Iowa Sales Tax on Computers
Computers and Operating Systems
“Computer” means stored program processing equipment and all devices fastened to it by means of signal cables or any communication medium that serves the function of a signal cable. A computer is a device having information processing capabilities and includes word processing equipment, testing equipment, and programmed or programmable microprocessors and any other integrated circuit embedded in the machinery or equipment.
Also included within the meaning of the word “computer” is any software consisting of an operating system or executive program. An operating system or executive program is exempt from sales tax only if purchased as part of the sale of the computer for which it operates.
“Operating system” or “executive program” means a computer program which is fundamental and necessary to the functioning of a computer. The operating system or executive program software controls the operation of a computer by managing the allocation of all system resources, including the central processing unit, main and secondary usage, input/output devices, and the processing of programs.
Excluded from the meaning of the word “computer” is any software consisting of an application program. “Application software” is a collection of one or more programs used to develop and implement the specific applications which the computer is to perform, and which calls upon the services of the operating system or executive program.
Note: All computers store and process information. However, the “final output” for the user or consumer must be stored or processed data in order for the computer to be exempt.
“Devices” means the physical computer assembly and peripherals fastened by a signal cable or other communication medium including, but not limited to, such items as the central processing unit, keyboards, consoles, monitors, display units, memory, disk and tape drives, terminals, printer, plotters, modems, tape readers, card readers, card or tape punchers, document sorters, optical readers, and digitizers.
Property is “directly used” only if it is used to initiate, sustain, terminate, or transform any exempt activity. In determining whether any property is “directly used,” consideration should be given to the following factors:
- The physical proximity of the property in question to the activity in which it is used;
- The proximity of the time of use of the property in question to the time of use of other property used before and after it in the activity involved; and
- The active causal relationship between the use of the property in question and the activity involved. The fact that a particular piece of property may be essential to the conduct of the activity because its use is required either by law or practical necessity does not, in and of itself, mean that the property is directly used.
“Commercial enterprise” includes businesses and manufacturers conducted for profit and includes centers for data processing services to insurance companies, financial institutions, businesses, and manufacturers, but excludes professions, occupations, and nonprofit organizations.
“Profession” means a vocation or employment requiring specialized knowledge and often long and intensive academic preparation. Lawyers and doctors are examples of professions. Professions, including professional corporations, do not qualify for the exemption.
“Occupation” means an individual who has a particular skill or trade. Farming is considered to be an occupation; therefore, farmers do not qualify for the exemption.
A “financial institution” is a bank incorporated under any state or federal law; a savings and loan association incorporated under any state or federal law; a credit union organized under any state or federal law; or any corporation licensed as an industrial loan company under Iowa Code chapter 536A. Excluded from the meaning of the term are loan brokers governed by Iowa Code chapter 535C and production credit associations.
“Insurance company” means an insurer organized or operated under Iowa Code chapter 508, 514, 515, 518, 518A, 519, or 520 or authorized to do business in this state as an insurer or licensed insurance agent under Iowa Code chapter 522. Excluded from the definition of “insurance company” are fraternal and beneficial societies governed by Iowa Code chapter 512 and health maintenance organizations governed by Iowa Code chapter 514B.
A replacement part is substituted for another part that has broken, worn out, become obsolete, or has otherwise become unable to perform its intended function.
Replacement parts are presumed to have a useful life of one year or more. Replacement parts which have a useful life of less than 12 months are generally considered a supply and are subject to tax.
Sales or rentals of the following are exempt from tax:
- Computers directly and primarily used in processing of tangible personal property by a manufacturer.
- Computers directly and primarily used to maintain a manufactured product’s integrity or to maintain any unique environmental conditions required for the product.
- Computers directly and primarily used to maintain unique environmental conditions required for other machinery, equipment or computers used in processing by a manufacturer.
- Computers directly and primarily used in research and development of new products or the processes of manufacturing.
- Computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise.
- Computers directly and primarily used in recycling or reprocessing of waste products.
- Materials used to construct or self-construct any computer which would qualify for exemption if purchased as a finished unit.
- Exempt sales of electricity: Sales of electricity consumed by computers used in any exempt manner described in “1,” “2,” “3,” “4,” and “6” are exempt from tax. Sales of electricity consumed by computers used in the manner described in paragraph “5” remain subject to tax.
- Sales of qualifying replacement parts.
