<%@LANGUAGE="JAVASCRIPT" CODEPAGE="1252"%> Iowa Department of Revenue electronic newsletter: Iowa Tax eNews
DECEMBER 2006
graphic for Iowa Department of Revenue Tax eNews electronic newsletter


Message from the Director
:

It is the end of the year and a time when the Department reviews how it has performed during the year. The results are interesting. The percentage of individual income tax returns filed electronically rose to 66 percent. Two out of every three individual income returns were received electronically in 2006. Tax refunds for those electronic returns were issued in 14 days 96 percent of the time. In 2006, the Department received 69 percent of all General Fund revenues electronically. Additionally, more than 95 percent of all sales tax and withholding tax returns were received electronically.

Electronic filing and payment is demanded and used by taxpayers and taxpayer representatives. The Department's system is available 24 hours a day, seven days a week. Electronic filings allow the Department to respond quicker and with more accuracy.

Things have changed. We are all changing with them and for the better. We will continue to monitor how we perform, and continue to change to ensure we address your needs.

Mark R. Schuling
Director

Iowa Withholding Tax - Claim for Refund

Iowa Form IA 843, Claim for Refund, will no longer be accepted for refunds of Iowa withholding tax. Iowa Administrative Rule 701-46.3(3)(h) states that if an employer remits more than the correct amount of withholding tax, the employer MUST file an amended withholding tax return to report the correct amount of withholding tax (emphasis added). Therefore, in all cases where there has been an overpayment of Iowa withholding tax, an amended withholding quarterly tax return must be filed.

For example, there have been situations where Form IA 843 has been filed for withholding tax when an employer failed to claim the new jobs credit from withholding allowed under Iowa Code section 260E.5. In the alternative, some employers who had failed to claim the new jobs credit were claiming larger amounts of jobs tax credit on current period returns to "catch up" with the credit that should have been claimed on prior returns. An employer in this situation must file amended returns for each of the tax periods when the job training agreement was in place, and these amended returns should all be filed at the same time for each of the affected tax periods.

Amended withholding quarterly returns should be filed electronically through eFile & Pay .

While no longer acceptable for withholding tax, the revised IA 843 can still be used to claim refunds of other taxes and is available on the Iowa Department of Revenue Web site at http://www.state.ia.us/tax/forms/22009.pdf

New Iowa Power of Attorney Form

The Iowa Department of Revenue has recently revised its Power of Attorney Form
(IA 2848).

Iowa 's updated form is at http://www.state.ia.us/tax/forms/14101.pdf

The Federal Power of Attorney form is also accepted by the Iowa Department of Revenue. To be valid, the Federal form must contain a written statement that indicates it is being submitted for use with State of Iowa forms. The statement needs to be initialed by the taxpayer.

Nonresidents Who Own Property in Iowa

Iowa income tax and sales tax filing requirements may apply to nonresidents who own property located in Iowa.

Income earned from Iowa property is generally subject to Iowa income tax even if the owner is not an Iowa resident. This income might take the form of rent received from a tenant, a gain from the sale of the property, or other income received for use of the land. If the annual income received from Iowa sources is $1,000 or more, a nonresident is required to file an Iowa Individual Income Tax Return (IA1040). The 2006 IA1040 Booklet can be found on our Web site at: http://www.state.ia.us/tax/forms/1040LongBooklet06.pdf .

Sales tax may also apply if a charge is being made for use of the land that falls within the definition of a taxable service. For example, the service of providing “commercial recreation” is subject to Iowa sales tax. Included within the category of commercial recreation would be fees paid by hunters for access to a particular piece of property. To apply for an Iowa sales tax permit, go to our online registration at: https://www.idr.iowa.gov/CBA/start.asp .

Delivery Charges

Delivery charges are exempt from sales tax, as long as they are separately stated, reasonable in amount and directly related to the cost of transportation. Delivery charges are currently defined as follows:

“Delivery Charges” means charges assessed by a seller of personal property for preparation and delivery to a location designated by the purchaser of personal property including, but not limited to, transportation, shipping, postage, handling, crating, and packing charges.

Prior to July 1, 2005, if stated as a single item and mandatory to obtain the merchandise, shipping and handling charges were considered part of the purchase price of the merchandise and were subject to sales tax. However, handling charges now fall under the definition of delivery charges and are exempt from tax on that basis.

