House File 705: Energy Phase-out Summary and FAQs

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:

Phase-Out of Sales Tax:

The schedule for the phase-out was as follows:

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:

Updated February 20, 2009