A health insurance company has three computers. Computer A is used to monitor the temperature within the insurance company’s building. The computer transmits messages to the building’s heating and cooling system, telling it when to raise or lower the level of heating or air conditioning as needed. Computer B is used to store patient records and will recall those records on demand. Computer C is used to tabulate statistics regarding the amount of premiums paid in and the amount of benefit paid out for various classes of insured. The final output of Computer A is neither stored nor processed information. The use of Computer B is for stored information. The final output of Computer C is processed information. The sale, lease, or use of Computers B and C is not taxable. Computer A is taxable.
Summary of Taxable Sales
The following are not entitled to an exemption on the purchase or rental of computers:
- Nonprofit organizations
- Utility companies centrally assessed for property tax
- Computers purchased to be used as “point-of-sale” equipment; for example, cash registers
- Computers whose final output is not stored or processed data
- Supply items that are not replacement parts
- Computers purchased for personal use
“Canned software” is prewritten computer software which is offered for general or repeated sale or rental to customers with little or no modification at the time of the transaction beyond specifying the parameters needed to make the program run. The term also includes programs offered for general or repeated sale or rental which were initially developed as custom software. Canned software includes program modules which are prewritten and later used as needed for integral parts of a complete program.
The sale or rental of canned software is taxable if the program is transferred by storage media. Tax does not apply to software delivered to the purchaser digitally, electronically, utilizing cable, radio waves, microwaves, satellites, or fiber optics.
“Custom software” is specified, designed, and created by a vendor at the specific request of a customer to meet a particular need. It is considered the sale of an exempt service and is not taxable.
Tax does not apply to the transfer of custom software in the form of written procedures, such as program instructions listed on coding sheets. Tax applies to the sale of material transferred to the customer in the form of typed or printed sheets if separately invoiced. Where a vendor sells custom software to a purchaser who requires multiple copies, separately stated charges for copying the custom software are charges for the sale of tangible personal property.
Separately stated charges for replacing custom software which has become unusable with another copy of the software are taxable.
Modifying Canned Software
Canned software is taxable. The service of modifying canned software is exempt if the charges are separately itemized and if the modifications are written or prepared exclusively for a particular customer.
When the charges for modification are not separately stated, tax applies to the entire charge unless the modification is so significant that the new program qualifies as a custom program.
If the prewritten program before modification was previously marketed, the new program will qualify as a custom program if the price of the prewritten program was 50 percent or less of the price of the new program.
If the prewritten program was not previously marketed, the new program will qualify as a custom program if the charge made to the customer for custom programming services was more than 50 percent of the contract price to the customer.
Examples of services that do not result in custom software include loading parameters to initialize program settings and arranging preprogrammed modules to form a complete program.
Royalties, Copyrights, Licenses
The sale or rental of canned software is taxable. Tax applies to the entire amount charged to the customer for canned software. All fees included in the purchase price are subject to tax. These include license fees, royalty fees, right to use fees or program design fees, whether for a period of minimum use or for extended periods. Royalty, copyright, and license fees are not subject to tax if the software to which they apply is delivered to the purchaser digitally, electronically, utilizing cable, radio waves, microwaves, satellites, or fiber optics.
Software Maintenance Contracts
Maintenance contracts generally provide that the purchaser will be entitled to receive storage media on which prewritten program improvements have been recorded. The maintenance contract may also provide that the purchaser will be entitled to receive certain services, including error corrections and telephone or on-site consultation services.
Nonoptional maintenance contract
If the maintenance contract is required as a condition of the sale or rental of taxable canned software, it is considered as part of the sale or rental of the canned software. The gross receipts are subject to tax whether or not the charge for the maintenance contract is separately stated from the charge for software.
Optional maintenance contract
If the maintenance contract is optional to the purchaser of canned software, then only the portion of the contract fee representing improvements delivered on storage media is subject to sales tax if the fee for other services, including consultation services and error corrections, is separately stated.
If the fee for other services, including consultation services and error corrections, is not separately stated from the fee for improvements delivered on storage media, then tax is to be imposed on 50 percent of the gross receipts from the sale of the maintenance contract.
However, if the contract is for technical support only, then tax is not to be imposed on the sale of the contract.
Services, such as maintenance services, that are an inseparable and mandatory part of the sale or lease are taxable.
Taxable services purchased on an optional basis are also subject to tax. Taxable services may include, but are not limited to, tangible personal property rental, machine repair, services of machine operators, office and business machine repair, and electrical and electronic installation and repair.
Programming and training are not taxable services.
As defined below, data processing is not a taxable service, even though some tangible personal property may be incidentally transferred to the client. (Charges for tangible personal property separately sold to the client are taxable sales.)
