Those of us in Minnesota who have been to school (and who hasn’t) remember that when you miss a deadline for getting a paper turned in, that your grade suffers accordingly. Your teacher was not happy. Your parents were not happy. You did not get the “A” that you so richly deserved.

That is somewhat similar to what happened in Minnesota and Wisconsin recently. The October 1 deadline to reach a new reciprocity agreement has come and gone. Those who work in Minnesota and live in Wisconsin are not happy. Those who work in Wisconsin and live in Minnesota are not happy. Wisconsin legislators are not happy. So why did the deal fall apart?

According to news sources in Wisconsin, the deal fell apart due to a change in the demand made by Minnesota and our Department of Revenue. Minnesota law limits the credit that taxpayers can take for taxes paid to another state. Because Wisconsin has a lower state income tax rate than does Minnesota, when Governor Pawlenty ended the reciprocity in 2009, Minnesota’s coffers have benefited with higher state tax revenues.

In order to return to reciprocity, the Department of Revenue is requesting that Wisconsin make up the difference in lost revenue. Wisconsin has reciprocity agreements with other states that do not have a similar agreement, so Minnesota would be an anomaly.

This primarily affects people in border communities such as Hudson, Wisconsin, Duluth and Superior, Red Wing and La Crosse areas. In border communities, the taxpayer must submit two state income tax returns if they live in one state and work in the other.

It is an issue that appears will not be resolved until perhaps the next deadline – October 1 of next year.

Source: Hudson Star-Observer, “Minnesota ups ante on tax reciprocity,” Randy Hanson, Oct. 3, 2012

At our Minneapolis law firm we represent clients with the full range of federal and state tax issues including those with litigation or state income tax controversy and those who must file returns in multiple states.