Iowa Sales Tax & Audit Guide

• Do I need to collect Iowa sales tax?
• Should I be collecting or paying Iowa use tax?
• What do I do if I should have been collecting but haven't?
• I received an audit notice. What should I do?
• Guidance on fighting a sales tax assessment in Iowa.

Like most states, to be subject to Iowa sales tax collection and its rules, your business must:

1) Have nexus with Iowa, and

2) Sell or use something subject to Iowa sales tax.

According to the Iowa Department of Revenue, a retailer with a physical presence in Iowa is any retailer with any permanent or temporary place of business, employee, or other representatives or property in Iowa.

A retailer with a physical presence in Iowa must collect Iowa sales tax. A typical example is a retailer that has a store in Iowa, sends sales representatives to Iowa, or sets up a temporary booth to sell items at fairs or trade shows in Iowa.

Additionally, businesses that do not have a physical presence in Iowa can establish *economic nexus* by exceeding the annual sales threshold covered in the next section.

Economic Nexus (Wayfair Law) and Internet Sales in Iowa

Out-of-state retailers

A remote seller makes retail sales of tangible personal property, services, or specified digital products in Iowa but doesn't have a physical presence in Iowa. A remote seller makes sales in Iowa in various ways, including by phone, catalog, or website.

Remote sellers must collect Iowa sales tax if they have $100,000 or more in gross revenue from Iowa sales.

A remote seller must collect and remit Iowa sales tax starting January 1, 2019, if their previous calendar year's sales exceed the economic nexus threshold.

Example: Seller A is a remote seller making retail sales of clothing delivered to Iowa. Seller A has not had a physical presence in Iowa. During the calendar year 2018, Seller A received $150,000 in gross revenue from sales of clothing delivered to Iowa. Since Seller A has received $100,000 or more in gross revenue from Iowa sales during the calendar year 2018, Seller A must begin collecting Iowa sales tax on January 1, 2019.

Marketplace facilitators

The Iowa tax reform bill requires marketplace facilitators like Etsy to collect sales tax for sellers using their marketplace. Marketplace facilitators without a physical presence in Iowa are required to collect Iowa sales tax once the combined total of their sales in Iowa and third-party sales in Iowa exceeds $100,000 in the current or previous year. They must have separate seller permits for their sales in Iowa and third-party sales.

Marketplace sellers might not need to register or collect sales tax. Marketplace sellers should contact their marketplace to determine whether they need to collect Iowa sales tax on sales made through the marketplace.

How is the $100,000 gross revenue threshold calculated?

The total revenue generated from Iowa sales is included in the gross revenue calculations.

All retail sales, taxable or exempt, and any other sales (wholesale, resale, etc.) of tangible personal property, services, and specified digital products sold into Iowa. Iowa sales include all sales made by a remote seller through a marketplace or other means.

However, certain charges are excluded from a transaction’s sales price:

• A credit card processing fee on a nontaxable sale is not itself subject to tax.
• Discounts
• Interest, finance, or carrying charges
• Charges that are itemized on a receipt, such as delivery or installation service charges
• Other taxes

Iowa imposes a tax on the sales price of transactions made by retailers who sell tangible personal property, taxable services, or specified digital products. Retailers must collect, report, and remit a 6% sales tax on these transactions. An additional local option sales tax (LOST) of 1% applies to most sales in many jurisdictions, bringing the combined rate to 7%. There is no local option use tax.

Unlike many states, Iowa taxes an enumerated list of services — generally referred to as "taxable enumerated services." If a service appears on Iowa's list (for example, repair of tangible personal property, landscaping, lawn care, dry cleaning, pet grooming, photography, certain personal services, and others), it is subject to Iowa sales tax. Services that are not enumerated are generally not taxable.

Many businesses get tripped up at the line between a taxable service and a non-taxable professional service. When a service is bundled with the sale of tangible personal property or with another taxable service, the entire transaction may become taxable unless charges are separately stated and meet Iowa's bundling rules.

Effective January 1, 2019, Senate File 2417 substantially expanded Iowa's taxation of software and digital products. Today:

• Prewritten (canned) software delivered electronically or on tangible media is subject to Iowa sales tax.
• Software as a Service (SaaS) is taxable in Iowa when sold to a business or individual end user.
• Specified digital products — including digital audio works, digital audiovisual works, digital books, and certain other digital goods — are taxable.
• Custom software developed for a specific customer is generally not subject to Iowa sales tax.
• Information services, computer services, and storage services are taxable under the enumerated services list.

Because Iowa is one of the broader SaaS-taxing states, software and tech businesses with Iowa customers should carefully review where sourcing rules place each transaction. See Iowa Administrative Code r. 701-219 for additional detail.

