Ad Valorem Tax
The Minerals Tax unit of the Special Taxes Division provides counties with valuation information only for the ad valorem taxes on unmined taconite and unmined natural iron. We have no administrative responsibility or duties relating to the ad valorem taxes on 1) Auxiliary Mining lands for Taconite Operations; 2) Taconite Railroads; or 3) Severed Mineral Interests.
Lands and structures actively used for taconite production are exempt from the Ad Valorem Tax and are subject to the Production Tax in lieu of Property Tax. Actively used lands include the plant site, mining pit, stockpiles, tailings pond and water reservoirs. Also included are lands stripped and ready for mining, but not lands merely cleared of trees. It is important to note that this exemption applies only to the Ad Valorem Tax on the land and buildings and not to the Unmined Taconite Tax. See Ad Valorem Tax on Unmined Taconite below for more information. Lands adjacent to these facilities, commonly referred to as auxiliary mining lands, are subject to assessment of Ad Valorem Tax administered by the county.
The county assessor is responsible for estimating the market value of auxiliary mining lands and classifying them into one of several property classifications established by Minnesota law. The two most common property classifications used on auxiliary mining lands are industrial and rural vacant land. In general, lands in close proximity to active taconite operations are assigned the industrial classification while those further away are classified as rural vacant land under Minnesota Statutes 273.13 Classification of Property.
Each property classification has a legislatively set percentage called the class rate that is multiplied by the property’s taxable market value (TMV) to calculate tax capacity. For payable 2016 taxes, the class rate for rural vacant land is 1.00 percent of the estimated market value. For the industrial classification, there are two class rates: 1.50 percent for the first $150,000 of the TMV and 2.0 percent for the value over $150,000.
Property taxes are calculated by multiplying a property’s tax capacity times the tax extension rate for the jurisdiction where it is located. Tax extension rates are determined by county, local government and school district spending. In St. Louis County within the mining area for taxes payable in 2016, they range from a low of approximately 82 percent to a high of approximately 414 percent. In addition, the market value times the referendum rate must be added to the tax determined above if there is a referendum in the taxing district. For industrial class property, the state general tax rate of 48.641 percent applies in addition to the local tax rate.
The following schedule provides for adjustments in both the valuations and classifications of auxiliary mining lands located on the iron formation versus off-formation lands as well as further refinements based on the proximity of these lands to active mining operations. It outlines valuation adjustments to be made on excess lands where they are located as market conditions and/or Minnesota statutes dictate (see below).
This schedule was updated based on market conditions for the 2013 assessment.
St. Louis County Mining Land Assessment Schedule
|Iron Formation Land||Value ($acre)||Classification|
|Land within 1/4 mile of active pit||$1,000||Industrial|
|Excess land (more than 1/4 mile from mining activity or outside 15-year pit mine|
|Undisturbed||Same as other private land||Rural vacant land or current use|
|Stockpiles||75% of other private land||Rural vacant land or current use|
|Abandoned Pits||50% of other private land||Rural vacant land or current use|
|Land within 1/4 mile of mining activity||$700||Industrial|
|Undisturbed||Same as other private land||Rural vacant land or current use|
|Stockpiles||75% of other private land||Rural vacant land or current use|
|Tailings Pond||30% of other private land||Rural vacant land or current use|
The heading in the statute is somewhat misleading since it refers to a Tax on Unmined Iron Ore or Iron Sulfides. The tax clearly applies to unmined taconite and has been administered in that manner. The term “iron ore” does not refer to high-grade natural ore in this instance.
The tax, as presently administered, applies to all iron formation lands on the Mesabi Range. The statutory exemption administered by the county assessor provides that in any year in which at least 1,000 tons of iron ore concentrates are produced from a 40-acre tract or government lot, the tract or lot are exempt from the Unmined Taconite Tax. The county assessors have also exempted actual platted townsites that are occupied.
