Mining Tax Guide - Minnesota State Legislature

Income Tax Withholding on Mining and Exploration Royalty
Income tax withholding is a 6.25 percent tax assessed on exploration
and/or mining royalty income. This section defines royalty,
identifies who must pay the tax, and outlines the statutory
requirements of both the royalty payer and the royalty recipient.
Also included is the royalty cost by company per ton of pellets
produced (Figure 31) and the industry-wide cumulative total
royalty paid and income tax withholding (Figure 30).
Royalty is defined as any amount (in money or value of property)
received by any person having any right, title or interest in or to any
tract of land in Minnesota for permission to explore, mine, take
out or remove ore. Ores subject to withholding are iron, taconite,
and other minerals (copper, nickel, gold, etc.) subject to the net
proceeds tax. Royalties may include rents, bonus payments, and
non-recoverable lease payments.
Withholding Income Tax on Royalties
All payers of mining or exploration royalties are required to withhold
and remit an income tax of 6.25 percent on royalties paid for
use of Minnesota lands (effective Jan. 1, 2001). Note: This does not
include royalties paid to partnerships, S corporations and C corporations.
Royalties paid to these entities should not have income
tax withheld. See below for information on royalties paid to trusts.
Royalty payers have the option of reporting royalty withholding with
their regular wage/salary withholding, or reporting it under a separate
Minnesota tax ID number used for royalty withholding only. If
you choose to report royalty withholding separately, you must first
register for a separate ID number. Go to the department’s website at
www.revenue.state.mn.us and register for an ID number online or
call 651-282-5225. Then, file your royalty withholding returns separately
from your wage/salary withholding. All withholding returns
must be filed electronically through the department’s e-Services
system. Go to the department’s website for more information.
Federal Form W-4. Royalty payers must have all new employees
complete federal Form W-4 to determine their federal and
Minnesota withholding allowances. For Minnesota, employees
may claim up to, but not more than, the number of federal
allowances they claim.
Keep all W-4 forms in your records.
If they choose the same number of federal and Minnesota withholding
allowances, only one W-4 form is necessary. If they claim
fewer Minnesota withholding allowances than federal allowances,
they must complete a form W-4MN listing the Minnesota allowances.
If the employee does not provide a completed W-4 before
the first wage payment, withhold tax as if he or she is single with
no withholding allowances.
You are not required to verify the number of withholding
allowances claimed by each employee. You should honor each
W-4 form unless we notify you that it is not valid.
You must, however, send the department a copy of any W-4 form
on which:
(M.S. 290.923)
39
• an employee claims more than 10 withholding allowances;
• an employee claims to be exempt from Minnesota
withholding and you reasonably expect the wages to
exceed $200 per week, unless he or she has completed
Form MWR, Reciprocity Exemption/Affidavit of Residency;
or
• you believe an employee is not entitled to the number of
exemptions he or she claimed.
Send required W-4 copies to: Minnesota Revenue, 612 Pierce St.,
Eveleth, MN 55734-1611.
If you don’t send us a copy of Form W-4 when required, you are
subject to a $50 penalty for each required certificate you do not
send. An employee who knowingly files an incorrect W-4 form
will be subject to a $500 penalty for each incorrect certificate filed.
Federal Form 1099 MISC. Royalty payers must also provide each
royalty recipient with a federal Form 1099 MISC by January 31 for
royalties paid during the previous year. Follow the federal requirements
to issue 1099s to persons to whom you made payments.
Enter MN in the “State” space, and fill in the amount of Minnesota
income tax withheld for that royalty recipient during the year.
Mail the 1099s by March 1 to: Minnesota Revenue, Mail Station
1173, St. Paul, MN 55146-1173. Also mail a copy to: Minnesota
Revenue, 612 Pierce St., Eveleth, MN 55734-1611.
Magnetic Media Reporting. Royalty payers who are required to
send federal W-2 wage detail and 1099 information on magnetic
media are required to submit that information to Minnesota on
magnetic media as well. Use Social Security Administration (SSA)
Publication (MMREF-1), IRS Publication 1220, and the department’s
Withholding Fact Sheet 2 to prepare your magnetic media
for Minnesota. Minnesota accepts returns on magnetic media
allowed by the federal government, except reel-to-reel tapes and
cartridges.
Royalties Paid to Trusts
Simple trusts (i.e., trusts that distribute all royalty income to
their beneficiaries) are exempt from withholding on royalties
unless they elect to have tax withheld by the royalty payer. If the
trust elects to have tax withheld, it must notify the royalty payer
of its decision by providing the payer with a federal W-4 form.
If the trust chooses tax-exempt status, the trust becomes the
“royalty payer” and is responsible for withholding tax from its
beneficiaries as well as complying with all withholding tax
requirements, including:
• Informing beneficiaries of the requirements to withhold tax
and providing them with W-4 forms;
• Providing beneficiaries with 1099 MISC forms each year
by January 31 for royalties received the previous year; and
• Filing all required withholding returns electronically with
the State of Minnesota.