IOWA SALES TAX AND AUCTIONS

This information has been developed to explain the relationship between the Iowa sales tax statutes and regulations and auctions. Because the contents of this paper are general, it should not be used to bind the department in any legal issue. If this paper raises additional questions, we urge you to contact Taxpayer Services for assistance.

In General

In most cases, when an auctioneer makes a sale, the auctioneer is making the sale on behalf of another individual or business. By law, this is known as an agent-principal relationship.

Therefore, in order to determine responsibilities for Iowa sales tax, the status of the principal (the owner of the property) must be evaluated. The following general rules can be applied to determine if sales tax must be collected.

If the Owner Meets the Casual Sale Exemption

Iowa Code Section 422.42(12) exempts certain sales from the state sales tax as "casual sales." The exemption can be applied to two separate types of transactions.

  1. Sales of a nonrecurring nature where the seller at the time of the sale is not engaged in a business of selling property or services subject to sales tax.

  2. Bulk sale of a retailers trade or business where the retailer holds a sales tax permit when the business is sold to another person who is going to engage in a similar business.

Sales of a nonrecurring nature when the seller does not operate a retail business. The department has limited the term "sale of a nonrecurring nature" to two separate selling events outside the regular course of business within a 12-month period. See Rule 730-18.28. The third selling event and all selling events thereafter within the 12-month period would be taxable. However, if the selling event occurs consistently over a span of years, the sale is recurring and not casual even though only one sales event occurs each year. Des Moines Police Department v. Bair, equity No. CE3-1591, Polk County District Court, November 1, 1976.

Examples

F, a farmer, does not sell tangible personal property at retail or engage in any taxable services. F liquidates the farming business and hires a professional auctioneer to auction off many items of tangible personal property. Assuming this liquidation event is casual, all items sold by the auctioneer at retail are casual sales notwithstanding that many different sales to numerous different buyers may occur. Therefore, no sales tax is imposed on the items sold.

H, an insurance agency, holds a semiannual auction to sell its used office furniture. Even though H does not regularly sell tangible personal property at retail, the casual sale exemption does not apply because the selling events are recurring. Therefore, the items sold are subject to sales tax.

I, a corporation, has one sales event every year whereby it auctions off capital assets which it has no use for or desires to replace. This event has been a planned function of I and is conducted regularly and consistently over a span of years. Even though this sale event occurs only once a year, it is of a recurring nature because of the pattern of repetitiveness present, and, therefore, the casual sale exemption would not apply, regardless of the number of items sold at such sale event each year. Therefore, the items sold are subject to sales tax.

J, a corporation engaged in the sale for resale of tangible personal property, sells three capital assets used in its trade or business consisting of a typewriter, a desk, and a computer. Each sale is made to different buyers and is unrelated to the other sales. The three sales occur in January, June, and October of the same year. The sale made in October consists of a typewriter sold at auction. The sale of the typewriter auction is not a casual sale, but the sales of the desk and the computer are casual and exempt. The auctioneer must collect sales tax on the sale of the typewriter.

Corporation A auctions the company computer. At the time of this sale, Corporation A is engaged in the business for profit of selling clothes at retail. Assuming that the auction of the computer constitutes a sale of a nonrecurring nature, there is a casual sale because the sale is outside the regular course of Corporation A’s business. Therefore, the auctioneer does not have to collect sales tax on the computer.

Bank C is engaged in the business of lending money secured by collateral. In the course of such business, Bank C must repossess some collateral and sell it at retail for purposes of payment of loans. Such sales recur from time to time by auction. Notwithstanding that Bank C is presumably not engaged in the business of selling tangible goods or services for a-profit, since the sales are recurring, there is no casual sale. See S & M Finance Co., Fort Dodge, v. Iowa State Tax Commission, 1968, Iowa 162 N.W.2d 505. Therefore, the auctioneer must collect sales tax on the items auctioned.

Estate A is created due to the death of Mr. Jones. An auctioneer is hired to dispose of Mr. Jones’ household goods. The casual sale exemption would apply, assuming that the estate did not have any previous sales of tangible personal items during the 12-month period after his death. Therefore, no sales tax would be due on any of the items sold.

