Iowa Tax Responsibilities of Cities and Counties

TAXABLE SALES TO CITIES AND COUNTIES

EXEMPT SALES TO CITIES AND COUNTIES

Examples:

  1. Municipally-owned electric utility ABC purchases additional electricity from XYZ, a neighboring utility, to meet its summer demand peak. ABC will purchase the electricity for resale tax free.
  2. ABC purchases electricity from XYZ to operate the generators which produce the electricity ABC sells to the public. ABC will purchase the electricity tax free and provide XYZ an exemption certificate since the purchase is for processing.

For sales to a county or city to be exempt, payment must be made with an official county or city voucher, check or credit card or must be charged directly to the county or city. Sales made to city or county employees and paid in any other manner are subject to sales tax.

TAXABLE SALES BY CITIES OR COUNTIES

•  Sales of utilities and communication services

The gross receipts from the sales, furnishing or service of the following by a county or city are subject to sales tax:

*Energy Sales Phase-out: As of January 1, 2006, the state sales tax rate dropped to 0% on metered gas, propane, heating oil, kerosene, and metered electricity used as energy for residential dwellings, apartment units, and condominiums. Local option tax, if applicable, continues to be imposed.

If the city or county resells a utility or communication service to a customer who will again resell it or use it for processing, the city or county must obtain an exemption certificate from that customer.

•  Sales of sewer and solid waste services

Sales by a city or county of sewer service, as well as solid waste collection and disposal services, are taxable to nonresidential commercial customers.

A “nonresidential commercial operation” is any industrial, commercial, agricultural or mining operation, including hotels and motels. Tax must be collected from both profit-making and nonprofit nonresidential commercial operations, including churches, hospitals, nursing homes, charities and fraternal organizations. Exempt from the garbage and sewage tax are single and multifamily dwellings, apartment complexes and mobile home parks. The standard sales tax exemptions also apply, such as sales to governmental entities, educational institutions, etc.

Any person who contracts with a city or county to provide solid waste collection and disposal service is obligated to collect tax upon that service performed for the city or county on behalf of nonresident commercial operations located within the city or county.

Sales tax must be imposed on landfill fees charged to nonresidential commercial customers depositing their own waste or who transport, without compensation, solid waste generated by another. Commercial solid waste collection companies are not charged sales tax on landfill fees since they are to collect tax on their services from their customers.

A customer that has both taxable and nontaxable sewage and solid waste disposal use should be charged sales tax on only the taxable portion of the service. For example, if a customer owns 100 residential apartment units and an office building of 20 suites, only the office building sewage and garbage use is taxable. The city or county should separate the taxable from the nontaxable use by formula; possible formulas would be by weight or by number of square feet of the structures. The formula should realistically reflect the taxable and nontaxable work performed.

•  Fees for participating in athletic sports

Cities and counties that sponsor athletic events must charge sales tax on fees to participate. Both team and individual entry fees are taxable. This includes but is not limited to baseball, basketball, softball, volleyball, golf, tennis, racquetball, swimming, wrestling and foot racing. Also included are league and tournament fees.

•  Fees for using an athletic facility

Fees charged by a city or county to use an athletic facility for the sport for which it was designed are subject to sales tax. This includes, for example, fees for use of a golf course, ball diamond, tennis court, swimming pool or ice skating rink. The fee is taxable to both individuals and groups. Daily fees and season ticket fees are taxable. The fee is taxable whether or not the use is for a brief or extended period of time.

•  Third-party sales

A city or county that operates a facility through which a third party makes taxable sales depends on the third party to collect the sales tax on those sales. The third party making the sales of taxable goods or services is the retailer, and is, therefore, responsible for collecting sales tax.

It may sometimes be difficult to determine whether the city or county or the third party is the retailer. Therefore, the facts of each situation and the terms of existing contracts must be evaluated.

•  Registered Vehicles

If a city or county sells a vehicle subject to registration, the buyer will pay the 5% Iowa one-time registration fee on the purchase price.

EXEMPT SALES BY CITIES OR COUNTIES

•  Lessons or instruction

Fees paid to cities and counties for lessons or instruction in how to play or to improve in an athletic sport are not subject to sales tax. This includes, but is not limited to, golf and swimming lesson fees.

•  Equipment rental

Rental fees paid to cities and counties on equipment used to participate in athletic sports are not taxable. Examples include the rental of a golf cart, recreational boat or moveable duck blind.

•  Merchandise sales

City or county sales of merchandise such as food or drink to anyone watching or participating in any athletic sport are not taxable. This includes concessions sold at city-owned swimming pools and golf courses. Sales by auction or other means of office equipment and furniture are not taxable.

Note, however, that if a third party sells at a city or county event, those sales are taxable unless otherwise exempt in the Iowa Code. Third party sales are not exempt just because they take place at a city or county event.

