By Bruce Baker and Dwayne Vande Krol
The passage of Senate File 2417 during the 2018 legislative session resulted in many changes to Iowa’s tax code. In an earlier post, we highlighted some of the more significant changes affecting business entities. In this post we’ll address 10 key changes to Iowa’s sales and use tax code concerning the list of taxable products, taxable services and exemptions.
More information concerning all of the changes made by Senate File 2417 can be found in the Legislative Service Agency’s fiscal note and the Iowa Department of Revenue’s tax reform page . Unless otherwise noted, all changes discussed below are effective January 1, 2019.
- Protections Provided for Persons Required to Collect Tax
New Iowa Code § 421.71 provides the following protections for persons required to collect Iowa sales and use taxes (i.e., in situations where tax has been potentially over-collected):
- Prohibits class actions.
- Clarifies that no implied private right of action or private common law claims are created or provided by the Iowa Code.
- Provides that persons required to collect tax are immune from any private cause of action arising from or related to the overpayment of sales and use taxes (and other similar excise taxes.)
- Tax Imposed on Additional Enumerated Services
Iowa Code § 423.2(6) was amended to add the following to the list of taxable services:
- Storage of tangible or electronic files, documents, or other records
- Information services.
- Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products.
- Video game services and tournaments.
- Software as a service.
New § 423.1(22A) provides a definition of the new taxable service of “information services.”This definition is generally limited to providing tangible or electronic access to databases or subscriptions to information.
- Tax Imposed on Specified Digital Products
New Iowa Code § 423.2(9A) imposes tax on specified digital products, including “digital codes.”New § 423.1(36A) provides a definition of “personal property” that includes both tangible personal property and “specified digital products.”
New § 423.1(55B) generally defines “specified digital products” as electronically transferred products, including computer software.These products will now generally be treated the same as tangible personal property for Iowa sales and use tax purposes.
- True Object Test Utilized
New Iowa Code § 423.2(8)(d) excludes certain products and services from the definition of a “bundled transaction” based on the “true object” of the transaction. This test looks to the purchaser’s “true object” for the transaction to determine whether a transaction will be treated for sales and use tax purposes as a sale of a service or a sale of tangible personal property.For example, while an attorney’s preparation of a will may involve a transfer of tangible personal property (i.e., the paper that the will is drafted on), it is clear that the purchaser’s true object for the transaction is the attorney’s expertise and services.Accordingly, the transaction will be treated as the sale of a service for purposes of determining whether or not it is subject to Iowa sales or use tax.
This change is effective as of July 1, 2018.
- Exemptions Amended
Several subsections within Iowa Code § 423.3 were amended to state that exemptions provided for sales to various organizations of tangible personal property also include sales of specified digital products. Examples include, but are not limited to, the exemptions provided for sales to private non-profit educational institutions, non-profit hospitals, governmental entities, and others.
- Manufacturing and Computer Exemptions Amended for Non-Profit Organizations
Iowa Code § 423.3(47) was amended to make the following changes to the manufacturing and computer exemptions as applied to certain non-profit organizations:
- Revises the definition of “commercial enterprises” eligible for exemption on purchases of computer hardware to include nonprofit insurance companies and nonprofit financial institutions.
- Excludes nonprofit organizations from the definition of “manufacturer” eligible for exemption on purchases of manufacturing machinery, equipment, supplies, and consumables.
These changes are effective as of the May 30, 2018 date S.F. 2417 was enacted.
- Manufacturing Exemption No Longer Available for Primarily Retail Locations
The exemption provided by Iowa Code § 423.3(47) for machinery, equipment, and other qualified items used in manufacturing was amended to exclude “activities occurring on premises primarily used to make retail sales” from the definition of qualifying “manufacturing.”
This change is effective as of the May 30, 2018 date S.F. 2417 was enacted
- Existing Exemptions for Electronically-Delivered Products and Certain Services Repealed
S.F. 2417 struck current Iowa Code §§ 423.3(65), (66), and (67), eliminating the exemptions for access to on-line computer services, information services, and electronically-delivered goods and services.
- New Exemption for “Commercial Enterprises” Enacted
New Iowa Code § 423.3(103) provides an exemption for specified digital products, prewritten computer software, and certain otherwise taxable services purchased by “commercial enterprises.”
- The exemption applies to purchases of the following services:
- Storage of tangible or electronic files, documents, or other records;
- Information services;
- Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products;
- Software as a service.
- Unlike the computer exemption, the definition of “commercial enterprise” for purposes of this exemption does include “professions and occupations” (in addition to the other entity types listed for purposes of the computer exemption).
- The exemption is not available if the product or service is used for “noncommercial purposes” that are more than “de minimis,” both as defined by the Director of the Iowa Department of Revenue.
- Nexus Standards Expanded
New Iowa Code § 423.14A expands the standards under which persons can be required to collect Iowa sales and use taxes when engaged in the remote sale (i.e., via the Internet) of tangible personal property, services, or specified digital products.
New § 423.14A.3 imposes a tax collection responsibility upon retailers that either (1) have gross revenue from Iowa sales equal to or exceeding $100,000 for the immediately preceding or current calendar years, or (2) make Iowa sales in 200 or more separate transactions during the immediately preceding or current calendar years.This change, including the U.S. Supreme Court’s decision upholding an identical South Dakota statutes, is discussed in more detail here [LINK TO WAYFAIR BLOG POST].
If you have any questions on changes to the Iowa tax code, please contact your Nyemaster Goode attorney.