Many Iowans have noticed a price increase on their Netflix and iTunes purchases during the past couple of months.
That’s because Iowa’s recently enacted tax reform bill has levied a sales tax on certain digital products and services. However, like all items subject to sales tax, many business leaders are questioning how the new tax will impact 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 their bottom line.
Sales tax on digital products and services
The first 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 also was 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 might now be considered taxable digital products or fall into one of the newly taxable services categories. However, many of these businesses also might 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 basis — or if these purchases are planned — it is important to consider a review for sales tax overpayments and exemption eligibility.
It is important to note the exemption only applies to commercial enterprises and not purchases made by individuals or non-profits.
Sales tax nexus considerations
The second noteworthy change is the enactment of economic sales tax nexus. This “Wayfair-styled” law requires remote sellers with no physical presence in Iowa to collect and remit sales tax when sales are made to Iowa customers.
In-state businesses purchasing from remote vendors might begin to see Iowa sales tax charged on their invoices that historically had no sales tax. Accounts payable personnel will need to be vigilant in determining if the sales tax is charged correctly. Businesses that might 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.
What does this mean for your business?
You could 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 might 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 correctly.
Additionally, a thorough review of applicable exemptions and exemption certificate compliance should be considered so sales tax is not mistakenly paid on nontaxable transactions.
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.