Iowa to tax remote sales, services, and digital goods starting January 2019
- June 11, 2018 | Gail Cole
Iowa Governor Kim Reynolds has championed tax reform since taking office on May 24, 2017. Her 2018 Condition of the State Address lauded the “historic tax reform” passed in December 2017 and called for more. On May 30, 2018, she signed a sweeping tax reform bill that makes significant changes to the state’s sales and use tax laws: New taxes on remote sellers, select digital goods, and certain services will take effect January 1, 2019.
New taxes on remote sellers
The Iowa bill (SF 2417) strives to increase tax collections from remote sales by instituting:
- Cookie (software) nexus
- Economic nexus
- Marketplace facilitator tax
- Use tax reporting
Effective January 1, a retailer with at least $100,000 in gross revenue from Iowa sales in the immediately preceding or current calendar year is considered to be doing business in Iowa and subject to the sales and use tax laws if that retailer:
- Owns, licenses, or uses software or data files installed or stored on property used in Iowa (“software or data files” includes cookies, preloaded software, software affirmatively downloaded by a user, and software downloaded as a result of the use of a website)
- Uses in-state software to make Iowa sales (“in-state software” means computer software installed or stored on property located in Iowa or distributed within Iowa for the purpose of facilitating a sale by the retailer)
- Provides, or enters into an agreement with another person to provide, a content distribution network in Iowa to facilitate, accelerate, or enhance the delivery of the retailer’s internet site to purchasers (“content distribution network” means a system of distributed servers that delivers internet sites and other internet content to a user based on the geographic location of the user, the origin of the internet site or internet content, and a content delivery server)
A handful of other states, including Connecticut, Massachusetts, Ohio, and Rhode Island, have adopted similar laws. Some are being challenged.
Also, as of January 1, a retailer is considered to be doing business in Iowa and subject to the sales and use tax laws if in the current or immediately preceding calendar year that retailer:
- Has gross revenue from Iowa sales equal to or exceeding $100,000; or
- Makes Iowa sales in 200 or more separate transactions.
South Dakota was one of the first states to require a remote seller to collect and remit tax based on economic activity alone. It’s economic nexus law was challenged and the case is currently being considered by the Supreme Court of the United States. A decision in South Dakota v. Wayfair, Inc., expected in June 2018, could affect the enforceability of Iowa’s economic nexus law. Learn more.
Marketplace facilitator tax
Starting January 1, a marketplace facilitator that meets the economic nexus de minimus thresholds detailed above ($100,000 in Iowa sales or 200 or more separate sales transactions) and makes or facilitates Iowa sales on behalf of itself or one or more marketplace sellers must collect and remit sales tax on each taxable Iowa sale it facilitates. (This is the case regardless of whether the marketplace seller has or is required to have a retail sales tax permit in Iowa or would have been required to collect tax on the sale had it not been facilitated by a marketplace facilitator.)
The bill specifies, “This sales and use tax collection responsibility … applies but shall not be limited to sales facilitated through a computer software application, commonly referred to as in-app purchases, or through another specified digital product.”
A marketplace facilitator may not be held liable for failure to collect and remit sales tax on third-party sales if that failure was due to having incorrect information from the seller.
A referrer that meets the economic nexus de minimus thresholds ($100,000 or 200 sales) from referrals from the referrer’s platform (e.g., catalog, website) is required to collect and remit tax unless it:
- Posts conspicuous notice on each platform that includes:
- A statement that sales or use tax is due on certain purchases
- A statement that the marketplace seller from whom the person is purchasing on the platform may or may not collect and remit sales and use tax on a purchase
- A statement that 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
- A statement informing the purchaser that the notice is required by law
- Instructions for obtaining additional information from the department regarding whether and how to remit sales and use tax to the state of Iowa
- Provides a monthly notice to each marketplace seller to whom the referrer made a referral of a potential customer located in Iowa during the previous calendar year, containing:
- A statement that Iowa imposes a sales or use tax on Iowa sales
- A statement that a marketplace facilitator or other retailer making Iowa sales must collect and remit sales and use tax
- Instructions for obtaining additional information from the department regarding the collection and remittance of Iowa sales and use tax
- Provides the department with monthly reports in an electronic format and in the manner prescribed by the department, containing:
- A list of marketplace sellers who received the referrer’s notice
- A list of marketplace sellers that collect and remit Iowa sales and use tax and that list or advertise the marketplace seller’s products for sale on a platform of the referrer
- An affidavit signed under penalty of perjury from an officer of the referrer affirming that the referrer made reasonable efforts to comply with the applicable sales and use tax notice and reporting requirements of this subparagraph
SF 2417 also imposes a tax collection obligation on the following:
- An affiliate of any person required to collect and remit sales or use tax if the affiliate makes retail sales in Iowa
- A retailer that makes Iowa sales through the use of a solicitor (a person who directly or indirectly solicits business on behalf of the retailer), provided the retailer has gross revenue from Iowa sales (referred by solicitors who are residents) of more than $10,000 for the current or immediately preceding calendar year
- A retailer that controls, licenses, makes available, owns, or uses any tangible or intangible property in Iowa to make or facilitate a retail sale
- A person that has an agreement or contract with a governmental entity
Use tax notice and reporting
The law authorizes the Iowa Department of Revenue to establish and impose notice and reporting requirements for retailers, including marketplace facilitators, who do not collect and remit sales and use tax. These may include the following:
- Notifying purchasers at the time of an Iowa sales transaction of sales and use tax obligations
- Providing purchasers with periodic reports of purchases that are Iowa sales
- Providing the department with annual reports that include but are not limited to information relating to purchases, purchasers, and Iowa sales
The department may also impose penalties on sellers that fail to comply with the notice and reporting requirements, provided the penalty can be waived upon a showing of reasonable cause for the failure. The penalty for failure to provide the necessary notification to a purchaser may not exceed $5 per failure; the penalty for failure to provide a periodic report of purchases to the purchaser may not exceed $10 per failure; and the penalty for failure to provide the department with an annual report may not exceed $10 "multiplied by the number of purchasers for whom informaiton should have been but was not included in the annual report."
Tax on specified digital goods and services
The following digital goods and services will be subject to sales and use tax as of January 1, 2019:
- Digital audio works (e.g., music, ringtones)
- Digital audiovisual works
- Digital books
- “Other digital products”
- Information services
- Software as a Service
- Services related to enhancing, installing, maintaining, operating, repairing, servicing, or upgrading specified digital products
- The storage of tangible or electronic documents, files, or records
Tax on services
The following services will also be taxed as of January 1:
- Pay television, including but not limited to streaming video, on-demand video, and pay-per-view
- Personal transportation services, including but not limited to driver services, ride-share services, rides for hire, and taxis
- Photography and retouching services
- Subscription services
Altogether, the sales and use tax changes are expected to generate more than $66 million for the state in the 2019 fiscal year. That figure should gradually increase to more than $177 million by fiscal year 2024. According to the Iowa Fiscal Partnership, Iowans earning less than $25,000 can expect to pay approximately $16 more in sales tax each year. The highest earners ($426,000 or more) will likely pay an additional $224 in sales tax annually.
If you’re unsure how Iowa’s new law could impact your business, now may be a good time to speak with a tax advisor. Avalara Professional Services can help get you started.