sales taxes. Procedures for each of these three systems are outlined below.
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. 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 gross sales price that is subject to sales tax.
In order to calculate the tax portion when it is not separately stated:
- Determine the applicable tax rate.
- Divide the total receipts by (1 + the tax rate) to get the gross taxable revenue, or the amount subject to tax.
The remaining amount collected is the tax obligation that is to be remitted to the State of Minnesota.
It is the responsibility of the University departments to retain supporting documentation. This requirement applies regardless of the tax filing system used by the department.
Collecting sales tax through Enterprise Financial System Billings module
When payment is not collected at the time of sale, the Enterprise Financial System Billings module should 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 will also be associated with the tax liability in account code 200152. For any activity billed through the Enterprise Financial System, sales tax will be calculated, collected and remitted, and a Sales and Use Tax Return will be completed and filed by Accounts Receivable Services.
Departments with point-of-sale activity and/or non-EFS billings
For departments with point-of-sale activity (or during the AR/Billing phase-in period for departments that continue running their own billing system) calculating, collecting, and remitting sales tax and related returns will remain a departmental responsibility (unless they qualify for the central annual filing option – in which case, this section should be skipped and see the next section below).
Steps for filing and remitting University department sales tax returns:
- Determine what University sales tax identification number will be used to report and remit the sales tax. If a new identification number is needed, contact the Tax Management Office at email@example.com
- 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 withheld 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 facts sheet #170 on the Minnesota Department of Revenue website at www.taxes.state.mn.us for information on filing and payment of Minnesota sales tax electronically. Contact the Office of Investments and Banking at 621-624-5558 for the bank routing number (TRN/ABA) and bank account number.
NOTE: 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 will then store the banking information for future payments.
After filing and initiating the electronic payment, e-mail the following information to both the Office of Investments and Banking and Treasury Accounting at firstname.lastname@example.org:
- The scheduled payment date the funds will be withdrawn from the bank account
- The dollar amount of the payment
- The sales tax ID number
- The University department/area making the payment and
- Contact information of the individual making the payment
- 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 200152. 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 website. The State of MN requires that all payments be rounded to the nearest dollar. Therefore, the amount posting to the cash account above would also be rounded and odd cents would be posted to the following chart string: 1000-12000-21578-200152.
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 taxes at the time of sale to account 200153. At the end of the year the department will need 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 will be used to file an annual centralized sales tax return. Sales tax that was collected during the year will be 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 will be reviewed annually by the Accounting Services Department to make sure that all taxes collected will be remitted to the Minnesota Department of Revenue in a timely manner.