Minnesota is on the verge of a historic tax policy change that could reshape the professional services landscape. Under Governor Tim Walz’s proposed $65.9 billion budget for 2026-2027, the state aims to lower the sales tax rate from 6.875% to 6.8%—but at a cost. The plan seeks to expand the sales tax base to include professional services, meaning law firms, accounting firms, financial advisors, and consulting agencies may soon face tax obligations they’ve never had before. However, business-to-business (B2B) transactions remain exempt under the proposal, meaning firms that primarily serve corporate clients may not be directly impacted.

Who Is Most Affected?

If your business provides direct-to-consumer professional services in Minnesota, this change could significantly impact your bottom line. Industries that stand to be most affected include:

  • Legal Services: Law firms handling personal injury, estate planning, family law, and other consumer-focused legal matters.
  • Accounting & Tax Preparation: CPAs and tax professionals serving individuals and small business owners.
  • Financial Planning & Investment Advisory: Firms offering retirement planning, wealth management, and investment advice.
  • Real Estate & Mortgage Brokerage: Services tied to home buying, mortgage origination, and residential real estate transactions.
  • Certain Banking Services: Consumer-focused financial transactions not currently subject to sales tax.

Why Now?

The proposed tax expansion is projected to raise $205 million in new revenue, partially addressing an anticipated $5.1 billion state budget shortfall for 2028-2029. The budget also includes spending cuts in areas like Medicaid and special education reimbursements, signaling that broader fiscal challenges may drive further tax policy changes.

Sales Tax Nexus – Who Must Collect?

Businesses must collect and remit sales tax in Minnesota if they establish a nexus through either physical presence or economic activity:

  • Physical Nexus: A business has a physical presence in Minnesota if it maintains a location, employs sales representatives, leases property, or delivers goods using company vehicles.
  • Economic Nexus: Out-of-state businesses must collect sales tax if they have 200+ retail sales or over $100,000 in Minnesota sales within a 12-month period.
  • Marketplace Providers: Online platforms facilitating sales and processing payments must collect sales tax if they meet physical or economic nexus thresholds.

Sales Tax Sourcing – How Will Tax Be Applied?

Minnesota follows destination-based sourcing, meaning tax applies based on where the customer receives the benefit:

  • Services provided to Minnesota-based clients may be taxable, regardless of where the provider is located.
  • Services delivered to out-of-state clients may remain untaxed if the benefit is received outside Minnesota.
  • Multi-state engagements require careful analysis to determine taxability.

What Service Providers Need to Consider Now

Even though this proposal is still under legislative review, professional service providers should start assessing their potential exposure:

  • Client Impact: A new tax could increase costs for clients, affecting pricing strategies and client relationships.
  • Compliance Readiness: Service providers operating in Minnesota should evaluate whether they would be required to collect and remit sales tax.
  • Contract Review: Businesses may need to update agreements to account for potential tax implications, particularly for multi-state engagements.

Next Steps

While this proposal is still under debate, businesses should stay ahead of potential changes. Understanding the impact now will help ensure compliance if the law moves forward. We are closely monitoring developments and will continue to provide updates as the legislative process unfolds. If you have questions about the proposal or how the expansion may affect your business, please feel free to reach out to any member of our Tax team.

March 11, 2025