Posted on 03/26/2018 at 12:26 PM by Cody Edwards
I previously wrote about the double dip in sales tax in a light-hearted blog comparing George Costanza and the Iowa Department of Revenue’s habit of double dipping. However, as the Department’s audit activity has increased and the double dip has shown up in more scenarios, costing taxpayers more money, it is time we get serious about ending the double dip.
In a nutshell, the double dip occurs when the Department collects sales tax from both the buyer and seller of a good or service through a sales or use tax audit. The classic double dip occurs in audits of construction contractors. More recently, the double dip has shown up in the case of audits of Iowa’s equipment rental businesses.
The Construction Contractors. In the construction contractor context, the double dip occurs as follows. The contractor purchases building materials and supplies exempt for resale and then charges its customer tax on the price of the same building materials and supplies. When the Department audits the contractor, it takes the position that the contractor should have paid tax on cost of the building materials and supplies and disregards that fact the contractor charged tax on the sales price of the same building materials and supplies. Thus, if contractor pays the tax assessment, the Department would have collected tax on the same items from 1) the contractor and 2) from the contractor’s customer. Of course, the contractor’s customer could file for a refund claim for the tax they paid on the building materials and supplies, but this does not fully limit the double dip.
The Department’s audits often look back 10 years, but customers only have three years to file for a refund claim, resulting in a seven-year double dip. Even if the Department’s audit is limited to three years, the contractor’s customers are often left in the dark with respect to their ability to file a refund claim. And, if the contractor’s customer is enlightened and does file a refund claim, the Department’s position is often inconsistent with that of the audit of the contractor: the contractor resold the building materials and equipment and, therefore, the customer is not entitled to a refund.
Recently this inconsistency showed up when the Department took the position, in an audit, that the contractor’s customers must pay tax on the price of building materials and supplies--even if the contractor paid tax on the building materials and supplies. The contractor could, according to the Department, file for a refund of sales tax paid on the building materials and supplies. Inconsistencies abound.
The Equipment Rental Businesses. Iowa’s law governing equipment rentals is complex. An oversimplification of the Department’s current interpretation of the law is that 1) equipment rental businesses can purchase their rental fleet exempt for resale unless that equipment will be rented for use in new construction; 2) the rental of certain equipment used in new construction is exempt from tax; and 3) the rental of the same equipment used in a repair is subject to tax.
The latest iteration of the double dip occurs when the equipment rental company has purchased exempt the equipment to be placed in its rental fleet and charged sales tax on the rental payments. Under audit, the Department takes the position that once the equipment is rented for use in new construction, the equipment rental business owes use tax on the entire original purchase price of the equipment—even if the first 20 rentals were not for new construction. The Department does not provide credit for the tax collected on the rental payments.
The Fix. In each of the foregoing scenarios, the Department is collecting tax on the purchase and sale or purchase and rental of tangible property, a tax policy that is frowned upon so much that nearly every state allows a resale exemption. In the case of the audit of the contractor, the Department should be required to give a credit for tax collected by the contractor on the building materials and supplies. In the case of the audit of the contractor’s customer, the state should be required to give the customer credit for the tax paid by the contractor on the building materials and supplies. Finally, the Department should be required to give the equipment rental businesses credit for the tax previously collected on the rental payments (assuming tax is actually due on the initial purchase).
This year, the Iowa legislature is embarking on significant tax reform, but it may be too late to propose legislation that would provide relief in the above and similar scenarios. Even so, I think the Department can and should adopt administrative rules that the double dip. Whether the double dip is prevented through legislation or rule making, equity requires that taxpayers of Iowa are no longer assessed for tax that the State of Iowa has already collected.
Contact Cody Edwards to discuss the problems with the double dip or potential legislative fixes to the problem.
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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