Iowa's rule on shipping and handling is straightforward: delivery charges are taxable when associated with the sale of a taxable item, and non-taxable when associated with the sale of a non-taxable item. Delivery charges include transportation, shipping, postage, handling, crating, and packing — whether by the seller, a common carrier, or USPS.

If a shipment includes a mix of taxable and non-taxable items, the seller may either tax the delivery charge in full, or allocate the delivery charge between the taxable and non-taxable portions based on price or weight.

Iowa recognizes two separate transactions in a drop-shipment scenario: (1) the sale from the drop-shipper to the reseller, and (2) the sale from the reseller to the Iowa end customer. If the reseller provides the drop-shipper with a valid Iowa or multi-state resale certificate, the first transaction is exempt and the reseller (not the drop-shipper) is responsible for collecting Iowa sales tax on the second transaction — provided the reseller has nexus in Iowa.

If the reseller does not have Iowa nexus and the drop-shipper does, the drop-shipper may be required to collect Iowa tax on the wholesale transaction unless the reseller has registered for Iowa sales tax or provided an acceptable exemption certificate.

Iowa's state sales tax rate is 6%. In addition, most cities and unincorporated areas have adopted the Local Option Sales Tax (LOST) of 1%, bringing the combined rate to 7% in most of the state. A small number of jurisdictions have not adopted LOST and remain at the 6% state rate.

LOST is destination-based for in-state deliveries: the rate that applies is the rate at the location where the customer takes possession of the goods. The Iowa Department of Revenue's address-based rate lookup is the recommended tool for verifying which rate to apply. Iowa does not have a local option use tax — use tax is imposed at the 6% state rate only.

The answer depends on whether you are registered for Iowa sales tax and whether the Iowa Department of Revenue has already contacted you about an audit or outstanding liability.

One option may be to voluntarily disclose past liability and settle through a Voluntary Disclosure Agreement (VDA). The feasibility and value of this option depends on your specific situation — unlike firms that recommend a one-size-fits-all VDA, our sales tax professionals will help you determine the most cost-effective approach for your business.

Two options generally exist for businesses that have nexus but have not been collecting Iowa sales tax:

• Register with the Iowa Department of Revenue and pay back taxes, penalties, and interest; or
• Complete a VDA to limit lookback exposure and eliminate most penalties.

Sometimes registering with the Iowa Department of Revenue and paying owed tax makes more sense than a VDA. For example, a VDA may not be cost-effective if past liabilities and penalties are small after considering the administrative costs of processing the agreement.

Be cautious of professionals who recommend a VDA in these cases — their advice may not align with what makes economic sense for your business.

When registration and payment may make more sense than a VDA:

• Your business has had Iowa nexus for less than three years.
• The penalty amount is *less* than the professional fees charged for a VDA.
• Your issues are *not* the result of uncollected sales tax (for example, missed remittance of already-collected tax).

Note: Registering with the Iowa Department of Revenue generally will not eliminate past tax liability or interest.

Iowa's standard lookback period for a VDA is 3 to 5 years, depending on the facts and the type of tax. The Iowa Department of Revenue's Voluntary Disclosure Program is the right tool when a business has extended past exposure and wants to limit the period of liability and eliminate civil penalties.

The benefit of doing an Iowa VDA depends on:

• When you first established Iowa nexus.
• Whether the penalty savings exceed the professional fees for the VDA.
• Whether your issues stem from collecting but not remitting Iowa sales tax (collected-but-not-remitted tax is generally *not* eligible for VDA penalty relief).

Iowa VDAs are negotiated anonymously through a representative until terms are agreed and the taxpayer's identity is disclosed.

The Iowa Department of Revenue regularly audits businesses with return discrepancies, missing returns, or whose remittances appear inconsistent with the Department's data (1099-K reports, federal tax data, third-party information). Businesses that receive an Iowa audit notice should consider the following:

• Your experience handling Iowa sales and use tax audits. Without prior knowledge, it can be difficult to evaluate the auditor's findings.
• Your ability to know your options when asked to provide sensitive business or financial documents.
• Your knowledge of potential Iowa sales tax exposure, if any.

If you are unsure on any of these points, hiring a professional may be the right move. Contact us to learn how our sales tax professionals can give you the confidence needed to manage the Iowa audit process effectively.

You can review our resource pages for more detailed audit guidance:

• The Audit Overview & Selection Process
• The General Audit Process
• Statute of Limitations Extensions & Issues
• Managing the Sales Tax Auditor

An Iowa sales tax audit generally follows a predictable sequence: notice → entrance conference → records request → fieldwork → exit conference → audit report → Notice of Assessment. The auditor will typically request three to four years of sales records, exemption certificates, federal income tax returns, bank statements, and general ledger detail.

• The auditor will conduct pre-audit research using third-party data (federal returns, 1099-K, marketplace facilitator reports).
• The auditor may schedule an entrance conference to outline scope and request initial documents.
• The auditor will request documents — many of which may not be relevant or which you may not be required to provide depending on the circumstances.