Retailer D sells televisions and decides to reduce the inventory of used television sets taken in on trade. An auctioneer is hired to conduct the sale. Sales tax must be collected by the auctioneer as the television sets are part of Retailer D’s inventory. There is no sales tax exemption on "used" items. The Iowa sales tax is a transaction tax, not a tax on property. Therefore, each time a television set is sold at retail, sales tax applies.

The Bulk Sales of a Business

When a retailer sells all or substantially all of the tangible personal property held or used in the course of a trade or business for which the retailer is required to hold a sales tax permit, the casual sale exemption will only apply when:

(a) the trade or business is transferred to another person, and

(b) the purchaser or transferee is engaged in a similar trade or business.

Examples

L, a hardware store, desires to liquidate the business. L had been selling tangible personal property at retail and was required to have an Iowa retail sales tax permit. L hires a professional auctioneer and all items of inventory, equipment, and fixtures are sold to various purchasers. These items consist of all or substantially all of the tangible personal property held or used by L in the course of the business for which he or she was required to hold a sales tax permit. L, however, does not transfer the trade or business to anyone else. Under these circumstances, the casual sales exemption does not apply. Sales tax would be due on all the items sold unless, of course, another sales tax exemption such as the "resale" exemption would apply.

R, an operator of a restaurant, auctions off to various purchasers who are not engaged in the restaurant business all or substantially all of the tangible personal property held or used in the business, for which R was required to hold a retail sales tax permit. R transfers the trade or business to S who then operates a restaurant at the same location R did. Even if S did not purchase any of the tangible personal property, under these circumstances, the casual sales exemption applies. The auctioneer would not have to collect sales tax on the items sold.

T, a restaurant, auctions all of its tangible personal property held or used in the course of its business for which it was required to hold a sales tax permit to U and other individuals. T also sells its trade or business to U. U engages in the business of operation of a dance hall and does not continue to operate the restaurant. The casual sales exemption will not apply. Therefore, the auctioneer must collect sales tax on the items sold.

B operates a home furnishing store, but is forced to file bankruptcy. The assets of the business must be liquidated. A public auction was held and the assets were sold to the highest bidder. The purchaser was not another person who intended to engage in a similar trade or business and none of the items purchased were for resale. Consequently, the casual sale exemption did not apply; therefore, both the inventory and non-inventory property became subject to state sales tax. (See Hubs ReDair Shop, Inc. v. Department of Revenue, United States Bankruptcy Court, Northern District of Iowa, Bankruptcy No. 81-01077, April 4, 1983. In this case, no tax was collected at the time of sale and the estate of the bankrupt became liable for the tax.)

Auctions Involving Multiple Principals

The tax status of the principal determines the taxability of auction sales when a true agency relationship exists. If an auctioneer should combine different types of items into a single auction, detailed record keeping may be required to separate taxable transactions from nontaxable transactions.

Example: An auctioneer is hired to sell items from a farm sale, an estate sale, and a bankruptcy liquidation sale involving a retail hardware store. The casual sale rule applies to the farm sale and the estate sale, but not to the bankruptcy liquidation sale. Therefore, the auctioneer must collect sales tax on the items associated with the bankruptcy liquidation sale, but no sales tax should be collected on the items associated with the farm sale or the estate sale.

Auctions Involving Consigned Items

When items are consigned to an auctioneer the status of the consignee will determine if sales tax must be collected at the time of sale.

Examples

Mrs. Franklyn has several pieces of antique jewelry she wishes to sell. She consigns the jewelry to Al’s Auction House. Mrs. Franklyn is not engaged in a business of selling property or services, so the casual sale applies. No sales tax would apply to the sale of the jewelry at the time of auction.

Mr. Smith runs a clothing store and decides to liquidate his business over a period of three months. He consigns some of his inventory to Al’s Auction House. Since Mr. Smith is a retailer, sales tax would apply to the sale of the clothes at the time of auction.

Auctioneer Owned Property

Auctioneers can be retailers the same as any other individual or business. If an auctioneer takes title to goods and sells or auctions the goods at retail, sales tax will apply unless the sale is nonrecurring. In such cases the auctioneer will be required to be a registered retailer and must have a sales tax permit.

