On Jan. 15, 2021, the Iowa Department of Revenue released guidance regarding the sales and use tax exemption for computer hardware purchases.
Recall that in 2020, Iowa enacted a tax bill that expanded the sales tax exemptions to include ‘computer peripherals’ when directly used in manufacturing, research and development, processing or storage of data for insurance companies, financial institutions or commercial enterprises, reprocessing of waste products and pollution control. Computer peripherals are defined as an ancillary device connected to a computer digitally, by cable, or by other medium, used to put information into or get information out of a computer. The term ‘computer’ was previously in the exemption when directly used in the same manner. A ‘computer’ is defined an electronic device that accepts information in digital or similar form and manipulates the information for a result based on a sequence of instructions.
The new guidance provides a non-exhaustive list of taxable and exempt computer hardware items, as well as an acknowledgement by the department that refund claims will be accepted if taxpayers have purchased a qualifying exempt item.
Impact on Iowa businesses
Iowa taxpayers may be overpaying sales tax on computer hardware purchases that are exempt in Iowa. The new guidance impacts businesses in all industries, except for nonprofit companies and certain professional services and occupations. It is recommended Iowa businesses review invoices for purchases of computers and computer peripherals to ensure sales tax is accurately charged.
A reverse sales and use tax audit (RSUTA) involves a review of state and local sales and use tax payments with the objective of identifying potential sales and use tax refunds. Better technology and connectedness has improved the speed and efficiency in which an audit can be completed. The review generally includes an analysis of filed returns supporting data, and other documentation such as invoices and descriptions of purchases.
A reverse sales and use tax audit may lead to short-term cash refunds and long-term tax savings as companies are better positioned to identify sales and use tax exemptions and exclusions after the review. There are also longer term tax benefits through optimization of tax processes, improved ongoing compliance and long-term savings.
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 Iowa Department of Revenue guidance or have questions should speak to their tax advisers.
