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LOST in an Iowa Use Tax Audit: Tax Return > Administrative Rules?

Cody Edwards, Dickinson Law Firm, Des Moines Iowa, Iowa Table SALT Law, Iowa Taxation Law

Posted on 08/29/2018 at 01:17 PM by Cody Edwards

Mathematical symbols are confusing. Does the alligator eat the larger or smaller number?  And, as suggested in the title, does a tax return have greater authority than administrative rules?  Read on and you shall find out the answer to one of life’s toughest questions.   

Iowa’s consumer’s use tax return contains a line where taxpayers located in a local option sales tax (“LOST”) jurisdiction must report a 1-percent LOST on their taxable purchases for which sales tax was not charged, and are, therefore, subject to Iowa use tax (I have previously written about use tax here).  In consumer’s use tax audits, the Iowa Department of Revenue assesses an additional 1-percent LOST, in addition to the 6-percent state tax, if the purchases were used in a LOST jurisdiction.  To be clear, this assessment is not, and cannot be, an assessment of local option use tax since Iowa does not have a local option use tax.  Rather, this is a sales tax assessment on a taxpayer’s purchases during a use tax audit.  

Astute readers playing along at home have likely recognized that sales and use tax are separate and distinct taxes (compare Iowa Code § 423.2 with 423.5) and are likely wondering how the Department can assess a sales tax on purchases during a use tax audit.  I’m glad you asked.    

The answer to your question is found in the Department’s administrative rules and informal guidance. A review of such authority leads to the conclusion that the Department lacks the authority to impose a local option sales tax in a use tax audit.  Of course, the Department could assess the seller for sales tax on the additional 1-percent LOST that it failed to charge (assuming the seller has nexus). 

Iowa Admin. Code rule 701—223.2(2) states that “there is no local option use tax” and its example make this clear.  Iowa Admin. Code rule 701—223.3(2) provides that “Iowa does not impose a local option use tax.”  The Department’s informal guidance also makes it clear that there is no local option use tax.  See e.g., In the Matter of: L.E. Myers Hamby Young, Declaratory Order Docket No. 2005-30-6-00169 (Feb. 2006); Policy Letter, Iowa Sales Tax on Environmental Testing Services, May 30, 2012, Iowa Tax Research Library Doc. Ref. No 12300025.    

Recognizing the seemingly unequivocal law that “Iowa does not impose a local option use tax,” I recently mentioned to the Department in a consumer’s use tax audit that there is no local option use tax and requested the Department remove it from its assessment.  In response, the Department stated

Conspicuously absent from the Department’s response was a citation to a statute, rule or informal guidance supporting its position that there is a local option use tax or that LOST can be collected in a use tax audit. Rather, according to the Department, simply because the Department’s use tax return includes a line to pay LOST, the Department can collect the tax. So, based on the Department’s response, it would appear that Tax Return > Statute. However, notwithstanding the Department’s response, the Department offered to reduce the assessment, “for purposes of settlement only,” by an amount that looked a lot like the amount attributable to the local option sales tax, penalty, and interest they were assessing. 

Now I get it, Tax Return < Administrative Rule.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Cody Edwards

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