The iron formation lands on the Mesabi Range are divided into two categories by the Minnesota Department of Revenue. This is done through the evaluation of exploration drill hole data submitted by the mining companies.
The categories are:
Lands that are underlain by magnetic taconite of sufficient quantity and grade to be currently economic: They are considered to be economic taconite and are given a market value of $500 per acre.
- Lands either not believed or not known to be underlain by magnetic taconite of current economic quantity, quality and grade: They are considered to be uneconomic taconite and are given a market value of $25 per acre.
To be classified as economic taconite, category 1, the taconite must pass the following criteria:
- contain more than 16 percent magnetic iron with the Davis tube test;
- contain less than 10 percent concentrate silica (SiO2) with the Davis tube test;
- have a 15- to 25-foot minimum mining thickness; and
- have a stripping ratio of less than four-to-one (waste/concentrate), calculated as follows:
A) Surface (ft.) x 1.5= Equiv. Ft. SurfaceB) Rock (ft.) x 2.25 = Equiv. Ft. WasteC) Ore (ft.) x 2.5 = Equiv. Ft. Concentrate3Stripping Ratio = A + BC
If the material fails any of the above criteria, then it is considered to be uneconomic taconite and classified as category 2. Some lands may also be considered as uneconomic due to environmental restrictions.
For taxes payable in 2019, the tax is calculated by multiplying the market value for the parcel of land by the 2.00 percent class rate to obtain the tax capacity. The special rate on the first $150,000 of market value that applies to class 3 commercial/industrial property does not apply to class 5 unmined taconite. This is then multiplied by the local tax rate. Note: Call your county auditor for more information.
Since 1909, Minnesota’s natural iron ore reserves have been estimated and assessed by the state for Ad Valorem Tax purposes. The actual Ad Valorem Tax levy is set by the county, the school district and the local township or municipality. The county auditor collects the tax levy.
A Minnesota Supreme Court decision in 1936 established the present worth of future profits method for valuing the iron ore reserves. This is accomplished through the use of a complex formula known as the Hoskold Formula. The formula takes into account ore prices and all the various cost factors in determining the value of the unmined ore.
Each year, the Minnesota Department of Revenue uses a five-year average for allowable costs taken from the Occupation Tax report. A five-year average of the Lake Erie iron ore market value is also used. These averages are used to help reduce fluctuation of value due to sudden cost/price changes.
The following expenses are allowed as deductions from the Lake Erie market value on the computation of present worth, which is known as the Hoskold Formula:
1a. Mining, normal costs
1b. Mining, special costs
3. Miscellaneous (Property Tax, medical ins., etc.)
4. Development (future)
5. Plant and equipment (future)
6. Freight and marine insurance
7. Marketing expense
8. Social Security tax*
9. Ad Valorem Tax (by formula)
10. Occupation Tax
11. Federal income tax
12. Interest on development and working capital
These 12 allowable expense items are deducted from the Lake Erie market value to give the estimated future income (per ton). Note that although royalty is allowable as an Occupation Tax deduction, it is not allowable on Minnesota’s Ad Valorem Tax.
The present worth is then determined by multiplying the estimated future income (per ton) by the Hoskold Factor. The Minnesota Department of Revenue presently allows a 12 percent risk rate and six percent safe rate that yields the .33971 Hoskold factor when used with a 20-year life. A 20-year life has been used since 1968 as representative of the remaining life of Minnesota’s natural iron ore reserves. The resulting value is considered the market value by the Minnesota Department of Revenue.
The term “class rate” was introduced for taxes payable in 1990. The class rate for unmined iron ore is 2.0 percent.
The tax capacity is the product of the class rate and the market value. The product of the market value and class rate must then be multiplied by the local tax rate plus the state general Property Tax rate to determine the tax. In addition, the market value times the referendum rate must be added if there is a referendum in the taxing district.