Sales of leaf bags directly to the customer by a city or county are exempt from sales tax. The same leaf bags are taxable when sold by a store for a percent of the sales. If the store sells the bags but turns all the proceeds back to the city/county, they are exempt. Stickers required to be placed on a bag to make it eligible for pickup are not taxable when sold either by the city/county or retail store.

•  Facility or park rental

The rental fees charged by cities and counties for the use of facilities and parks are not taxable as long as the area is not a specific athletic facility.

•  Hiking and camping

Fees paid to cities and counties for the use of a campground or hiking trail are not subject to tax.

•  Repair work

Cities and counties that provide service to the public for repair of city or county property should not charge sales tax on that fee.

•  Sales to the U.S. Government or the State of Iowa

Cities and counties that make direct sales of any kind to agencies or instrumentalities of Federal, state, county or municipal government should not collect tax on those sales.

•  County fairs

Sales made by county fairs that are truly operated by the county itself are exempt from sales tax. Exempt sales include, but are not limited to:

Unless otherwise exempt, sales made by third parties at a fair are taxable.

•  Sales to Native Americans

Sales that would otherwise be taxable are exempt to Native Americans if delivery occurs on the reservation.

LOCAL OPTION SALES TAX

Through June 30, 2008, Iowa has two local option sales taxes: the “regular” local option sales tax (LOST) and the school infrastructure local option tax (SILO). Beginning July 1, 2008, SILO is no longer collected as a separate tax. The "regular" local option tax remains in effect.

Local option tax can be brought to an election one of two ways: By a petition presented to the county board of supervisors or by a motion(s) of governing bodies within the county representing at least half of the population of the county.

Local option sales tax is imposed only after an election at which a majority of those voting favors imposing the tax. This tax can be imposed on either January 1 or July 1 only. Repeals can only occur on June 30 or December 31. Any jurisdiction with a repeal date specified in the ballot prior to April 1, 1999, may repeal on the date specified. Imposition or change in rate or use can occur no sooner than 90 days following the election.

The local option tax cannot be repealed or reduced in rate if bond obligations are outstanding unless sufficient funds to pay the principal, interest, and premium, if any, on the outstanding obligation at and prior to maturity have been properly set aside and pledged for that purpose.

Within a county, some cities may have LOST, and some may not. Also, the unincorporated area of a county may or may not have the tax. The tax remains in effect until it is repealed. The rate is up to 1 percent.

There is no local option use tax.

Tax applies if “delivery” of the taxable goods or performance of taxable services occurs within a local option jurisdiction.

As a general rule, local option sales tax is collected on the sale of the same services and tangible personal property that are subject to the state tax and delivered in those jurisdictions. However, the following are exceptions to the local option tax in which state tax may be imposed, but local option tax is not:

Additional information is available on the Department's Web site at http://www.state.ia.us/tax/educate/localoption.html#Info

For information about:

LOCAL HOTEL / MOTEL TAX

A city or county may impose a local hotel/motel tax at a rate not to exceed 7 percent.

A city or county may impose the tax only after an election at which a majority of those voting favors the tax.

The tax can be implemented on one of two start dates: January 1 or July 1. Once imposed, the tax remains in effect at the rate imposed for a minimum of one year. After that one year period expires, the tax can be changed or repealed on one of two annual dates: December 31 or June 30.

The hotel/motel tax is imposed on the gross receipts from the renting of any and all rooms, apartments, or sleeping quarters in any hotel, motel, inn, public lodging house, rooming house, tourist court, bed-and-breakfast or in any place where sleeping accommodations are furnished to transient guests.

The hotel/motel tax does not apply to room rentals that are exempt from the 5% state excise tax. Some common exempt situations are:

The hotel/motel tax is applied in addition to the 5 percent state excise tax. The state rate for hotels and motels did not increase on July 1, 2008.

The rental of banquet rooms, conference rooms, and any other non-sleeping room in a hotel, motel, apartment, inn, public lodging house, rooming house or tourist court is subject to the hotel/motel tax and the 5 percent state excise tax.

Lodging is not subject to LOST, whether or not the hotel/motel tax is imposed.

Additional information on the hotel/motel tax is available.

For information about:

REPORTING TAX

Tax liability

The city or county can be held responsible for uncollected tax. The city or county may, in turn, file suit against the purchaser to recover sales tax it failed to collect; the unpaid tax is considered a legal debt by law.

Sales tax permits

Sales tax permits must be obtained for each location at which taxable sales occur.

eFile & Pay

The eFile & Pay system is a paperless method of filing your Iowa sales tax and withholding deposits and returns either online or by touch-tone telephone. Both are safe, secure systems. The system also provides the option to pay electronically. If you are a semi-monthly filer, you are required to pay electronically.

The Department is no longer providing paper forms; therefore, you need to file through eFile & Pay.

Keeping records

Cities and counties should retain appropriate tax records for three years.

Statute of limitations

The sales tax statute of limitations for assessing a tax or applying for a refund is three years.

