State and local governments levy sales and use taxes. For that reason, the laws regarding sales and use taxes vary broadly by state and by local government. The involvement of so many governmental entities can make the sales/use tax process cumbersome, complicated and confusing. If your business operates in multiple tax jurisdictions, you will likely have tax responsibility in each location in which you operate.
I don’t think many businesses are even aware of their use tax filing requirement. It would be good to remember that nonprofits aren’t automatically exempt from paying sales tax…only government entities are (i.e. cities, schools, counties, etc.). I find there is a lot of misunderstanding in that area. Usually churches think they are tax exempt (for sales tax) and that’s not the case. This quarter’s article answers some of your questions about sales and use tax requirements and responsibilities.
The laws are a bit tricky with all the various exceptions, so it’s always a good idea to contact a professional or Iowa Department of Revenue taxpayer services to get questions answered.
Sales Tax and Use Tax – What’s the Difference?
Because TD&T operates in Iowa, we will use Iowa taxes as an example. If your business operates in other states as well, you will want to consult their laws and regulations. The Iowa Department of Revenue covers the details regarding sales and use taxes in detail. You can get some good information at the links below.
The Department of Revenue explains the difference between sales and use taxes this way:
“At the time of a taxable purchase, Iowa state sales/use tax is collected by the retailer from the buyer. Unlike tangible personal property, which is subject to sales/use tax unless specifically exempted by Iowa law, services are subject to sales/use tax only when specified by Iowa law. Iowa sales tax is due when the first use of a taxable service occurs, or potentially could occur. The Iowa use tax complements the Iowa state sales tax. Generally, when a taxable service is purchased or obtained outside of Iowa for use in Iowa, it is subject to Iowa use tax.”
- Iowa Sales and Use Tax Guide
- Iowa Sales and Use Tax Taxable Services
- Consumers Use
- Iowa Tax Issues for Nonprofit Entities
Collecting Sales Tax
“Anyone selling taxable goods or services from an Iowa location must obtain a sales tax permit,” according to the Iowa Department of Revenue (DOR). The permit, which you must obtain for each Iowa selling location, allows your business to collect sales tax on sales to your customers.
The tax law bases the tax on the purchase or sale price of property or taxable services. The DOR website further defines the terms:
- “Purchase price” or “sale price” means the total amount of consideration for which personal property or services are sold, leased, or rented.
- “Consideration” includes cash, credit, property, and services.
- Sales of tangible personal property in Iowa are subject to sales tax unless exempted by state law.
- Sales of services are exempt from Iowa sales tax unless taxed by state law.
The rules on how taxation affects selling price are very specific:
- The retailer must add the tax to the price and collect the tax from the purchaser. The retailer cannot indicate that the sales tax is being “absorbed.”
- A retailer may include the tax in the price, but must post a notice or make a statement on the invoice that the purchase price includes the sales tax. This is typically done when selling alcoholic beverages or admissions to movie theaters or sporting events.
- Sales tax is applied and due when the first use of taxable services occurs, or potentially could occur or when taxable goods are delivered, not when payment is received from the customer.
Filing a Return
The law clearly places the responsibility of sales tax on the business or entity selling the product or service, not on the buyer. The DOR provides detailed information on how to prepare and file sales tax returns and payments. The Iowa Sales and Use Tax Guide outlines these rules in great detail. The guide also specifies liability for not paying sales taxes:
Personal Liability for Paying Taxes
- If a corporation, association, or partnership fails to pay sales and use taxes, the officers or partners are personally liable for the tax, interest and penalty.
- A person selling a business must file final tax returns and pay all taxes due. However, the new owner should withhold a sufficient amount of the purchase price to pay any unpaid tax, interest, and penalty in case the seller fails to pay the final tax due. If the new owner intentionally fails to do this, he or she is personally liable for the tax.
In addition, if you don’t file and pay sales tax, you may also owe penalties and interest on the unpaid amount. The regulations also require your business to keep normal accounting records of your business for at least the previous three years. If the DOR audits your business, you may have to produce records going back more than three years.
What Taxes Apply?
The taxes you may have to collect and/or pay could include:
- State sales and use taxes – both at the 6% rate
- Local option sales taxes – at 1% rate
- Hotel/Motel Taxes – tax rate can range from 1-7%, depending on the taxing jurisdiction
- State excise tax on lodging – 5% tax rate
Specific rules regard registration fees and rental fees for automobiles. If you are not sure whether or not a good or service is taxable, you can consult the Iowa Sales and Use Tax Guide, which provides a long list of products and services, with an explanation of whether they are taxable or tax exempt.
Taxes For Other States
If you operate in states other than Iowa, the laws and regulations may differ there. For example, while Iowa requires churches to pay sales taxes and use taxes on purchases they make, not all states have that rule. For example, in Missouri and Illinois a church or charitable organization can get a tax exemption that allows them to make purchases without paying the tax. Consult your tax professionals to make sure your business complies with the rules that relate to your non-Iowa business, too.
You will owe use tax on purchases you make tax free through mail-order catalogs, television shopping programs, the Internet, and toll-free 800 numbers. The tax also covers magazine subscriptions and untaxed purchases you make while in another state and shipped or otherwise brought into Iowa. The law requires paying consumer’s use tax on these kinds of purchases to the Iowa Department of Revenue.
According to the DOR:
- Consumer’s use tax is imposed after the sale takes place and only on goods and services that have not yet been subjected to sales tax.
- In most cases, these are purchases made from an out-of-state supplier not collecting Iowa tax and that are for use in Iowa.
- Ordinarily, the retailer is responsible collecting the tax; however, if the law does not require the retailer to collect the tax or the Iowa retailer fails to collect the tax, the purchaser is then responsible for consumer’s use tax.
- The purchaser must pay the use tax when he or she takes ownership or control of the purchase.
If you regularly purchase taxable goods or services for your own use in Iowa from out-of-state sources that don’t collect Iowa tax, you must register with the Department for consumer’s use tax.
Still Need Help Understanding How this Affects Your Business?
If you have questions or need additional information about sales and use taxes, please contact us. We would be happy to talk with you about the specifics of your business or organization.