Please remember that “inbound freight” or “freight in” charges do not fall within the definition of delivery charges, and are taxable when added to the price of a retail sale. An example of when “freight in” charges might appear is a situation where a purchaser wishes to buy a product from a retailer, but that retailer doesn't have the item in stock and must order the product. If the retailer prices the product at a certain amount, plus the shipping costs associated with obtaining the product by ordering from their supplier, those associated costs (freight in) are not exempt delivery charges even if separately stated. These charges reflect the costs a seller may incur to secure possession of the product from their supplier. Exempt delivery charges constitute the costs necessary to transfer the product from the seller to the purchaser.

Sales Tax – Exempt Service or Taxable Product?

Note: The information in this article should not be interpreted to exempt the taxable service of interior decorating.

When performing design, drafting, or other similar work, it can sometimes be difficult to determine whether a person is selling an exempt service or taxable tangible personal property. To make such a determination, the department will look at the “true object test.” In other words, we will look for the object of the transaction, or what the customer is actually purchasing.

For example, if a customer purchases a set of plans from a designer, it would be necessary to determine if the purchaser is actually buying taxable tangible personal property (the plans); or if the purchaser is buying an exempt service (designing the plans).

The department's position on this question is that sales to the general public of pre-existing plans or designs of any sort (e.g. for homes, other types of buildings, clothing, or furniture) are considered to be taxable sales of tangible personal property. The creation of plans or designs for individual clients would be treated as a nontaxable service.

In the case of floor plans for a home, if the floor plans are sold to the general public, there would obviously be a sale of taxable tangible personal property. On the other hand, if an architect is designing a home for a specific individual, the sale would be that of exempt architectural design services.

Pumpkins – Pies and Jack-o'-Lanterns

This information is no longer valid. Pumpkins are considered food and exempt from sales tax.

The Department has recently refined its position on whether pumpkins are subject to Iowa sales tax to more closely match what we believe to be the predominant use of those pumpkins.

In the past, pumpkins have been exempt from sales tax as a food (edible squash); even if they were to be later made into jack-o'-lanterns or used as decorations. Our position now is that pumpkins are taxable if they are advertised to be used as jack-o'-lanterns/decorations or it is understood that that is how they will be used.

Pumpkins are still eligible for exemption from tax under the following circumstances:

  • The purchaser evidences their intent to use them as food by completing a sales tax exemption certificate stating they are being purchased for human consumption.
  • The pumpkins are specifically of the variety to be used to make pumpkin pies and are advertised in that way.
  • They are purchased with Food Stamps.

Those retailers who sell pumpkins should keep these guidelines in mind during the Fall of 2007 and make any necessary changes to their tax treatment of pumpkin sales.

Sales Tax – Consolidated Returns

If a business has two or more Iowa locations and, therefore, two or more sales tax permits, it may request to file a consolidated return. Which means, when filing returns for multiple locations from which taxable sales are made, the permit holder may file ONE consolidated return when reporting total sales made from all locations for which a permit is held.

Except for permits that include Automobile Rental or Hotel/Motel Tax, consolidated sales tax returns may be filed by any retailer who has more than one sales tax permit.

To apply for a Consolidated Sales Tax Permit, complete the Iowa Business Tax Registration Form, attach a list of businesses, their locations, and Iowa Sales Tax Permit Numbers. Remember that each location is still required to have its own individual permit number even if part of a consolidated return.

If you are adding a new location to a CURRENT consolidated account, include your current Consolidated Number on the Business Tax Registration.

The online application cannot be used to apply for a new consolidated permit. However, if the business already has a consolidated permit, it may add a new location online.

Labor: Is it taxable?

Certain "enumerated" (taxable) services are commonly performed with the repair or maintenance of real estate.

Items which under normal circumstances become a part of real estate:

  • boilers, furnaces, and central air conditioning units
  • built-in household items such as kitchen cabinets, dishwashers, sinks (including faucets), exhaust and ceiling fans, garbage disposals and incinerators
  • residential water heaters, water softeners

When taxable services are performed on or in connection with new construction, reconstruction, alteration, expansion or remodeling of buildings or structures, they are exempt from sales tax.

When these services are a repair, sales tax must be charged.

When an entire unit is replaced, the distinction between repair and new construction is based upon whether the item being replaced is broken or defective.

For instance, replacing a broken water heater, furnace or central air conditioning unit is considered a “repair.”

However, replacing an entire water heater, furnace or central air conditioning unit would be classified as “new construction” if the item being replaced is not defective.

Examples of new construction and repair situations:

1)  A building is under construction and requires the installation of a furnace.  This is considered “new construction.”  The company providing the materials and the labor to install the new furnace will pay tax on all materials.  No tax is collected from the customer for either labor or materials.

