Iowa governor proposes taxing online sales, digital goods, other services

Update 6.7.2018: The legislation discussed below were replaced by HF 2489 and SF2417, and SF 2417 was signed into law on May 30, 2017. Economic nexus, cookie nexus, a tax on marketplace facilitators, and use tax reporting takes effect January 1, 2019. Additional information.

Iowa Governor Kim Reynolds has introduced a sweeping tax reform proposal to extend sales tax to remote sales, digital goods, and services. To offset these new taxes, she would cut individual and corporate income taxes.

The governor’s plan is outlined in House Study Bill 671 (Senate Study Bill 3195), a sprawling bill that’s still very much a work in progress.

Tax online sales

Like many states, Iowa currently adheres to the physical presence standard upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). That is, it only taxes sales by businesses with a physical presence in the state. Also like many states, Iowa is looking to tax businesses that do not have a physical presence in the state.

Gov. Reynolds’ tax proposal would put Main Street businesses “on a level playing field with out-of-state corporations” by taxing out-of-state retailers that do a certain amount of business in the state. There’s support for this idea on both sides of the aisle.

Representative Guy Vander Linden, the Republican Chairman of the House Ways and Means Committee, says it’s time for “a tax code that reflects the modern economy.”  The state shouldn’t avoid taxing internet sales simply because the internet is relatively new, just as the state didn’t shy from taxing automobiles “when buggy whips went out.”

Senator Pam Jochum, a Democratic ranking member of the Senate Ways and Means Committee, wants to ensure that “Iowa’s sales tax is being applied to all eligible purchases by Iowans,” including those made over the internet. She notes that the state missed out on approximately $200 million in revenue in 2015 due to untaxed online sales.

Lawmakers who feel less certain about the issue are still interested in exploring it. For example, House Speaker Linda Upmeyer would like to investigate a tax on sales by large internet retailers. And Senate President Jack Whitver, who believes the shuttered businesses in his hometown are a side effect of untaxed internet sales, is preparing for “robust discussion” on the matter.

HSB 671 would require retailers, including marketplace providers, to collect and remit tax if, in the current or preceding calendar year, their gross revenue from Iowa sales is at least $100,000, or they make 200 separate sales of taxable goods or services in Iowa. This would take effect January 1, 2019, and apply to any retailer that:

• Owns, licenses, or uses software or data files (as defined in the bill) that are installed or stored on property used in the state
• Uses in-state software (as defined in the bill) to make Iowa sales
• Provides, or enters into an agreement to provide, a content distribution network in the state to facilitate, accelerate, or enhance the delivery of the retailer’s internet site to purchasers
• Makes Iowa sales through a marketplace provider (as defined in the bill)

The physical presence standard upheld in Quill is currently being challenged by several states, including Alabama, Indiana, South Dakota, and Wyoming. To date, South Dakota’s challenge has made the most progress. The Supreme Court has agreed to reconsider Quill in South Dakota v. Wayfair, Inc. It’s expected to hear arguments in April and issue a decision in June.

Rep. Vander Linden would like Iowa to be prepared to jump if the Supreme Court rules in favor of South Dakota. He thinks online sales tax legislation should include a clause allowing the law to take effect sooner if the court abrogates Quill.

Tax digital goods

The bill would also tax specified digital goods and services at a rate of 6 percent, effective July 1, 2018. Specified digital goods include, but aren’t limited to, electronically transferred digital audio-visual works, digital audio works, and digital books. Tax would apply whether the purchaser obtains permanent use or less than permanent use, and whether obtained as part of a subscription or not.

Taxable digital goods and services would include:

• Streaming video, video on-demand, pay-per-view, etc.
• Specified information services
• Storage of tangible or electronic files, documents, or other records
• 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 (SaaS)

Tax services

In addition to taxing remote sales and specified digital goods and services, the bill would tax additional services as of July 1, 2018. These include:

• Photography and retouching (in practice, this isn’t much of a change because photography and retouching services are already taxed as if they were sales of tangible personal property)      
• Personal transportation services in addition to a limousine service (i.e., taxis, driver services, ride-sharing services, rides for hire)

The proposed tax reform would also amend the hotel and motel excise tax and the automobile excise tax to account for marketplace providers, and home-share and ride-share programs.

Clearly, the Iowa Legislature has a lot to consider this session. There’s no guarantee any of the proposed changes will actually transpire, but if they do, they could impact the way anyone selling into the state does business.

Lean more about what’s happening in the world of sales tax here.