Example

Al, an auctioneer, purchases 100 snow tires from a local wholesaler. The snow tires are auctioned to the general public. Sales tax would apply to the sale of the tires when they are auctioned.

Auctioned Property Exempted From Sales Tax

The Iowa Code specifically exempts certain types of tangible personal property from sales tax. Examples include, but are not limited to, certain foods for human consumption which can be purchased with food coupons (grocery items), prescription drugs, insulin, hypodermic syringes and diabetic testing materials, draft horses, agricultural breeding stock and domesticated fowl, commercial fertilizer, agricultural limestone, and herbicide, pesticide, insecticide, and food and medication used for agricultural purposes. When items specifically exempted from sales tax are sold at auction no sales tax applies.

Example

Al, an auctioneer, purchases the inventory of Ralph’s Corner Grocery Store. Included in the inventory are 100 cases of canned vegetables and 25 cases of soap powder. The inventory is sold at auction to the general public. Sales tax would not apply to the sale of canned vegetables since these items are for human consumption and they can be purchased with food coupons. However, no sales tax exemption would apply to the sale of the soap powder; therefore, sales tax must be collected with this item is auctioned.

Auctioned Property When Sales by the Principal are Exempted From Collecting Sales Tax

Iowa Code Section 422.45(20) exempts from sales tax sales by a county or city. However, certain public utility sales such as gas, electricity, water, heat, and communication services remain taxable. Iowa Code Section 422.45(3) exempts sales from educational, religious, or charitable activities if the entire proceeds from the sale are used for educational, religious, or charitable purposes. When an auctioneer is an agent for a city or county or conducts an auction which has an educational, religious, or charitable purpose, the items sold are not subject to sales tax.

Example

The American Heart Association conducts an annual auction to raise funds which are donated for medical research. Al’s Auction House is hired to conduct the auction. The auction would, therefore, have a charitable purpose. Since the proceeds from the auction are donated for medical research, no sales tax would apply to the items sold.

Auctioned Items Purchased by an Exempt Organization

Iowa Code Section 422.45 provides a general tax exemption for sales to certain governmental units. Examples include the federal government, the State of Iowa, cities, counties, political subdivisions of the state, school districts, state universities, and nonprofit educational institutions and certain residential care facilities. When these exempted entities purchase tangible personal property which would otherwise be subject to tax, no sales tax is due.

However, the auctioneer should obtain a signed sales tax exemption certificate from the purchaser for record keeping purposes to support why a tax free sale was made.

Many nonprofit organizations think they are exempted from paying Iowa sales tax on their purchases for their own use because they do not pay corporate income taxes or local property taxes. However, they are not exempted from sales tax. An example would be a church or a charity. As of July 1, 1998, all purchases made by nonprofit hospitals are exempt. The department publishes a booklet explaining the tax responsibilities of nonprofit organizations, which is available upon request.

Auctioned Items Purchased for Resale, Processing, or Other Exempt Purposes

There are over 50 sales tax exemptions of various types in the Iowa Code. The most common exemptions are purchases for resale, purchases of agricultural related items, and purchases of materials used in a manufacturing process. When exempt purchases are made, the auctioneer must obtain an exemption certificate from the purchaser for record keeping purposes to support why a tax free sale was made. Exemption certificates and a general sales tax information booklet which explains many of the various sales tax exemptions can be obtained from the department.

Vehicles Subject to Registration

Vehicles subject to registration are subject to an Iowa use tax, which is imposed on the owner of the vehicle at the time the vehicle is registered with the county treasurer. In addition, the casual sale exemption does not apply to vehicles subject to registration. Therefore, each time a vehicle is purchased and registered use tax will apply unless some other statutory exemption is applicable,

Local Option Sales Taxes

Sales made at some auctions could be subject to one or both of Iowa's local option taxes in addition to the sales tax. First of all, there will be no local option tax in any instances where the sale is exempt from state sales tax. If the auction transaction is subject to state sales tax, it could be subject to local option tax if either of the following instances occurs: