Leave the Attorneys & Accountants Out of It: Minnesota Department of Revenue Tweaks Domicile Rules for Individual Income Tax Purposes

Just an observation from the cheap seats about a recent notice issued by the Minnesota Department of Revenue (DOR) (Revenue Notice No. 19-05, referred to as Notice 19-05). This notice clarifies that neither the DOR nor the courts can consider the location of the individual's attorney, CPA, financial adviser, or the place of business of a financial institution where the individual opened or maintained an account for purposes of establishing whether an individual is domiciled in the state.

Because taxpayers pay personal income tax on income earned in the state where they reside, establishing residency and domicile is the critical first step in determining whether or not tax is owed. Determining residency depends on a person’s individual circumstances and involves weighing several factors. One of the factors in the Minnesota domicile test was previously the “location of business relationships and the place where business is transacted,” which has been interpreted in the past to include relationships with attorneys and accountants, which is kind of a bummer if you were a Minnesota attorney or accountant, since presumably it made getting clients with potential residency issues more difficult to come by!

Years ago, the New York tax department stopped doing this (thanks New York, by the way, as this would have also been a bummer for guys like me!). But changing this in Minnesota has taken some time. Based on discussions during the 2014 legislative session, the Minnesota DOR initiated a review of the residency law—both the statute and the rule—as well as the department’s application of them. Then in 2015, the DOR issued a residency report outlining changes it would make to the administration of the state tax system to make it more consistent, transparent and fair. However, legislation regarding these changes was not approved in 2015 and 2016. The Minnesota DOR issued Notice No. 16-01 instead on February 1, 2016. Notice 19-05 is a clarification that replaces Revenue Notice No. 16-01 which provided that employing, hiring, engaging, or having a business relationship with an attorney or certified public accountant whose address is in Minnesota does not, by itself, demonstrate an intent to establish or retain domicile in Minnesota. For taxable years beginning after December 31, 2016, Minnesota Statutes, Section 290.01, Subdivision 7, provides that when determining where an individual is domiciled, neither the Department nor any court shall consider the location of the individual’s attorney, certified public accountant, financial advisor, or the place of business of a financial institution where the individual opened or maintained an account.

So good for Minnesota on this. It always seemed silly to me for a state tax department to use this as a factor against a taxpayer. Not only is it bad for business, it’s also not fair to force taxpayers to use professionals in other states when planning important life events like a move to a new state.

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