Minnesota residents who live part time elsewhere could see a dramatic jump in their tax bills as a result of a ruling Wednesday by the state Supreme Court.
The 4-3 opinion sharply defined what the justices described as an ambiguous law that determines when a person is considered to be a resident in Minnesota. The law says full-time residency starts at 183 days, or half the year.
In the case of Curtis and Stacy Marks, who moved to Minnesota from Florida in August 2007, the court determined that the couple surpassed the half-year limit. The Markses spent 104 days in Minnesota before settling permanently in the state, time that the majority ruled should be tacked onto the months the couple spent in the state after their move. That made them responsible for a full year’s taxes, and will cost them at least an additional $390,000.
The Minnesota Department of Revenue declined to comment on how it will use Wednesday’s ruling in future residency tax cases. But Barry Gersick, the Markses’ attorney, predicted the case will have broad implications for snowbirds and others.
“I feel bad for my clients,” said Gersick, a partner at Maslon Edelman Borman & Brand. “I’m not sure how the Department of Revenue will use this ruling moving forward, but it will definitely have an impact beyond our narrow case.”
The ruling reverses a 2014 state tax court decision by Judge Joanne Turner, who sided with the Markses. She had ruled that only days spent in Minnesota as nonresidents should be counted toward the 183 days for tax purposes.
The revenue department argued that a person can claim residency elsewhere, but the clock starts ticking if 183 days or more are spent in Minnesota in a given year and that person keeps an abode in the state. An abode means a residence with a kitchen and a bathroom.
The Markses moved from Minnesota to Florida in 1999. They decided to return to Minnesota after their children were accepted into a private school. The revenue department audited the couple in 2009, reviewing past tax returns.
Court records show that they own a nearly $4 million home on Lake Minnetonka in Woodland. Marks cofounded Verifications Inc., a Twin Cities background checking and drug testing business that was acquired in 2013. He now runs a local software company.
Services received, taxes paid
In his ruling, Justice David Lillehaug wrote that tax law doesn’t define “nonresident” or an individual who is a resident for only part of a taxable year. He said the Markses and the revenue department had made reasonable interpretations of the law.
The law’s definition of “resident” applies to all individuals who fulfill three conditions during the tax year: domicile outside Minnesota, maintenance of an abode in the state and physical presence there for more than half the tax year.
Those who receive Minnesota’s services, benefits, and protections for most of the year are required to pay taxes on their entire income, Lillehaug wrote. The Markses, who spent 70 percent of the year here in a home they owned, enjoyed those services, benefits, and protections as much as or more than any nonresident who spent more than half the year in Minnesota, the court said.
The revenue department considers 26 factors in reviewing appeals of residency cases, including the location of the most actively used checking account, where children attend school and whether the taxpayer applied for resident or nonresident fishing, hunting or watercraft licenses in Minnesota. The state Supreme Court had previously ruled on two significant residency fights in which the taxpayers lost.
NBA referee Ken Mauer Jr. ran afoul of Minnesota’s tax laws after claiming residency in Fort Myers, Fla., and not paying Minnesota state income taxes in 2003 and 2004. Among the strikes against the St. Paul native, according to the Supreme Court decision, was that his efforts to sell his 10,600-square-foot home in Afton during those years were halfhearted.
Businessman William D. Larson, a Peterbilt truck dealership owner, moved to Las Vegas in 1998 and shifted belongings to his new home, including his extensive wine collection. He opened a Nevada bank account, registered cars there and canceled his Minnesota driver’s license.
But the court decided his connection with Minnesota during the 2002 through 2006 tax years was stronger than his connection with Nevada. He owned more property in Minnesota than in Nevada, spent more time in Minnesota than Nevada, registered more vehicles in Minnesota and kept bank accounts and mail delivery in Minnesota, the Supreme Court noted.
‘Mixed and matched’
In Wednesday’s ruling, Lillehaug said the court was within its right to reverse the tax court’s decision because the Legislature’s intent with the residency law “is not in doubt.”
In his dissent, Justice David Stras argued that the case was a policy issue and should be addressed by the Legislature.
Stras, who was joined in his dissent by Chief Justice Lorie Gildea and Justice Barry Anderson, said the tax court correctly concluded that the revenue commissioner erred by treating the Markses as full-year residents in 2007. The majority “mixed and matched” elements from the law’s two definitions of a resident.
Stras gave an example of how the court’s new interpretation could limit or even eliminate part-time resident status for many eligible taxpayers: An individual moves to Minnesota before July 1. That person buys or rents an “abode” before arriving in the state and establishes it as his or her new home. Although that person had no prior contact with the state, the revenue department can treat the taxpayer as a full-year resident of Minnesota.
“Such an outcome could hardly have been what the Legislature had in mind,” Stras wrote.
The Legislature, not the judiciary, must revise the law, he said. But with all the issues facing the Legislature this year, Gersick said he doubted it would address “such a minor thing.”