Local tax rates are a function of county, local government, and school district spending. In addition, a statewide general Property Tax levy applies to most types of property with the exception of agricultural and homestead properties. For example, taxes payable in 2019 in St. Louis County, the tax rates range from a low of approximately 84 percent to a high of approximately 290 percent (not including the state general Property Tax rate of 42.416 percent). The class rate from 2002–2019 has been 2 percent. The special rate on the first $150,000 of market value that applies to class 3 commercial/industrial property does not apply to unmined iron ore that are class 5 properties.
The Minnesota Department of Revenue has tried to maintain all ores on the tax rolls, including the uneconomic, underground and unavailable classifications. A schedule of minimum rates was established in 1963 and revised in 1974, 1986, 1988, 1992 and 1999. The market values for iron ores that do not show a value with the Hoskold Formula are determined from the schedule of minimum rates. See Minimum Valuation Rates on Unmined Natural Ore to view a table with the current schedules. Most of the iron ore value remaining today was determined using the schedule of minimum rates.
Open pit ores with costs too high to show a value with the Hoskold Formula are assigned minimum values from the open pit classification. Underground and uneconomic ores with stripping ratios exceeding five-to-one are assigned minimum values from underground uneconomic classification.
Beginning with the 1999 assessment, the minimum rates for determining market values in Crow Wing County were reduced by 50 percent. This simply recognizes that the potential for mining iron ore is substantially less in Crow Wing County than on the Mesabi Range in St. Louis or Itasca counties.
A notice of the market value of unmined ore is sent to each person subject to the tax and to each taxing district affected on or before May 1 as said by M.S. 273.1104.
According to the provisions of M.S. 273.1104, a public hearing to review the valuations of unmined iron ore must be held on the first secular day following May 20. This hearing provides an opportunity for mining company and taxing district representatives to formally protest any of the ore estimates or valuation procedures they believe to be incorrect.
In addition, current conditions and future trends in the iron ore industry are discussed. Iron ore Ad Valorem taxes are expected to continue their long decline as remaining economic deposits are mined or allowed to go tax forfeit. Reserves in old flooded pits converted to recreational use are classified as underground, low-grade recreational.
Beginning with the Jan. 2, 1989 assessment, taconite railroads have been included in the definitions of common carrier railroads and were assessed and taxed on an ad valorem basis according to Minnesota law. LTV and Northshore were the only railroads classified as taconite railroads. Since the 2003 assessment, Northshore Mining is the only operating railroad.
The Minnesota Department of Revenue developed rules governing the valuation of railroad operating property. The rules have been in effect since 1979 when common carrier railroads went off the gross earnings tax. Each railroad is required to file an annual report containing the necessary information.
The valuation process utilizes the unit value concept of appraisal. For taconite railroads, this involves calculating a weighted cost indicator of value allowing for depreciation and obsolescence. Personal property is then deducted from the net cost indicator to yield a Minnesota taxable value.
This value is then apportioned to the various taxing districts where the taconite railroad owns property. The amount of value each taxing district receives is based on an apportionment formula involving three factors: land, miles of track, and the cost of buildings over $10,000.
After the market value is apportioned to each taxing district, the value is equalized with the other commercial and industrial property on a county-wide basis using an estimated median commercial and industrial sales ratio. A commercial and industrial ratio is developed for each county and applied to that county’s taconite railroad market values.
Severed mineral interests are those separately owned from the title to surface interests in real estate. Each year, severed mineral interests are taxed under Minnesota law at 40 cents per acre times the fractional interest owned. The minimum tax on any mineral interest (usually 40-acre tracts or government lots) regardless of the fractional interest owned, is $3.20 per tract. No tax is due on mineral interests taxed under other laws relating to the taxation of minerals, such as unmined taconite or iron ore, or mineral interests exempt from taxation under constitutional or related statutory provisions.
Ownership of a specific mineral or group of minerals, such as energy minerals or precious metals rather than an actual fractional interest of all the minerals, does not constitute a fractional interest. Thus, if one individual reserved all minerals except gas, oil and hydrocarbons, and a second entity reserved the hydrocarbons, each owner would be subject to the full 40 cents per acre tax.
