Understanding Iowa Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Iowa.
In Iowa, a 6 percent state tax is imposed on gross receipts from all sales of:
- tangible personal property sold at retail in Iowa to consumers or users
- utility and communication service
- tickets or admission fees
- amusement devices and games of skill or chance
- rentals of hotels, motels, inns, etc.
- optional service or warranty contracts
- engraving, photography, and printing services
- solid waste collection and disposal service
The tax also applies to many services performed in Iowa.
In addition, make sure you contact your local (county, municipal etc.) governments in Iowa because they are allowed to assess a local sales and use tax of up to 1 percent.
Retailers Must Obtain Tax Permits
In Iowa every retailer must obtain a permit for each place of business from the Iowa Department of Revenue and Finance. Persons engaging in business temporarily and itinerant merchants report and pay the tax on a non-permit basis. Iowa requires no fee for a sales tax permit.
Sellers Can Not Absorb Sales Tax
In Iowa although the sales tax is generally imposed on a seller's gross receipts, shifting of the tax to the purchaser is mandatory. Sales tax must be separately stated, and the tax becomes a debt from the purchaser to the seller.
It is against the law to refund or offer to refund all or any part of the amount collected, or to absorb the amount of sales tax required to be added to the sales price and collected from the purchaser. As a seller, it is also against the law for you to advertise directly or indirectly that you will absorb the sales tax that is required to be added to the sales price.
Leases of Tangible Personal Property Are Taxed
In Iowa the rental of tangible personal property is subject to retail sales tax. Gross taxable services from rentals include rents, royalties, and copyright and license fees. Tax on gross receipts from the sale or rental of tangible personal property under a consumer rental purchase agreement is payable in the tax period of receipt.
Purchasers Can Provide Exemption Certificates
An exemption certificate may be issued by a purchaser of a nontaxable item. The exemption certificate may be based on the type of transaction (such as a resale exemption) or on the item itself.
Iowa Exempts Many Items From Tax
Iowa has many specific items that are exempt from sales tax — for example, certain prescription medications are exempt from Iowa sales tax. You'll want to check and see if you are exempt from the sales tax.
No Tax Due When Items Purchased for Resale
In Iowa the sale of tangible personal property or services for resale or the resale of tangible personal property in connection with the performance of taxable services, is not subject to sales and use tax.
Resale exemption certificate. In Iowa exemption certificates may be issued by the Iowa Department of Revenue and Finance or provided by the seller. If the seller provides their own exemption certificate, the following information must be included:
- the seller's name
- the purchaser's name and address
- the purchaser's nature of business
- the reason for the exempt purchase (processing or resale)
- a general description of the purchase
- state sales tax or I.D. registration
In addition, the buyer must sign and date the certificate.
Iowa Permits Blanket Resale Certificates
Sellers may accept blanket certificates from you as a purchaser if you repeatedly purchase the same type of property or service for processing or resale. However, blanket certificates may not be used to purchase property or services not covered by a blanket certificate. Sellers must periodically inquire whether the information on a blanket certificate is accurate and complete. If a seller has not accepted a blanket certificate in good faith, liability for the tax does not shift from the seller to the purchaser.
Physical Presence Required for Tax Liability
You will be responsible for paying sales tax only if you have physical presence within Iowa. To determine if you have physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse, or any office space in Iowa? Maintaining retail or warehouse facilities will give you physical presence. Also, having an office for employees, even for business activities unrelated to mail order sales, will give you physical presence.
- Do my employees or I enter Iowa for purposes of taking and transmitting orders from Iowa? If your employee or independent contractor goes into Iowa to take or transmit orders, your business may have physical presence in Iowa. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence.
- Do my delivery vehicles frequently enter Iowa for purposes of delivering property? Frequent deliveries in Iowa by your trucks will give you physical presence in Iowa.
File Claim to Receive Refund of Overpaid Tax
Any tax, penalty, or interest that is paid by mistake may be refunded to the taxpayer if a claim is submitted by the later of five years after the erroneous tax payment was due or one year after the payment was made. Property returned by a customer is not included in gross receipts if the entire sale price is refunded either in cash or by credit. The seller may deduct the amount of a full credit or refund if tax was previously paid on the gross receipts.
Iowa Imposes Use Tax on Out-of-State Purchases
An excise tax (use tax) is levied on the use of tangible personal property purchased for use in Iowa and on the use in Iowa of taxable services. The Iowa use tax complements the sales tax. As a general rule, a transaction that would be subject to Iowa sales tax if it were consummated in Iowa is subject to use tax if it takes place outside the state for use in Iowa.
A person who brings tangible personal property or who uses taxable services in Iowa and has paid tax on the services in another state owes Iowa use tax on the difference between the Iowa rate and the other state's rate. If the other state's rate is higher than Iowa's, no Iowa use tax is owed.