US - Iowa Sales and Use Tax Guide

Sales and Use Tax Basics in Iowa

Sales Tax

Iowa imposes a sales tax on the sale of tangible personal property, commonly referred to as tangible goods or products, as well as specified digital products and taxable services. Generally, sellers of taxable tangible goods, digital products, or services are liable for charging, collecting, and remitting sales tax relating to the taxable transactions.

Use Tax

As the counterpart of the sales tax, the use tax is imposed in Iowa when the sales tax has not been charged. Typically, use tax is charged on the transactions relating to the purchase of goods, digital products, or taxable services from remote out-of-state sellers who are not liable for sales tax in the state.

Notably, both individuals and businesses are liable for use tax. In cases where the total annual use tax exceeds USD 1,200, taxable persons are required to register for a sales and use tax permit and report the liability on the sales and use tax return form as “taxable purchase”. Taxable persons that do not exceed this threshold and do not hold a sales and use tax permit can file the Iowa Non-Permit Use Tax Return instead.

Iowa Sales and Use Tax Rates

In Iowa, the statewide sales and use tax rate is set at 6%. In addition to the state rate, most local jurisdictions impose a 1% local option sales and use tax rate. Apart from the sales and use tax, Iowa also imposes several special taxes, including the Hotel and Motel Tax, Motor Vehicle Fee for New Registration, Automobile Rental Tax, and Construction Equipment Tax.

Tax-Exempt Transactions

The Iowa Department of Revenue has a comprehensive list of taxable and tax-exempt transactions. Generally, whether the transaction is taxable or exempt depends on defined conditions. For example, sales and purchases of all-terrain vehicles (ATVs) are taxable, unless they are used primarily for agricultural production. In that case, transactions relating to the sales or purchase of ATVs are tax-exempt.

Another example is sales to American Indian governments. Purchases by a person who is not an American Indian, where delivery takes place on the settlement or reservation, and where delivery occurs off the settlement or reservation, are taxable. However, sales to American Indians where delivery occurs on the American Indian settlement or reservation are tax-exempt.

Notable examples of tax-exempt transactions include casual sales. However, there is a limitation to this exemption. Therefore, if the sales include vehicles subject to registration, ATVs, off-road motorcycles, off-road utility vehicles, aircraft, or watercraft, the exemption does not apply.

Nexus Rules in Iowa

Taxable persons, either individuals or businesses,  become liable for sales and use tax purposes if they establish a nexus in Iowa. Typically, taxable persons develop a physical or economic nexus. However, with the development of new rules and requirements, taxable persons may also be affected by the marketplace nexus rules, which are significant for both the marketplace facilitators and marketplace sellers.

Physical Nexus

If taxable persons are physically present in the state, they establish a physical nexus. Consequently, they are responsible for collecting and remitting sales tax. The physical nexus is established by having an office, warehouse, distribution center, or representatives such as employees, agents, or independent contractors who solicit sales, provide consulting services, or perform service work in Iowa.

Economic Nexus

Following the US Supreme Court's decision in South Dakota v. Wayfair, Iowa introduced its own economic nexus rules under which remote or out-of-state sellers become liable for sales tax purposes. The economic nexus threshold was initially set at USD 100,000 or more in gross revenue or 200 or more separate transactions. However, the economic nexus rules were changed, and the state decided to remove the 200-transactions threshold, leaving only the amount threshold in place.

Therefore, if remote or out-of-state sellers have a gross revenue of USD 100,000 or more from Iowa sales, they must register for sales tax in the state and charge, collect, and remit the due taxes. The gross revenue includes exempt sales, wholesale sales, sales for resale, and sales for which a marketplace facilitator collected sales tax.

Marketplace Nexus

Similar to economic nexus rules, the marketplace nexus is established if a marketplace facilitator makes or facilitates sales of USD 100,000 or more in Iowa. The primary difference between economic nexus and marketplace nexus is that economic nexus is calculated solely based on the revenue generated from sales within a state. In contrast, marketplace nexus considers both revenue from direct sales and revenue from sales facilitated through the marketplace.

Taxable Goods and Services in Iowa

Sales of tangible goods are generally taxable unless defined as exempt. In contrast, services are usually non-taxable, unless listed as taxable. Therefore, the Iowa Department of Revenue provided a list of taxable services, which includes specified vehicles and transportation-related services, household and personal services, building, property, and maintenance services, equipment, machine, and technical services, storage and rental services, digital, communication, and media services, and services considered as sales of tangible goods.

Bundled Transactions and the True Object Test

Under the Iowa legislation, bundled transactions refer to those that include one or more distinct and identifiable products, whether tangible goods, taxable services, or specified digital products, which are sold together for a single, non-itemized price. Generally, the entire sales price of the bundled transaction is subject to sales tax.

However, there are exemptions provided. For example, packaging or incidental materials do not constitute separate products, and items provided free of charge with another purchase do not constitute a bundled transaction.

Additionally, the true object test is used to determine whether a transaction is taxable or non-taxable. Therefore, transactions in which the true object is a non-taxable service, with any tangible goods merely incidental, are not treated as bundled transactions. Additionally, when service is essential to another or when taxable items are de minimis, meaning they comprise 10 percent or less of the total price, these transactions are not considered bundled. 

E-Commerce Framework

The e-commerce framework has undergone significant changes across the US, and Iowa is no exception. In 2019, Iowa introduced the economic nexus rules, targeting remote and out-of-state sellers, meaning those without physical presence in the state, that sell tangible goods, taxable services, or specified digital products to local consumers.

When these remote sellers exceed the USD 100,000 gross revenue threshold, they must register for sales tax, apply the state and local sales tax rate to the transaction, and collect and remit sales tax to the state Department of Revenue.

However, not all remote sellers strictly offer and sell goods, digital products, and taxable services through their own website or similar channels. Many of them utilize online marketplaces and platforms to place and sell their goods and services. For these sellers, there are specific rules to follow.

Marketplace Rules

Remote sellers that offer and sell goods and services solely through marketplaces are known as marketplace sellers. The sales tax liability of these marketplace sellers depends on whether the marketplace facilitator collects and remits sales tax. 

If the marketplace facilitator is registered for, collects, and remits state and local option sales tax, marketplace sellers are not required to obtain an Iowa sales tax permit or file sales tax returns. However, if the marketplace facilitator is not liable for sales tax in Iowa, the responsibility remains with the marketplace sellers. In this scenario, marketplace sellers should contact the marketplace facilitator to determine if and when the facilitator will become liable for sales tax purposes.

Finally, if remote sellers make both marketplace sales and non-marketplace sales, such as direct-to-consumer sales through a website, online store, or similar means, they must add the total gross revenue from both types of sales to determine whether they are responsible for registering for, collecting, and remitting due taxes.

Digital Goods and Services

The taxability rules for digital goods and services are divided into those before January 1, 2019, and those from January 1, 2019. Whether digital goods and services were subject to sales tax before January 1, 2019, depended on many factors, including whether they constituted a tangible good or a listed taxable service. Also, before January 1, 2019, electronically supplied products were exempt from sales tax.

However, as of January 1, 2019, Iowa has subjected certain digital products to state and local option sales tax and use tax. These specified digital products are defined as non-tangible goods transferred electronically, which are purchased, downloaded, or accessed over and through the internet.

Taxable digital goods and services include software delivered in physical or digital form, as well as services arising from or related to the installation, maintenance, servicing, repair, operation, upgrade, or enhancement of specified digital products. Additionally, Software as a Service (SaaS) is also subject to taxation. Furthermore, sales of storage services and information services, including database files, mailing lists, subscription files, scouting reports, and similar services, are subject to sales tax.

Digital Marketplace

With the implementation of the marketplace facilitator rules, online marketplace operators became liable for sales tax on transactions relating to their sales of goods and services, as well as facilitating sales. However, not all marketplace operators are considered facilitators under the sales tax legislation.

As defined by the Iowa Department of Revenue, marketplace facilitators are businesses that facilitate retail sales by providing infrastructure, such as listing products, hosting the marketplace, enabling offers and acceptance, or offering support services like customer service, fulfillment, or storage. Additionally, a marketplace facilitator collects the sales price, processes payments, or receives compensation from the sale.

Digital Platform Operator

Consignment stores, auctions, and online marketplaces that meet the defined requirements for marketplace facilitators and exceed USD 100,000 in Iowa sales must register for, collect, and remit sales tax. The obligation to collect and remit sales tax applies to all taxable sales in Iowa, regardless of the location or sales volume of the marketplace seller.

Notably, unlike some other US states, which allow marketplace facilitators and sellers to agree on who will collect and remit sales taxes, Iowa law does not permit this. Therefore, if marketplace facilitators establish a nexus in Iowa, they are entirely liable for sales tax. 

Filing and Payment Requirements in Iowa

The sales tax return filing frequency depends on the annual tax liability. Therefore, annual tax returns are allowed if the yearly tax liability is below USD 1,200. Monthly sales and use tax returns are required if the sales and use tax liability exceeds USD 1,200. In addition to these typical filing requirements, Iowa also defines seasonal filing frequency, applicable for those who have USD 1,200 or more in sales and use tax in four or fewer non-consecutive months per year. All tax returns are filed electronically, through the GovConnectIowa portal.

Penalties for Non-Compliance with Sales and Use Tax Requirements

A 5% penalty is imposed in cases of failure to timely file a return or pay at least 90% of the correct tax by the due date. The exact rate applies if an underpayment is discovered during an audit or examination. Furthermore, more severe penalties are defined in cases of fraud, frivolous filings, or willful failure to file, with a 75% penalty assessed on the fraudulent claim or unpaid tax, which cannot be waived.

Additionally, a USD 500 civil penalty is imposed in cases of frivolous returns that do not provide enough information to determine correct tax liability or intentionally misstate the tax, and a USD 1,000 penalty for failing to file within 90 days after a Department demand, assessed per unfiled return.