Iowa’s recently enacted tax reform bill has left many businesses questioning the impact on their organizations. While there are many significant changes to review, Iowa businesses should take note of two potentially overlooked sales tax changes that can impact your bottom line.
Sales tax on digital products and services
The first consideration is the expanded sales and use taxation of “digital products.” Digital products include electronically transferred digital audio-visual works, digital audio works, digital books, software-as-a-service, or other digital products, such as video, news or information products, and computer software applications. The tax was also applied to a number of services, effective Jan. 1, 2019, including: subscription services, information services and services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing digital products.
Businesses often fail to recognize that many of the day-to-day business systems used in their operations may now be considered taxable digital products or fall into one of the newly taxable services. However, many of these businesses may also be eligible for a number of Iowa sales tax exemptions due to the use of the purchase or simply because the business is a commercial enterprise or professional service. If an Iowa business purchases software, information services, software licenses, or certain digital products on an ongoing basiss, or if these purchases are planned, it is important to consider a review for sales tax overpayments and exemption eligibility.
Sales tax nexus considerations
The second noteworthy change to Iowa’s sales tax law is the enactment of an economic sales and use tax nexus provision. This “Wayfair-styled” law requires remote sellers with no physical presence in Iowa to collect, remit and comply with all applicable provisions of the state sales tax code when sales are made to Iowa customers. In-state businesses purchasing from remote vendors may begin to see Iowa sales tax charged on their invoices, especially if sales tax was not charged before. Accounts payable personnel will need to be vigilant in determining if the sales tax is charged correctly. Businesses that may have historically accrued use tax based on the purchase coming from certain vendors will need to ensure that tax has not been both accrued and a sales tax paid.
If purchases from remote vendors qualify for an Iowa exemption, a determination should be made for whether an exemption certificate or resale certificate should be provided to the vendor to exempt the sale. Many vendors are requesting these certificates post-Wayfair and it is important that businesses understand when those certificates are necessary and that they are accurately completed.
What does this mean for your business?
You may be overpaying sales tax on items that were previously exempt in Iowa. Iowa sales tax reform impacts businesses in all industries, but those in financial services, construction, and manufacturing may be particularly impacted by the expanded taxation of digital products and services. We recommend Iowa businesses review invoices for purchases of software, information services, software licenses, or certain digital products to ensure sales tax is being charged accurately.
Additionally, a thorough review of applicable exemptions and exemption certificate compliance should be considered so that sales tax is not overpaid. Iowa businesses that are uncertain whether they are impacted by the recent sales tax reform or have questions about these new provisions should speak to their tax advisers with questions.