Internet access remains tax exempt
Internet access and internet access service remains exempt from sales and use tax in Iowa. Iowa is prohibited by Federal law from imposing a sales or use tax on internet access service.
While many new products are now subject to tax, there are two new sales tax exemptions for businesses that apply specifically to specified digital products and related services.
Commercial enterprise exemption - Iowa Code section 423.3(104)
Beginning January 1, 2019, there is a new sales tax exemption for certain sales to “commercial enterprises.” For this exemption, a “commercial enterprise” means any of the following:
- Businesses and manufacturers (for profit only)
- Insurance companies (nonprofit and for-profit)
- Financial institutions (nonprofit and for-profit)
- Professions and occupations as defined in Iowa Administrative Code rule 701-230.18(3)(c) (such as medical offices, law firms, farming operations, etc.)
With the exception of insurance companies and financial institutions, other non-profit entities are not eligible to claim this exemption, although these purchases may still be exempt under other exemptions.
The following are exempt from sales tax when purchased by a commercial enterprise and used exclusively by or furnished to that commercial enterprise:
- Specified digital products
- Prewritten computer software
- The following services:
- Storage of tangible or electronic files, documents, or other records
- Information services
- Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products; and
- Software as a service
Importantly, a commercial enterprise may only claim the exemption if the products listed above are used “exclusively” by that commercial enterprise. For purposes of this exemption, “exclusively” means that any non-commercial uses are de minimis.
The Department is currently in the process of finalizing administrative rules implementing this exemption.
Non-end user exemption-Iowa Code section 423.3(105)
Sales of specified digital products are exempt from sales tax when sold to a “non-end user.” For purposes of this exemption, a “non-end user” means any person who contracts to receive specified digital products for further commercial broadcast, rebroadcast, transmission, retransmission, licensing, relicensing, distribution, redistribution, or exhibition of the product, in whole or in part, to another person. In other words, only sales of specified digital products to end users are subject to sales tax.
There are also several existing exemptions to which specified digital products have been added--many of which also include services and would apply to the new services described below. Example: Prior to January 1, 2019, legal aid organizations were exempt from paying sales and use tax on their purchases of tangible personal property and taxable services. Beginning January 1, 2019, those purchases remain exempt, and in addition, legal aid organizations are exempt from paying sales and use tax on their purchases of specified digital products and new taxable services.