Use tax

The use tax differs from the sales tax in that the use tax is assessed on the “right of use, ownership or control” instead of on the sales transaction. The use tax is usually imposed when property purchased out-of-state on which Iowa tax has not been paid is brought into Iowa for use here. The exemptions that apply to the sales tax also apply to the use tax.

There is no local option use tax.

Electricity loss through “line loss” is not subject to tax.

CONSTRUCTION CONTRACTS

Designated exempt entities, including cities and counties, may issue special exemption certificates to contractors and subcontractors that allow them to purchase, or withdraw from inventory, building materials for the contract free from sales tax.

This special exemption certificate also allows a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials.

These exemption certificates are obtained and issued only by exempt entities who register their projects through the system developed by the Department.

Designated exempt entities include only the following:

NOTE: Nonprofit hospitals are NOT designated exempt entities.

The exemption certificate process works as follows:

  1. Designated exempt entities register contracts, including information on contractors and subcontractors, through an online application developed by the Iowa Department of Revenue.
  2. Designated exempt entities provide each contractor/subcontractor with an exemption certificate/authorization letter developed exclusively for this purpose. These are printed directly from the online application. The letter/certificate can be obtained only through this application.
  3. Contractors and subcontractors give a copy of the certificate to each of their material suppliers. This allows them to purchase building materials for the contract free from sales tax.
  4. Suppliers should retain this certificate in their records for at least three years.

The exemption certificate option benefits designated exempt entities in several ways:

The exemption certificate process is an option; designated exempt entities may also use a claim for refund process.

The claim for refund process works as follows:

  1. The contractor pays Iowa sales tax on all building materials and includes that cost in the bid.
  2. The contractor then submits a Contractors Statement (pdf) (form 35-002) to the exempt entity documenting the amount of Iowa sales/use tax paid on the contract materials incorporated into real property.
  3. The exempt entity applies to the Iowa Department of Revenue for a refund of that tax by using the Construction Contract Claim for Refund (pdf) (form 35-003).

NOTE: The claim for refund process must be used when the contract is with businesses in economic development areas or rural water districts organized under Iowa Code Chapter 504A. They do not qualify as "designated exempt entities.”

IOWA FUEL TAX

All fuel – except LPG and CNG – is taxed when it leaves the pipeline distribution system (terminal). Suppliers collect the fuel tax from their customers when the fuel is sold “over the rack” at the terminal. Suppliers then remit the tax to the Iowa Department of Revenue.

Only fuel purchased for direct export outside of Iowa and the purchase of dyed diesel fuel can be made tax free. Fuel tax exemption certificates do not exist, except for LPG and CNG.

Cities and counties are allowed to purchase dyed diesel fuel for use in their off-road vehicles. If allowed under federal law, cities and counties may also purchase dyed diesel for use in on-road vehicles. Dyed diesel is sold without fuel tax.

Except for dyed diesel, cities and counties must pay the Iowa fuel tax on their purchases of fuel. The city or county may then apply for a refund of the tax. To obtain a refund, the city or county must apply for a refund permit number with the Department as an “Other Political Subdivision.” A governmental agency is allowed to designate another governmental agency as an agent for filing and receiving a refund.

Claims for refund may be filed any time after a $60 minimum refund amount has been accumulated. Once the $60 minimum has been met, the claim for refund must be filed within three years. Claims will not be filed on paper; they will be processed through a special telephone system developed for this purpose. Cities and counties who apply for a permit will receive detailed information on this telephone system when their refund permit number is issued.

Cities and counties and their political subdivisions may obtain refunds of fuel tax. An entity is a political subdivision if the entity has...

If an entity does not meet all of the above criteria, it does not qualify for a refund permit number. Many nonqualifying entities, referred to as “instrumentalities,” receive funds from cities and counties. However, because they do not qualify as political subdivisions, they cannot file for refunds unless the fuel is used for nonhighway purposes. Highway use of fuel is taxable to instrumentalities of cities and counties.

For example, a nonprofit group may receive partial funding from a city or county. However, if that group does not meet the above criteria, it cannot apply for fuel tax refunds because it is not a political subdivision of the city or county.

Regional transit systems

Regional transit systems cannot make tax-free purchases of fuel. Like cities and counties, they must pay the tax and then apply for a refund with the Department.

A regional transit system is defined as a public transit system serving one county or all or part of a multicounty area whose boundaries correspond to the same boundaries as those of the regional planning areas designated by the governor, except as agreed upon by the Department.

Privately-chartered bus services and uses other than providing services that are open and public on a shared-ride basis are not considered to be regional transit systems.

Urban transit systems

Urban transit systems cannot purchase fuel tax free. They too must pay the tax and then apply for a refund with the Department.

An urban transit system is one whereby buses are (1) operated primarily on the streets of cities (2) for the transportation of passengers for an established fare (3) without discrimination (4) up to the capacity of each motor bus.

Other entities that may apply for an Iowa Fuel Tax Refund

UPDATED 9/19/08