Iowa to tax online sales and impose use tax reporting on non-collecting sellers
- May 15, 2018 | Gail Cole
Update 6.7.2018: Gov. Reynolds signed S.F. 2417 into law on May 30,2018.
Iowa looks like it’s going to be the next state to establish an economic nexus provision for remote sellers, tax online marketplace sales, and impose use tax notice and reporting requirements on non-collecting sellers. If so, it will walk the path blazed by Alabama, Minnesota, Oklahoma, Pennsylvania, and Washington.
The changes are part of a sprawling tax reform bill, S.F. 2417, which was proposed by Governor Kim Reynolds and currently awaits her signature. If enacted, and she’s expected to approve it, the measure will take effect January 1, 2019. It’s likely the Iowa Department of Revenue will then have to establish thorough guidelines for out-of-state sellers that do business in Iowa.
Rather than base a tax collection obligation on physical presence, economic nexus is based on the economic ties a business has to a state. The economic thresholds created under S.F. 2417 are the same as those created under South Dakota S.B. 106, which is currently under review by the Supreme Court of the United States (more on that below).
Starting January 1, 2019, an out-of-state retailer must register with the state and collect and remit Iowa sales and use taxes when, in the current or immediately preceding calendar year, it either:
- Has gross revenue from Iowa sales equal to or exceeding $100,000
- Makes Iowa sales in 200 or more separate transactions
These economic nexus thresholds pertain to all remote sellers: marketplace facilitators and marketplace sellers, as well as those that use in-state software to generate business in Iowa.
A remote retailer meeting the economic nexus thresholds must collect and remit if it:
- Owns, licenses, or uses software or data files that are installed or stored on property used in Iowa (e.g., web cookies)
- Uses in-state software to make Iowa sales
Marketplace facilitators meeting the economic nexus thresholds must collect sales and use tax on the entire sales or purchase price paid by a purchaser on each taxable Iowa sale made or facilitated by the marketplace facilitator. This is the case regardless of whether the marketplace seller has or is required to have a retail sales tax permit, or would otherwise be required to collect and remit Iowa tax.
The marketplace facilitator is also required to collect and remit tax on marketplace sales facilitated through a computer software application (in-app purchases) or other specified digital products.
Notice and reporting requirements for non-collecting sellers
The measure allows a referrer that meets the economic nexus thresholds to opt out of collecting and remitting sales tax, provided it complies with the notice and reporting requirements detailed below.
Non-collecting referrers must post a conspicuous notice on each platform that includes the following statements:
- Sales or use tax is due on certain purchases
- The marketplace seller may not collect and remit sales and use tax
- Iowa requires the purchaser to pay sales or use tax and file sales or use tax returns if sales or use tax is not collected at the time of the sale by the marketplace seller
Instructions for obtaining additional information from the Iowa Department of Revenue about sales and use tax remittance must also be provided.
In addition, a non-collecting referrer must provide a monthly notice to each marketplace seller to whom the referrer made a referral of a potential Iowa customer during the previous calendar year. The monthly notice must contain the above information.
Finally, a non-collecting referrer must provide the Department of Revenue with monthly reports (in electronic and perhaps other format) containing the following information:
- A list of marketplace sellers that collect and remit Iowa sales and use tax as well as list or advertise the marketplace seller’s products for sale on a platform of the referrer
- An affidavit, signed under penalty of perjury, affirming that the referrer made reasonable efforts to comply with the applicable sales and use tax notice and reporting requirements
States with notice and reporting requirements for non-collecting sellers generally impose annual reporting requirements. Iowa stands out in imposing monthly reporting requirements to consumers and state tax authorities.
The physical presence limitation
Iowa is looking to increase sales and use tax collections with the above laws. Precedent holds that a state may not tax a business that doesn’t have a significant connection to — i.e., physical presence in — the state. With the explosion of ecommerce, this physical presence limitation is taking a bite out of state and local sales and use tax revenue. Although consumers in most states are supposed to remit a corresponding use tax if sales tax isn’t collected at checkout, use tax compliance is low and enforcement challenging for state tax authorities.
South Dakota’s economic nexus law is challenging the physical presence standard, which was last upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). The court agreed to take the case in January 2018, heard oral arguments on April 17, and is expected to issue a decision in June.
No one knows what the court will decide. However, if it sides with South Dakota, other states may adopt a similar economic nexus provision. Iowa is one of several states, including Hawaii, to consider economic nexus provisions this session, despite the unknowns.