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Iowa Sales Tax Error Has Staying Power

  • Apr 9, 2014 | Gail Cole

 Will Iowa lawmakers correct a sales tax error from 2008?

In 2008, a mistake was made when the tax code of Iowa Department of Revenue is trying to correct today, and it involves sales tax.

Back in 2008, the tax code rewrite “had an unintended consequence of repealing the state sales tax on heavy equipment purchases.” This was not well publicized. Indeed, heavy equipment retailers have continued to collect tax on those sales, not realizing the tax was repealed. Buyers have continued to pay it without complaint. But the fact that the tax has legally been repealed creates a complicated situation.

If lawmakers allow the error to stand, the state will be required to refund the erroneously collected sales tax (plus interest!) to customers who paid it when they shouldn’t have. This would be in the $20 - $30 million range. In addition, the state would not collect sales tax on future sales of heavy equipment, to the tune of approximately $7 million, annually.

If the error is retroactively corrected, the state gets to keep past and future tax collected on sales of heavy equipment.

Let the error stand

Lawmakers in favor of letting the error stand argue that not doing so would create a new tax. They worry that it would be “a constitutionally questionable move that could face a court challenge.” Senator Mark Chelgren (R-Ottumwa) said, “If this bill is passed and if this bill is signed into law, I do not believe that it will stand in the courts.”

Correct the error

Lawmakers in favor of rewriting the tax code to correct the error retroactively to 2008 scoffed at the idea that the tax would be a new tax. According to Senate President Pam Jochum (D-Dubuque):

“We are not somehow raising taxes. We are a correcting a mistake…. There was never any intention that people who were purchasing heavy construction equipment would not pay sales tax on that purchase…. Not one person in the industry has asked for a repeal of the tax nor have they advocated for a repeal.”

Survey says

Representatives of the heavy equipment industry have said that while they won’t fight a reinstatement of the tax, they would happily stop paying it if lawmakers fail to retroactively repeal it this session.

The future of heavy equipment sales tax in Iowa is sitting on the desk of Governor Terry Brandstad (R). As of this writing, House File 2438 is unsigned.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.