Back to Basics: Iowa Use Tax

Dickinson Law Des Moines, Iowa Cody Edwards Iowa Table SALT Iowa Tax Law

Posted on 02/07/2017 at 07:05 AM by Cody Edwards

Most everyone is familiar with sales tax, the tax imposed by states and local jurisdictions on everyday purchases of certain goods and services. In Iowa, sales tax is imposed on purchases of all tangible property (unless one of the 100+ exemptions apply) and services are subject to tax only if specifically enumerated. 

States, including Iowa, that impose a sales tax also impose a complementary use tax. A use tax is imposed on the purchaser when taxable tangible property or services are used in a state and the seller—properly or improperly—failed to charge sales tax. The purchaser is required to report and pay the use tax directly to the state rather than paying sales tax to the seller. 

A purchaser generally incurs use tax in the following three situations:

1)    Purchases of taxable tangible property or services from a seller who does not have tax collection responsibility and properly does not charge sales tax; 
2)    Purchases of taxable tangible property or services from a seller who does have sales tax collection responsibility, but improperly fails to charge the customer sales tax; or
3)    Purchases of an item exempt for resale, but subsequently uses the item for its own operations.   

Although use tax may be insignificant for individuals, use tax can be a significant liability for businesses. 

If the Iowa Department of Revenue (“Department”) conducts a use tax audit of a business that does not file use tax returns, the Department has an unlimited amount of time to audit that business’ records, although in practice the audit period is limited ten years. For those businesses filing use tax returns, the statute of limitations is three years. In the case that the Department finds use tax underpayments, filers and non-filers must pay penalty and interest in addition to the tax due; however, the penalty and interest is significantly higher for non-filers that are subject to a ten-year audit, sometimes approaching 50-percent of the tax due.  

It is worth noting that use tax audits are not atypical for those businesses that file sales tax returns but do not file use tax returns.  

Non-filers have three options with respect to use tax filings going forward: 

1)    Continue to be a non-filer.  
2)    Prospectively file use tax returns. This option may raise the risk of being audited since the Department may ask when the business started doing business in the state, thereby allowing the Department the opportunity to audit for a period starting on the date the business started doing business in the state. 
3)    Enter into a voluntary disclosure agreement with the state. Under this option the business anonymously contacts the Department indicating that it is currently not filing use tax returns and has identified a use tax liability. In exchange for voluntarily coming forward, the Department halves the look-back period and waives penalty; there is no statutory authority for waiver of interest. 

Due to the benefits of entering into a voluntarily disclosure agreement, it is advisable to assess your potential for use tax liability before filing your first use tax return. 

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.


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