The Severed Mineral Interest Tax is a Property Tax that is levied by local taxing authorities in the same manner as other local Property taxes. Proceeds from the tax are distributed in this manner: 80 percent is returned by the county to local taxing districts where the property is located in the same proportion that the local tax rate of each taxing district bears to the total surface tax rate in the area; and 20 percent to the Indian Business Loan Account in the state treasury for business loans made to Indians by the Department of Employment and Economic Development.
The registration and taxation of severed mineral interests is a county function. Severed mineral interests are registered with the county recorder in the county where the interest is located. The county auditor sends a tax statement similar to any other real estate interest. The tax is normally collected in two increments payable in May and October. If the tax is less than $50, the taxpayer is required to pay in full with the May payment.
Nonpayment Penalty: Forfeiture
The eventual penalty for not paying the tax is forfeiture. Policies vary somewhat among counties. Specific questions about the tax, interest or penalties should be directed to the county recorder and auditor in the county where the minerals are located.
The tax on severed mineral interests was enacted in 1973 as part of an act that required owners to file a document with the county recorder where the interests were located describing the mineral interest and asserting an ownership claim to the minerals. The purpose of this requirement was to identify and clarify the obscure and divided ownership conditions of severed mineral interests in the state (M.S. 93.52). Failure to record severed mineral interests within time limits established by the law results in forfeiture to the state according to M.S. 93.55.
History of Litigation
In 1979, the Minnesota Supreme Court ruled that the tax, the recording requirements and the penalty of forfeiture for failing to timely record were constitutional, but also ruled that forfeiture procedures were unconstitutional for lack of sufficient notice and opportunity for hearing. This decision is cited as Contos, Burlington Northern, Inc. U.S. Steel, et al. v. Herbst, Commissioner of Natural Resources, Korda, St. Louis County Auditor, Roemer, Commissioner of Revenue, and the Minnesota Chippewa Tribe, et al., 278 N.W. 2d 732 (1979). The U.S. Supreme Court refused to hear an appeal requested by the plaintiffs. Shortly after this decision, the legislature amended the law to require notice to the last owner of record and a court hearing before a forfeiture for failure to timely record becomes complete. Under these requirements, court orders have been obtained by the state in several counties declaring the forfeiture of particular severed mineral interests to be complete and giving title to the state.
In 1988, the legislature amended the law to allow the commissioner of the Minnesota Department of Natural Resources (DNR) to lease unregistered severed mineral interests before entry of the court order determining the forfeiture to be complete. However, mining may not commence under such a lease until the court determines that the forfeiture is complete.
In a 1983 case, the Minnesota Supreme Court ruled that severed mineral interests owned by the Federal Land Bank of St. Paul were exempt from the state Severed Mineral Interest Tax under a federal law exempting Land Bank real estate from local Property taxes. The U.S. Supreme Court denied a petition by the State of Minnesota to review the case.
If someone buys a DNR mining lease of 3 or more years duration, the Severed Mineral Interest Tax of 40 cents per acre applies. Contact the DNR, Minerals Division, to determine the status of activities under any state metallic minerals lease.
Indian Business Loan Account
The 20 percent portion of the Severed Mineral Interest Tax that is allocated to the Indian Loan Program is reported by the county auditors on the Severed Mineral Interest Return (SMI1). Normally, the form is submitted twice each year to correspond with payment of Property taxes.
The money deposited in the Severed Mineral Interest Account is distributed to the Indian Loan Program at the end of each month.
Department of Revenue
The processing and payment of the Severed Mineral Interest Tax is handled by the Special Taxes Division of the Minnesota Department of Revenue, Mail Station 3331, St. Paul, MN 55146-3331. Phone 651-556-4721.
The Indian Business Loan Program is administered by the Department of Employment and Economic Development, 1st National Bank Building, 332 Minnesota Street, Suite E-200, St. Paul, MN 55101-1351. Phone: 651-259-7424.