Iowa’s Sales Tax Gets Creative

Iowa was not late to the post-Wayfair internet sales tax party. They made their new sales tax laws requiring all remote sellers to collect sales tax last June. The law didn’t kick in until January of 2019, well after the Supreme Court decision that allowed states to demand sales tax collection without physical nexus.

Before that decision — known as Wayfair — sellers didn’t have to collect and remit sales tax unless they had a physical presence in a state. A warehouse would fit the bill, but a website would not. Consumers were still required to pay the tax in the form of use tax, but almost no consumers did so.

Iowa prepared for that Supreme Court decision by deciding that “tangible personal property, services or specified digital products” sold in Iowa would all require sales tax collection. Sellers include Amazon and Walmart, but also affiliates with links on their websites.

Iowa is following the leaders in exempting small businesses. $100,000 in sales or 200 transactions will be the annual threshold.

Specified digital products

Iowa also now requires sales tax on “specified digital products.” This is a very broad category. Iowa residents will have to pay sales tax to Netflix and Spotify, which might not be so difficult. However, they’ll also have to pay sales tax on access codes for online college textbooks, ring tones, streaming news reports, and everything else that is delivered digitally, including Uber rides. The law specifically states that these sales must comply with sales tax regulations, even if they wouldn’t be taxed if they took place at a physical location in the state.

Things get a little bit complicated here.

For one thing, there may be conflict with laws already on the books. The Internet Tax Freedom Act forbids states taxing online sellers more than Main Street merchants. It also says that sales tax collection can’t be required of a third party like eBay. The new tax requirement holds that Bay has a choice between collecting sales tax and supplying Iowa with a list of individuals who have made sales in Iowa.

Another issue is logistics. House Ways and Means Committee Chairman Rep. Guy Vander Linden said, “In general, the intent was to try to make the sales tax code match the modern economy…What’s the difference between downloading a movie and checking out a disc at a Redbox?”

Iowa figures any digital event that involves a transaction can also involve sales tax. Photo sharing services, for example, must charge sales tax for subscriptions or for individual purchases. But what about a magazine with both print and digital versions? Does the print version constitute a free bonus that comes with the print version, or a separate part of the subscription transaction? Streaming services can often be used anywhere. If a resident of Iowa streams exercise classes in a hotel room in a state that doesn’t charge sales tax, will collection of sales tax be required for that transaction?

Manufacturers of digital goods

Companies that produce and sell digital goods and services will have to collect sales tax in some states going forward. There will have to be a certain amount of trial and error to figure out all the possible complications.

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