Tax alert

Iowa makes significant sales tax changes; reduces franchise tax rate

Jun 20, 2022
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State & local tax Business tax

On June 17, 2022, Iowa Gov. Kim Reynolds signed into law Senate File 2367, making various changes to the state tax code. Key provisions of the legislation include significant changes to the sales tax base, rate reductions for the state’s bank franchise tax, modifications to the Solar Energy System Tax Credit and an income tax exemption for bonuses received by certain individual taxpayers.

Sales and use tax changes

Senate File 2367 makes several notable updates to sales and use tax exemptions. Effective Jan. 1, 2024, the sales and use tax exemption for the purchase of computers and peripherals used in processing or storage of data or information by an insurance company, financial institution or commercial enterprise is eliminated. Recall that in 2020, the exemption was expanded to include peripherals, clarifying that items such as cables, computer mice, webcams, hotspots, flash drives and other similar items were included in the exemption. The exemption was also unique among state computer-related exemptions as it provided a broad purchase exemption applicable to most businesses and industries, except for certain nonprofits and “professions and occupations.”

The law also provides a clarification of the existing sales tax exemption available to food manufacturers for property or services used in production. Previous definitions limited the sales tax exemption to manufacturers that produced “marketable food products for human consumption.” The amended provisions clarify that the exemption applies to property and services used by producers of food or food ingredients, without regard to the marketability for human consumption, retroactive to Jan. 1, 2019. Refund claims for affected taxpayers must be filed prior to Oct. 1, 2022, and may not exceed $100,000 (in the aggregate for all taxpayers) in any single calendar year. 

Finally, Senate File 2367 makes the following sales and use tax changes:

  • Ends the ‘tampon tax’ by exempting sales of feminine hygiene products, effective Jan. 1, 2023.
  • Exempts the sale of child and adult diapers, effective Jan. 1, 2023
  • Expands the definition of ‘commercial enterprise’ to include certain public utilities 

Bank franchise tax rate reduction

Iowa imposes a franchise tax on financial institutions doing business within the state. The current franchise tax is imposed at a rate of 5% on income apportioned to Iowa. Senate File 2367 provides for a schedule of annual rate reductions beginning in Jan. 1, 2023, culminating in a rate of 3.5% applying for tax years beginning Jan. 1, 2027 and after. Applicable franchise tax rates enacted by the new legislation and their respective effective dates are shown below:

  • Tax years beginning before Jan. 1, 2023: 5%
  • Tax years beginning on or after Jan. 1, 2023: 4.7%
  • Tax years beginning on or after Jan. 1, 2024: 4.4%
  • Tax years beginning on or after Jan. 1, 2025: 4.1%
  • Tax years beginning on or after Jan. 1, 2026: 3.8%
  • Tax years beginning on or after Jan. 1, 2027 and after: 3.5%

Solar energy system tax credit

Iowa has provided a Solar Energy System Tax Credit since 2012, with the Iowa credit computed as a percentage of the total credit available for federal tax purposes related to residential solar energy system installations. To claim the credit, qualifying taxpayers must apply with the state and receive approval; historically, approved credit amounts have been limited to $5 million per calendar year. Senate File 2367 contains provisions that will allow all qualifying 2021 installations as well as taxpayers currently on the waiting list to receive approval for the credit, without regard to the $5 million annual cap. The program will still only apply for installations completed before Dec. 31, 2021, but the application deadline date for 2021 credits is extended to June 30, 2022. 

Individual income tax exclusions

Senate File 2367 also provides for a new subtraction allowed in determining Iowa individual taxable income. The subtraction relates to certain bonuses paid to eligible peace officers, correctional officers, medical staff at correctional facilities, certain teachers and certain childcare workers. The subtraction is available for eligible bonus amounts up to $1,000, retroactively appliable to tax years beginning on for after Jan. 1, 2022, and before Jan. 1, 2023. 

Takeaways

The scheduled elimination of the computer and peripheral exemption could have a significant impact on business technology purchases. Eligible businesses considering significant purchases of qualifying equipment should make plans to do so before the exemption is eliminated in 2024. 

The expansion of the food products exemption, as well as the retroactive relief, provides clarity to the exemption that many food products manufacturers have requested in recent years. Businesses manufacturing food ingredients and products should consider eligibility for filing a refund for purchases from 2019 as soon as possible due to the October deadline and refund limitations. 

Gov. Kim Reynolds has signed several pieces of major tax legislation within the last four years, and Senate File 2367 continues the administration’s focus on tax policy and reform. For more information on prior tax changes enacted in Iowa, see our article: Iowa continues tax reform efforts into 2021. Iowa taxpayers who may be impacted by the latest or prior changes to the state’s tax laws should consult their Iowa state and local tax professional for more information. 

RSM contributors

  • Chris Tobin
    Principal
  • Brad Hershberger
    Partner
  • Todd Hendricks
    Senior Director

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