Tax Considerations Pertaining to External Sales Transactions

Departments are permitted to engage in activities that generate unrelated business income (UBI). Revenue-generating activities not 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 to provide information needed to file the UBIT return.

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. In addition, the University of Minnesota must collect and remit sales tax in other states where sales tax filing requirements have been met and the University is filing sales tax returns. 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 should 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.

Generally, any federal or state income tax owed by the University is charged back to the departments generating the UBIT. Generally, 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 sales of taxable goods or services sourced in states where the University files sales tax returns when the customer is not exempt from tax. 

Determine customer’s tax status

Tax-exempt customers must provide a fully completed exemption certificate valid in the state where the sale is sourced (where the sale occurs under sales tax laws). Purchases by federal entities and tribal nations are always exempt from sales tax. It is not necessary to collect an exemption certificate and no tax should be charged when the customer is a federal entity.

Determine tax status of goods or services sold

Taxability of the actual goods or services being sold is controlled by state statutes. Therefore, taxability varies by state and units should contact the Tax Management Office at [email protected] with any questions.

Determine tax rate based on where the sale is sourced

State and local sales tax laws impose a sales tax rate based on where the sale is sourced. Accurate sourcing of the sales activity is critical to determining the applicable state and local tax rate imposed on the sale. Units should refer to the Job Aid: Sourcing Transactions for Sales Tax for guidance or contact the Tax Management Office at [email protected] with any questions.

Sales tax should be listed separately whenever practicable. When it is not practicable to separately state the sales tax, the tax on the sale is included in the sales price. The seller must communicate that tax is included in the sales price.

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.