“Processing a client’s data” means the developing of original information from raw data furnished by a client. Examples of data processing which develop original information are summarizing, computing, extracting, sorting, sequencing, or the updating of a continuous file of information maintained by the customer with the data processing firm.
Generally speaking, if a person enters into a contract to process a client’s data, the transfer of the original information to the client is incidental to the data processing service. This transfer of information is not taxable.
Data processing contracts usually provide that the person will receive the client’s source documents, record data in machine readable form, such as on discs or magnetic tape, make necessary corrections, create original information as the result of the processing, and then provide tabulated listings or record output on other media. This constitutes a data processing service even if the total charge is broken down into specific charges for each step.
Examples of nontaxable data processing services include, but are not limited to, accounting reports, accounts receivable, accounts payable, sales analysis, inventories, payrolls, and tax reports.
“Processing a client’s data” does not include:
- An agreement providing solely for the reformatting of data or preparation of a proof listing or the performance of an edit routine or other preprocessing; this is taxable
- The using of a computer as a mere printing instrument, as in the preparation of personalized computer-printed letters; this is taxable
- The mere converting of data from one medium to another; this is taxable or
- An agreement under which a person undertakes to prepare artwork, drawings, illustrations, or other graphic material where the graphic material is transferred onto storage media; this is taxable. Note, however, that graphic material furnished incidentally for the performance of a nontaxable service is not subject to tax. For example, graphics furnished in connection with the performance of architectural, engineering, accounting, or similar nontaxable professional services are not subject to tax.
Processing of a client’s data must not be confused with the term “processing” as is done by a manufacturer. The processing exemptions for manufacturing are not the same as for data processing.
Company H contracted with Company I to process the results of a consumer market survey. H sent the raw data consisting of completed questionnaires to I. I entered the data into its computer, tabulated the results, and analyzed the research. I presented H with a printed report with its conclusions and a magnetic tape containing all the tables and graphs. I’s charges are for the service of processing a client’s data and are not for the sale of tangible personal property.
An auto parts retailer hires a data processing firm to optically scan and record its parts book on a computer disk. No analysis or other service is performed regarding the data. Essentially, this is the same as making a copy of the parts book and the transaction is, therefore, a sale of tangible personal property.
“Storage media” includes hard disks, compact disks, floppy disks, diskettes, disk packs, magnetic tape, cards, paper tape, paper, books, film, videotape, audio tape, cassette, coding sheets, record, drums, microfilm, or other media or devices used for storage of information readable by a computer.
Tax applies whether title to the storage media on which the canned software is recorded, coded, or punched passes to the customer or the software is recorded, coded, or punched on storage media furnished by the customer. A fee for the temporary transfer of possession of storage media for the purpose of direct use to be recorded, coded, or punched by the customer or by the lessor on the customer’s premises is taxable.
Gross receipts from the rental of films, video disks, video cassettes, and any computer software on storage media (other than rental of custom software) are subject to tax when rented to the general public.
Gross receipts from royalties, copyright, and license fees are subject to tax if a tangible medium is transferred by the seller.
Charges made for the use of computer equipment on a time-sharing basis, where access to the equipment is by means of remote facilities, are not subject to tax. Time sharing which is, in fact, a rental of equipment, and the lessee exercises the right of possession or control over the equipment, is subject to tax unless an exemption for computer hardware rental applies.
Other Exempt Services
Designing of systems, converting of systems, consulting, training, and miscellaneous services.
These services consist of the developing of ideas, concepts, and designs. Common examples of these nontaxable services are:
- Designing and implementing computer systems (for example, determining equipment and personnel required and how they will be utilized)
- Designing storage and data retrieval systems (for example, determining what data communications and high speed input-output terminals are required)
- Converting manual systems to automatic data processing systems, converting present automatic data processing systems to new systems (for example, changing a second generation system to a third generation system)
- Consulting services (for example, study of all or part of data processing system)
- Feasibility studies (for example, studies to determine what benefits would be derived if procedures were automated)
- Evaluation of bids (for example, studies to determine which manufacturer’s proposal for computer equipment would be most beneficial)
- Providing technical help such as analysts and programmers, usually on an hourly basis.
- Writing (coding) and testing of programs, such as contract programming. These services result in the production of customized programs. This type of service is not taxable because programming requires the development or ascertainment of information, and the evaluation of data, in addition to other development skills
Persons engaged in providing nontaxable computer services are the consumers of all tangible personal property used in such activities, and tax must be paid on their acquisition of such property.
