2020 Iowa Legislative Session Sales and Use Tax Changes
Posted on 07/13/2020 at 12:00 PM by Cody Edwards
On June 29, 2020, Governor Reynolds signed into law House File 2641, which included several changes to Iowa’s sales and use tax laws.
Last year, the Iowa Legislature created a computer exemption task force to revisit Iowa’s computer exemption found at Iowa Code § 423.3(47). I have previously written about this exemption here. Generally speaking, the computer exemption exempts from sales tax computers purchased and used by a commercial enterprises, financial institutions, and insurance companies. Historically, Iowa’s definition of “computer” included not only computers, but also all items attached to the computer, via cable or otherwise, (items referred to as computer peripherals). The inclusion of computer peripherals in the exemption was by way of the Department’s administrative rules.
The new law statutorily defines computer peripheral in Iowa Code § 423.1(10A) as “an ancillary device connected to the computer digitally, by cable, or by other medium, used to put information into or get information out of a computer.” This is not a major change from the prior law, other than to codify the exemption for computer peripherals. However, it is worth noting that absent from the new definition of “computer peripheral” is any requirement that the peripheral be directly or primarily used to put information into or get information out of the computer. Thus, so long as the peripheral merely puts information into or gets information out of a computer—and is used by a commercial enterprise, financial institution, or insurance company and does not fall within another exclusion—the peripheral should be exempt from sales tax.
One final note, as I wrote about in a prior blog, Iowa’s computer exemption is extremely broad. Businesses should analyze their major purchases to determine whether the purchases would be exempt from Iowa sales tax under Iowa’s computer exemption.
Snowmobiles and All-Terrain Vehicles
New sections have been added that help to guide county reporters when snowmobile or all-terrain vehicles owners fail to present satisfactory evidence of payment of sales or use tax. If such an owner is unable to prove that they paid sales or use tax or that the snowmobile or ATV is exempt from tax, the county record must collect the tax owed and, on or before the tenth day of each month, remit to the Department of Revenue the amount of taxes collected during the preceding month. The county recorder must include with this remittance an itemized statement that includes the name of each taxpayer, the make and purchase price of each snowmobile or ATV, the amount of tax paid, and such other information as the Department of Revenue requires.
Purchases of snowmobiles and ATVs from dealerships are likely subject to sales tax, unless it is an ATV used primarily in agricultural production. Therefore, for ease of administration, purchasers should pay sales tax to the dealership and be prepared to present proof of tax payment to the county recorder.
Whitetail Deer Hunting
The sale of a commercial recreation service offering to hunt a preserve whitetail deer is now exempted from sales tax if the sale occurred between July 1, 2005 and December 31, 2015. The legislation precludes tax refunds that arise as a result of the amendment. That is, taxpayers who paid sales tax on the price of commercial recreation service offering to hunt preserve whitetail deer cannot claim a refund even though the sales tax they paid is no longer applicable.
Although the reason for the enactment of this legislation is not clear, something tells me there was an audit or audits of businesses that arranged for the hunting of preserve whitetail deer for tax periods July 1, 2005 through December 31, 2015, which resulted in significant assessments. With this legislation, those assessments are effectively canceled. Give that lobbyist a raise!
Liability for Failure to Pay
The legislature changed to statutory language related to liability for failure to pay sales or use tax. As a refresher, if a purchaser does not pay sales tax to the retailer, the purchaser must pay use tax directly to the Department of Revenue. However, in the event the purchaser fails to pay sales or use tax, both the retailer and purchaser remain liable for the tax.
Iowa Code § 423.33 was amended so that the retailer and purchaser are “jointly” liable for failure to pay sales or use tax. Legislative intent that accompanied the bill—which is quite rare in Iowa—indicates that the addition of “jointly” “is a conforming amendment consistent with current state law, and that the amendment does not change the application of current law but instead reflects current law both before and after the enactment.”
A new section, which does not appear to be a conforming amendment, provides that if the purchaser does not pay the retailer sales tax, then either the retailer or the purchaser shall thereafter remit the applicable sales or use tax, respectively. The difficulty here is determining whether the other party remitted the tax and the risk is tax gets paid twice, or not at all.
Perhaps the most significant change is that retailers are now on the hook for remitting the one-percent local option sales tax in the event the purchaser only remits six-percent use tax. The issue here is that the retailer will not know whether the purchaser remitted the additional one-percent tax (assuming there is a one-percent use tax, which I dispute), which sets the retailer up for a “gotcha” assessment.
Sales Tax on Certain Services Related to Software Sold as Tangible Personal Property
The Iowa legislature amended Iowa Code § 423.2(6)(bs) so that services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading or enhancing software sold as tangible personal property is now subject to tax. Historically, such services were subject to tax only if they related to specified digital products.
It is unclear what the phrase “software sold as tangible personal property” means; however, I suspect these services are subject to tax only if they relate to software that is not downloaded electronically. Look for guidance from the Department of Revenue on this in the future.
Keep in mind these services are exempt from sales tax if they are furnished to a commercial enterprise for use exclusively by the commercial enterprise. Iowa Code § 423.3(104). So, only entities that are not commercial enterprises (such as non-profit entities) and individuals are impacted by this tax increase.
Bundled transactions have long been subject to sales and use tax in Iowa. Generally speaking, a bundled transaction is “the retail sale of two or more distinct and identifiable products, except real property and services to real property, which are sold for one nonitemized price.” Iowa Code § 423.2(8). This year, the legislature amended the definition of “bundled transaction” to exclude certain transactions that include specified digital products.
Under the new law, the retail sale of a specified digital product and a service for one nonitemized price is not a bundled transaction if the specified digital product is 1) essential to the use of the service; 2) is provided exclusively in connection with the service; and 3) the true object of the transaction is the service. Specified digital products include “electronically transferred digital audio-visual works, digital audio works, digital books, and other digital products.” Iowa Code § 423.1(55B). Historically, this exclusion applied only to retail sales of tangible personal property and a service for one nonitemized price.
Under the new law, a non-taxable service should not be transformed into a taxable bundled transaction if, for example, the service provider sends you a digital book that helps you navigate the non-taxable service.
Sales to Tribal Governments
Sales of tangible personal property or specified digital products sold to and services furnished to a tribal government are now exempt from sales and use tax.
Construction Contracts with Designated Exempt Entities
The law regarding sales tax and construction contracts with designated exempt entities is too complex to fully discuss here. However, for purposes of this blog, note that contractors must generally pay sales tax on the building materials and supplies used in a construction contract, except when the contractor performs work for a designated exempt entity.
The Iowa legislature changed the law regarding sales tax and contracts with designated exempt entities. Three major changes are as follows.
First, the new law adds the following to the list designated exempt entities:
- The state of Iowa,
- Any political subdivision of the state, and
- A tribal government and any instrumentality of the tribal government which do not have earning going to the benefit of an equity investor or stockholder.
A complete list of designated exempt entities can be found at Iowa Code § 423.4(1).
Second, under the new law, the sales tax exemption applies only if (1) the building materials, supplies, equipment, or services are completely consumed in the performance of the construction project; and (2) the property that is subject to the project becomes public property or property of the designated exempt entity.
Third, under the new law, the contracts entered into by the contractor and the designated exempt entity must be written, as opposed to verbal.
For more information on any of these new Sales and Use Tax Changes, you can contact me here.
Categories: Table SALT, Cody Edwards, Taxation Law, Dickinson Law News
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