If you are selling goods or products online and some of your customers are located in Iowa, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Iowa. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For basic guidance on how physical presence is determined specifically under Iowa law, consult Section 423.1(43) of Iowa’s sales tax statute, which defines “Retailer maintaining a place of business in this state.” (A general index to all of Iowa’s sales and use tax laws is available online.)
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Notes on “Nexus” and the Streamlined Sales Tax Project
In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential “nexus” between a business and a state, including one type based on the Due Process Clause of the Constitution and another type based on the Commerce Clause of the Constitution. The type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which, for all practical purposes, is physical presence. Key Iowa sales tax rules and publications, in turn, emphasize nexus rather than physical presence:
- Rule 701—30.1 of the Iowa Administrative Code (IAC), which discusses use tax and sales tax, refers to "nexus” rather than “physical presence”
- The same is true in several other Iowa Department of Revenue online publications
- Iowa also publishes an online questionnaire to help businesses determine if they have nexus with Iowa
The key difference between physical presence and nexus is that nexus is generally understood to include the physical presence in a state not just of the out-of-state business itself, but also of any subsidiary entity. Taken together, these various “nexus” documents published by the Iowa state government suggest that having a nexus creates an obligation to collect and pay Iowa sales tax.
Example 1: You are operating solely out of a warehouse in Orem, Utah and make a sale to a customer in Sioux City, Iowa—a state where your business has no physical presence: You are not required to collect sales tax from the Sioux City customer.
Example 2: You are operating solely out of a store in Cedar Rapids, Iowa and make a sale to a customer in Waterloo, Iowa: You are required to collect sales tax from the Waterloo customer.
Example 3: After several years of operating solely out of a warehouse in Orem, Utah, you open a one-room satellite office just outside of Des Moines, Iowa—a state where previously you had no physical presence. A day later, you make a sale to a customer in Davenport, Iowa: You are required to collect sales tax from the Davenport customer.
Some items sold via the Internet to Iowa customers may be exempt from sales tax under Iowa law. For example, Section 701—231.3 of the Iowa Administrative Code (IAC) states that food and food ingredients are exempt from sales tax. For further information on many exemptions, consult this easy-to-read DOR webpage, as well as the online index of exemptions under the IAC.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” For additional information, see the DOR’s webpage on use tax and IAC Section 701—30.1. (Note that the DOR’s webpage states that use tax applies when an otherwise tax-free purchase is made through, among other sources, the Internet.)
While you might not know it from looking solely at Iowa’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. Iowa does participate in the Streamlined Sales Tax Project to “encourage” out-of-state businesses to collect sales tax, and does emphasis not just physical presence but “nexus” in several key DOR documents as well as in the state’s administrative code. However, at this time, Iowa has not enacted any law that would require out-of-state retailers to collect sales tax from Iowa customers.
In Iowa , the physical-presence rule continues to apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Iowa Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.