Installation of a computer or related equipment can include the taxable service of electrical or electronic installation. Electrical or electronic installation are exempt only when performed on or in connection with new construction, reconstruction, alteration, expansion, or remodeling of real property. Nontaxable services which are a part of computer installation are not taxable if separately contracted for, or where no contract exists, and separately stated on the invoice. An example of a nontaxable service is the set-up of a computer.
Pickup and Delivery Charges
Pickup and delivery charges are not taxable when separately contracted for or, where no contract exists, are separately invoiced.
Taxability of Other Items
Persons who sell or lease computer equipment may provide a number of training services with the sale or rental of their equipment. Training services, per se, are not subject to tax. Training materials, such as books furnished to the trainees for a specific charge, are taxable.
Materials and Supplies
Materials and supplies are taxable, unless purchased for resale.
When additional copies of records, reports, tabulations, etc., are sold, tax applies even if the original record, report, or tabulation was considered incidental to a service. Charges for copies produced by means of photocopying, multilithing, or by other means are subject to tax.
“Additional copies” are all copies in excess of those produced on multipart carbon paper simultaneously with the production of the original and on the same printer, whether the copies are prepared by rerunning the same program, by using multiple simultaneous printers, by looping a program such that the program is run continuously, by using different programs to produce the same output product, or by other means.
If no separate charge is made for the additional copies, tax applies to that portion of the gross receipts which the cost of the additional computer time (if any) and the cost of materials and labor cost to produce the additional copies bear to the total job cost. Tax applies to a contract where data on magnetic tape are converted into combinations of alphanumeric printing, curve plotting or line drawings, and put on microfilm or photorecording paper.
The addressing of material to be mailed, with names and addresses furnished by the customer or by the service provider, is not taxable. Similarly, where a service bureau prepares, through the use of its automatic data processing equipment or otherwise, labels to be affixed to material to be mailed, with names and addresses furnished by the customer or maintained by the service bureau for the customer, tax does not apply to the charge for producing the labels, regardless of whether the service bureau itself affixes the labels to the material to be mailed. However, tax would be due on any tangible personal property, such as labels, consumed by the service bureau in performing its service.
Services of a Machine Operator
The services of a machine operator, such as a data processor, key punch operator, or the operator of any other computer-related equipment, hired to operate another person’s machinery or equipment are subject to tax when contracted for and performed by someone other than an employee of the owner of the machinery and equipment.
Iowa use tax is complementary to the Iowa sales tax. The general rule is that if taxable tangible personal property or taxable services are purchased outside of Iowa for use or consumption in Iowa the sale is subject to Iowa use tax. In most cases, these are purchases made from out-of-state suppliers, catalogs, or magazines, or television, radio or Internet vendors. If the seller has not collected Iowa tax, the purchaser must pay the use tax directly to the Iowa Department of Revenue. The total gross purchases must be reported and the tax remitted in the quarter in which the purchase occurred.
Businesses or persons that have an Iowa sales tax permit can report the purchase and pay the tax due on its quarterly sales tax return on Line 2 “goods consumed.”
If purchases are ongoing, the buyer must apply for a consumer’s use tax permit.
Others who make these kinds of purchases only rarely can pay the use tax to Iowa by sending a note listing the items purchased and their prices and explaining that the check (payable to “Treasurer, State of Iowa”) is for use tax. This can be sent with the Iowa income tax return.
When state sales or use tax is paid to another state on goods or services that are also subject to Iowa use tax, a credit may be allowed. The credit cannot exceed the state use tax rate.
Consumers who make out-of-state purchases and pay sales tax to another state at a rate less than the Iowa use tax must pay the difference to Iowa.
Through June 30, 2008, Iowa had two local option sales taxes: the “regular” local option sales tax (LOST) and the school infrastructure local option tax (SILO).
Beginning July 1, 2008, SILO is no longer collected as a separate tax. The "regular" local option tax remains in effect.
Within a county, some cities may have the local option tax, some may not. Also, the unincorporated area of a county may or may not have the tax.
Tax applies if “delivery” of the taxable goods or services occurs within a local option jurisdiction. “Delivery” is the location in which ownership of tangible personal property is transferred from the seller to the buyer or the location in which a service is rendered, furnished, or performed. If delivery occurs in a local option tax jurisdiction, then the local option tax must be collected on the transaction.
As a general rule, local option tax is collected on the sale of the same services and tangible personal property that are subject to the state sales tax and delivered in those jurisdictions.
Local option lists are updated in June and December for the July 1 and January 1 effective dates.
There is no local option use tax; therefore, those sales that are subject to a use tax, such as motor vehicles, are not subject to local option sales tax.