• The auditor will compare your Iowa sales tax returns to your federal income tax returns, bank statements, and other available records to verify all sales were reported.
• Once the auditor accounts for all sales, they will review your exempt and out-of-state sales, including the supporting exemption certificates.
• The auditor will conduct a use tax review of business expenses such as advertising, auto and truck expense, repair and maintenance, rent, office expense, miscellaneous expense, supplies, and equipment.

*NOTE: A slight error in how Iowa sales tax was charged on a single category of transactions can add up to a substantial liability when multiplied over several years.*

Remember: if your business buys an item online without paying Iowa sales tax to the seller, your business still has an obligation to remit Iowa use tax. Failure to track this obligation often produces surprise use-tax assessments during an Iowa audit.

One of the final audit steps is an exit conference with the auditor, who will produce an audit report and a proposed assessment. It is advisable to have a sales tax professional present — this is your first opportunity to push back on areas where the auditor overstepped or misapplied Iowa's sales tax laws.

We generally recommend that businesses refrain from agreeing to the assessment until a sales tax professional has reviewed the audit report. The consequence of premature agreement can be drastic overpayment — owners and in-house accounting staff often miss flaws that, if challenged, could materially reduce the assessment.

After the audit, the auditor will issue a proposed assessment. Documentation issues — exemption certificates, proof tax was paid, calculation errors, and the like — are best resolved with the auditor at this stage. Legal interpretations of Iowa's sales tax law typically cannot be resolved at the auditor level and will require formal protest.

If a resolution cannot be reached with the auditor, the next step is to file a formal protest with the Iowa Department of Revenue.

If you cannot resolve issues with the auditor, the Iowa Department of Revenue will issue a Notice of Assessment. Under Iowa Code § 421.60, a taxpayer who disagrees with a Notice of Assessment must file a written protest within 60 days of the date of the notice (90 days for taxpayers outside the United States).

The protest must:

• Identify the taxpayer and the assessment being contested;
• Specify the tax periods and amounts in dispute;
• Set out the facts and the legal grounds supporting the protest; and
• Be signed by the taxpayer or an authorized representative.

Missing the 60-day deadline generally makes the assessment final and very difficult to reopen.

Along the way, you may have an opportunity to settle your Iowa sales tax case by negotiating with the Iowa Department of Revenue. Often, you can reach better results through informal settlement than at the auditor level. If you or your professional team rarely does state and local tax work, it can be difficult to evaluate a fair versus unreasonable Iowa sales tax settlement. We don't recommend trying to negotiate a settlement without an experienced Iowa state and local tax lawyer or other professional.

Iowa also offers a payment plan option under Iowa Code § 421.60 for businesses that cannot pay an assessment in full at the time it becomes final.

Under Iowa Code § 422.30 and related sales/use tax provisions, the Iowa Department of Revenue may issue a jeopardy assessment when the Director believes that collection of sales and use tax will be jeopardized by delay — for example, when a taxpayer is leaving the state, dissipating assets, transferring inventory out of Iowa, or otherwise placing collection at risk. The tax, interest, and penalties become immediately due and payable, and the Department may begin enforced collection (liens, levies, distress warrants) without waiting for the standard 60-day protest period to run.

An Iowa jeopardy assessment may be challenged, but the deadlines are compressed and the Department may require a bond or other security equal to the assessment before staying collection. Because every standard procedural protection is shortened, it is critical to engage an experienced Iowa sales tax professional immediately upon receipt of the jeopardy notice.

If you cannot resolve your case within the Iowa Department of Revenue or if your protest is denied, your next venue is an administrative hearing. Iowa restructured its administrative tax appeals process in 2024 under the Iowa Department of Inspections, Appeals, and Licensing — protests are heard by an Administrative Law Judge (ALJ) of the Iowa Administrative Hearings Division, with the resulting proposed decision subject to review by the Iowa Department of Revenue Director.

The hearing is similar to a court trial: testimony, exhibits, discovery (in some cases), motion practice, and post-hearing briefing all apply. After the Director's final order, the taxpayer may appeal to Polk County District Court, then to the Iowa Court of Appeals, and ultimately to the Iowa Supreme Court.

Because of the formality involved and the significant strategic decisions made before and during the hearing, representation by an experienced Iowa state and local tax practitioner is essential at this stage.

• Iowa Department of Revenue — Sales and Use Tax
• Iowa Voluntary Disclosure Program
• Iowa Department of Revenue — Audit Information
• Iowa Administrative Hearings Division (DIAL)
• Iowa Code Chapter 423 — Streamlined Sales and Use Tax
• Iowa Administrative Code 701 — Revenue
• Iowa Local Option Tax Information