House File 705: Energy Phase-out Summary (below) and Questions and Answers

In 2001, House File 705 was enacted to provide a phase-out of state sales tax (but not local option tax) for stated periods on charges for specific types of energy. The following are the criteria and definitions for each provision in this law:

In situations involving exempt and nonexempt structures on the same meter, a proration formula will be applied to obtain the qualifying portion eligible for exemption.

This phase-out did not affect franchise fees.

Definitions for the Exemption:

• "Fuel" is defined as a liquid source of energy for a residential dwelling, apartment unit or condominium. "Fuel" includes, propane, heating fuel, and kerosene. However, "fuel" does not include blended kerosene used as motor fuel or special fuel.
• "Metered gas" and "metered electricity" is natural gas or electricity which is billed based on metered usage to provide energy to a residential dwelling, individually metered apartment unit, or condominium.
• "Residential dwellings" is a structure used exclusively for human occupancy. This does not include commercial or agricultural structures. Nor does it include nonresidential buildings attached or detached from a residential dwelling, such as a detached garage, outbuilding or apartment located above a business. (In situations involving exempt and nonexempt structures on the same meter, a proration formula will be applied to obtain the qualifying portion eligible for exemption.) Also excluded from this phase-out are classified commercial facilities. Classified commercial facilities includes, but is not limited to, nursing homes, adult living facilities, assisted living facilities, half way houses, charitable residential facilities, YMCA residential facilities, YWCA residential facilities, apartment units not individually metered and group homes

Phase-Out of Sales Tax:

• January 1, 2002, through January 1, 2006
• One percent decrease of state sales tax each year (local option is still imposed and the tax rate for local option will not be reduced)
• On sales of metered gas, electricity, and fuel, including propane and heating oil
• Used as energy in residential dwellings, apartment units and condominiums
• Phase-out is based on billing date or meter-reading cycle date for metered electricity and gas, or delivery date of fuel

The schedule for the phase-out was as follows:

• Starting January 1, 2002, the sales tax rate dropped to 4% on metered gas, propane, heating oil, kerosene, and metered electricity used as energy for residential dwellings, apartment units and condominiums. Local option tax, if any, continued to be charged.

• Starting January 1, 2003, the sales tax rate dropped to 3% on metered gas, propane, heating oil, kerosene, and metered electricity used as energy for residential dwellings, apartment units and condominiums. Local option tax, if any, continued to be charged.

• Starting January 1, 2004, the sales tax rate dropped to 2% on metered gas, propane, heating oil, kerosene, and metered electricity used as energy for residential dwellings, apartment units and condominiums. Local option tax, if any continued to be charged.

• Starting January 1, 2005, the sales tax rate dropped to 1% on metered gas, propane, heating oil, kerosene, and metered electricity used as energy for residential dwellings, apartment units and condominiums. Local option tax, if any, continued to be charged.

• Starting January 1, 2006, the 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 any, continued to be charged.

This phase-out did not affect franchise fees.

Questions and Answers

The following are questions and answers that the Department has encountered with regard to this law:

Does the law also include an exemption from local option tax?

No. On January 1, 2002, a 1 percent decrease per year in the state sales tax began and continued until January 1, 2006, when the state sales tax on these items was eliminated. However, local option tax on these items remains fully intact. Local option tax is imposed at the same rate as always within each jurisdiction.

Under the law, are franchise fees still to be collected?

Yes. The law does not impact franchise fees.

How does the law impact contracts for fuel which are executed to establish a fixed price of the fuel over a period of time in which delivery occurs in a subsequent phase-out period? For example, a contract is executed in September of 2001 to fix the price for fuel which will be delivered in February of 2002.

Delivery date of the fuel controls the tax rate to be imposed on the transactions for the sale of the fuel. As a result, a 4 percent state sales tax should have been imposed on the sale of this fuel in 2002.

How does the law impact contracts executed to establish a fixed price for fuel, which also includes total or partial prepayment for the fuel under the contract?

As previously stated, the percentage of tax to be imposed centers on the delivery date of the fuel. As a result, tax on the transaction will depend upon the date on which the fuel is delivered, regardless of the date on which prepayment is made.

What if a structure includes both residential and commercial usage on the same meter?

In this type of situation, a proration formula will be applied to obtain the qualifying portion eligible for phase-out. The users of the structure may be required to complete exemption certificates or provide other documentation to substantiate claimed usage.

Do utility customers need to do anything to receive the sales tax phase-out?

No. Iowa utility providers automatically reflect the phase-out of sales tax on customer billings. If incorrect tax is collected during a phase-out period, the customer may apply for a refund from the Department.

How do we handle the phase out on our sales tax returns?

Utilities who sell to residential customers eligible for the phase-out of the state sales tax on utilities do the following:

• Report all sales on line 1 (Gross Sales)
• Determine the gross sales subject to the phase-out and put:
  • 20% of that amount on line 4 (Exemptions) of returns filed for 2002
  • 40% of that amount on line 4 (Exemptions) of returns filed for 2003
  • 60% of that amount on line 4 (Exemptions) of returns filed for 2004
  • 80% of that amount on line 4 (Exemptions) of returns filed for 2005
  • 100% of that amount on line 4 (Exemptions) of returns filed for 2006 and subsequent years
• Designate that amount as "Residential Utility" (line f) under Exemptions (line 4).
• Remember that the phase-out does not apply to local option tax, so add that amount back in when making entries for local option tax.

Source: Iowa Department of Revenue
Updated September 2, 2008