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. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
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 a1992 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 having:
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.
Examples of Physical Presence
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.
Physical Presence and Nexus in Iowa
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Iowa, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
For basic guidance on how physical presence is determined specifically under Iowa law, consult Section 423.1(48)of Iowa’s sales tax statute, which defines “Retailer maintaining a place of business in this state.” The definition includes the physical presence of subsidiaries. (A general index to all of Iowa’s sales and use tax laws is available online.)
Other Iowa sales tax rules and publications 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’s sales tax law includes a provision for so-called affiliate nexus. In short, if an out-of-state retailer has a person (sometimes known as an affiliate) in Iowa who works in certain specific ways with the retailer, then the retailer is maintaining a place of business in Iowa for sales tax purposes. If you work with a person in Iowa to help sell, store, or service your products, check Section 423.1(48)(b) of Iowa’s sales tax statute.
Some items sold via the Internet to Iowa customers may be exempt from sales tax under Iowa law. For example,Section 423.3(57) of Iowa’s sales tax statute states that food and food ingredients are exempt from sales tax. For further information on many exemptions, consult the section on exemptions on this easy-to-read DOR webpage.
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. You can find additional information on twoDOR webpages covering the use tax and IAC Section 701—30.1. Note that the DOR’s webpages state that use tax applies when an otherwise tax-free purchase is made through, among other sources, the Internet.
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
For most small online businesses, it is the long established physical presence rule that will apply in Iowa. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Iowa Department of Revenue to see if the rules have changed.
Updated: April 27, 2016