2)  The owner of a building wants to have a new furnace installed.  The existing furnace is not defective.  This would be considered an “improvement.”  The company providing the labor and materials to install the new furnace will pay tax on all materials.  No tax is collected from the customer for either labor or materials.

3)  A furnace in an existing structure has become defective.  The furnace is to be replaced.  The replacement of the defective furnace will be considered “repair.”  The company doing the installation will pay no tax on the materials; however, will collect tax on both labor and materials from the customer.

Sales Tax – Interstate Commerce  

Non-Iowa Sales – Tangible personal property purchased from an Iowa retailer, but delivered outside Iowa is not subject to Iowa sales tax. In other words, a product transported by the Iowa retailer in their own vehicle to a point in another state, or mailed by the retailer to a location outside Iowa, are considered sales in interstate commerce and are exempt from Iowa tax. Under certain circumstances, retailers may need to register for the collection of tax in other states and should inquire with that state(s) as to what their requirements might be.

Iowa Sales – When tangible personal property is delivered in Iowa, it is generally subject to Iowa sales tax even if the purchaser may subsequently transport the property to a point outside Iowa.

Delivery in Iowa can take several forms: (1) the purchaser may take possession of the item themselves at a point in Iowa; (2) the purchaser may send their agent to pick up the item at a point within Iowa; or (3) the purchaser may hire a common carrier to transport the item from a point in Iowa. The first two scenarios are quite clear. The third depends upon the terms of the contract between the buyer and seller to determine whether it would be considered an Iowa sale or not.

If the contract states in some fashion that the sale is complete at a point in Iowa, then it is an Iowa sale even if the purchaser hires a common carrier to transport the product to a point outside Iowa. If the contract is silent and the purchaser hires a common carrier that transports the item to a point outside Iowa, it is a sale in interstate commerce and not subject to Iowa tax.

Hotels & Motels – Local Option Sales Tax

It has come to the attention of the department that not all hotels and motels are aware of a change in the taxation of rooms that went into effect last year. We present this article in an attempt to provide that information.

Legislation passed in 2005 (SF 413-I) removed from the sales tax portion of the Iowa Code the rental of rooms in a hotel, motel, inn, public lodging house, rooming house, or in any place where sleeping accommodations are furnished to transient guests for rent. Instead, the rental of these rooms was placed under a separate state “excise” tax. This change, which became effective on 7-1-05, was part of Iowa 's continuing effort to comply with the Streamlined Sales Tax Project. So lodging is no longer subject to 5% state sales tax. It is subject to the new 5% excise tax and any additional locally imposed hotel/motel tax.

This revision also impacted the imposition of Local Option Sales Tax (LOST) and School Infrastructure Local Option Tax (SILO). Transactions can only be subject to LOST/SILO if they are first subject to the state sales tax. Since lodging is no longer subject to state sales tax, it is no longer subject to either LOST or SILO under any circumstances.

Prior to 7-1-05, the rental of rooms was exempt from LOST/SILO if they were subject to the hotel/motel tax. On or after 7-1-05, lodging is no longer subject to LOST/SILO, whether or not the hotel/motel tax is imposed.

So if a room is rented in a jurisdiction that has no locally imposed hotel/motel tax, but does have one or both local option taxes, only the 5% excise tax is charged. If lodging is rented in a jurisdiction that does have hotel/motel tax, it is subject to the 5% state excise tax, plus the applicable hotel/motel tax. In neither case would LOST or SILO be imposed.

The information in the following two paragraphs is no longer correct. For the most current information, please see our hotel/motel Q&A.

In addition to sleeping rooms, these changes also apply to banquet or conference rooms in a hotel, motel, or other similar facility. Therefore, the rental of a banquet or conference room in a hotel would be subject to the new 5% excise tax, but not state sales tax. And since they are no longer subject to sales tax, they are no longer subject to LOST or SILO.

Furthermore, where the prior hotel/motel tax provisions applied to “sleeping rooms” only, the new locally imposed hotel/motel tax applies to “rooms,” including banquet and conference rooms in a hotel, motel, or other similar facility. Therefore, a banquet or conference room in an area with a locally imposed hotel/motel tax would be subject to 5% excise tax and up to 7% hotel/motel tax. In an area with no locally imposed hotel/motel tax, a banquet or conference room will be subject to only the 5% excise tax.                                

Registering for a tax permit

When applying for sales tax or withholding tax permit online, don't forget to go to the top of the second page of the application and click on “GET PIN.” Print your PIN (personal identification number) information. If you need to quit in the middle of applying, you can exit and then continue later using the PIN.    

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