Changes and clarifications to Iowa sales tax

Iowa recently took care of some housekeeping with the enactment of House File 2641. Many of the changes pertain to sales and use tax.

All-terrain vehicles (ATVs) and snowmobiles cannot be operated on public land, public ice, or designated trails in Iowa unless registered with the Iowa Department of Natural Resources through a county recorder. ATV and snowmobile registrations must be renewed annually between September 1 and December 31.

Vehicle dealers generally take care of the initial registration, but vehicle owners typically handle subsequent registrations. Whoever is responsible for a vehicle must provide a bill of sale, proof of prior registration (if applicable), and any other proof of ownership required by the county recorder. They also need to pay all applicable fees, including any sales or use taxes owed.

House File 2641 clarifies that the county recorder shall collect sales or use tax “if the owner of the all-terrain vehicle is unable to present satisfactory evidence that the sales or use tax has been paid.” Ditto for snowmobiles. The county recorder must then remit the collected tax to the Iowa Department of Revenue by the 10th of the following month, along with an itemized statement of the name of each taxpayer, the make and purchase price of the ATV or snowmobile, and any other information required by the department.

This should streamline tax collection. Prior to the enactment of HF 2641, the county recorder wasn’t allowed to collect and remit the tax even though registration couldn’t be completed unless the tax was paid.

The bill also modifies language around an existing sales tax exemption and sales tax refund for building materials, equipment, or services, in order to “reduce confusion and provide consistency.”

Thus, effective July 1, 2020, building materials, equipment, or services are eligible for a sales tax exemption or refund if “completely consumed in the performance of the construction contract with the designated exempt entity,” provided:

• The contract for the construction project is written, and
• The property that is the subject of the construction project becomes public property or the property of the designated exempt entity

HF 2641 defines “computer peripheral” as “any 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.” It also adds computer peripherals to the list of items exempt from Iowa sales and use tax if purchased for use under certain circumstances (listed in Section 95 and 96).

Specified digital products and services have been subject to Iowa sales and use tax since January 1, 2019. However, charges to customize software delivered in physical form were overlooked, leaving their taxability unclear. Section 36 of HF 2641 removes the doubt by treating “software sold as tangible personal property” (i.e., delivered in physical form) like “specified digital products.”

The retail sale of “software sold as tangible personal property” is generally taxable in Iowa unless considered an exempt commercial enterprise.

Additionally, Section 37 clarifies that specified digital products are treated like tangible personal property when sold bundled with a service that’s the true object of the sale.

The bill clarifies that manufactured homes sold in Iowa are subject to a 5% state sales and use tax rate, rather than the general 6% Iowa sales tax rate.

Retailers with a physical presence in Iowa are responsible for collecting and remitting sales tax on Iowa sales, as are out-of-state sellers with economic nexus.

Prior to the enactment of HF 2641, consumers were liable for consumer use tax if a retailer didn’t collect sales tax on a taxable sale. Section 47 of the bill makes the retailer and the purchaser “jointly liable”: “If the retailer fails to collect sales tax at the time of the transaction, the retailer shall thereafter remit the applicable sales tax, or the purchaser thereafter shall remit the applicable use tax. If the purchaser remits all applicable use tax, the retailer remains liable for any local sales and services tax under chapter 423B that the retailer failed to collect.”

In Section 39, HF 2641 clarifies that the sales and use tax exemption for tangible personal property or specified digital products provided to many government entities also applies to sales to tribal governments.

The sales price from the sale of many commercial recreation services are exempt from sales and use tax in Iowa. HF 2641 specifies that this includes the opportunity to hunt preserve whitetail (white-tailed deer) — if the sale occurred between July 1, 2005, and December 31, 2015.

However, taxpayers who paid sales tax on charges to hunt preserve whitetail deer during that time may not seek a sales tax refund.

For additional guidance on HF 2641, see the text of the bill and the Iowa Department of Revenue.

The changes listed above illustrate why sales and use tax compliance can be so challenging for businesses, especially businesses required to collect and remit sales tax in multiple states. Sales tax law is detailed and nuanced and, despite the best efforts of legislators and tax officials, often unclear. Automating sales tax compliance makes managing sales tax more manageable.