2020 has been a challenging year for nearly everyone, especially for small businesses. In response to the COVID-19 pandemic, many retailers have established or strengthened their online presence to make sales to their customers or perhaps reach new ones. While retailers with physical locations in Iowa are likely aware they should obtain an Iowa sales tax permit and collect on sales of taxable products and services, some retailers may not be aware that online sales are also taxable or that sales made online to customers outside of Iowa may require collection of sales tax in another state.
Online and Marketplace Sales Guidance
In 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair. The Court overruled Quill Corp. v. North Dakota and the requirement that a retailer must have a physical presence in a state before the retailer can be required to collect sales tax in the state. Also in 2018, Iowa enacted legislation modernizing and expanding the types of businesses required to collect Iowa sales tax. This law change took effect on January 1, 2019. View South Dakota v. Wayfair for more information about that change. Nearly every other state in the country that imposes a sales tax has also modified its law to require collection of sales tax on sales made to in-state customers by “marketplace facilitators” and out-of-state sellers, often referred to as “remote sellers,” that meet or exceed certain thresholds. In Iowa, marketplace facilitators and remote sellers must collect sales tax on sales into Iowa if their gross revenue from sales into Iowa is $100,000 or more in a current or preceding calendar year.
Retailers are responsible for collecting a total of 7 percent for sales tax on taxable sales made at their physical locations in most of Iowa: 6 percent for statewide sales tax, and 1 percent for locally-imposed “local option sales tax,” or LOST. Almost all local jurisdictions, meaning municipalities and counties, in the state impose LOST. For sales made by a retailer online, the retailer is responsible for collecting LOST, if applicable, and reporting LOST collected on the retailer’s Iowa sales tax return. This means retailers need to know the proper location to which the sale should be “sourced.” For most online sales, the delivery address will determine where the sale is sourced and the tax due.
Some retailers utilize a third-party vendor, often a mobile app, to facilitate sales online. If that third party qualifies as a “marketplace facilitator” under Iowa’s definition and exceeds the threshold, the third party should be collecting and remitting sales tax on sales in Iowa. Very generally, a marketplace facilitator is a person that makes goods or services available for sale on a marketplace and collects the payment for transactions of those goods or services. This includes large online platforms such as Amazon and eBay, food delivery apps like Grubhub and DoorDash, and other restaurant takeout services, like Toast and ToGoOrder. If the marketplace facilitator does not collect sales tax in Iowa for whatever reason, the retailer and marketplace facilitator can both be held responsible for collecting and remitting the tax. Retailers should confirm their marketplace facilitators are properly collecting and remitting tax on the retailers’ sales in Iowa (and elsewhere).
Iowa retailers making sales online directly to customers are responsible for collecting and remitting tax for all taxable sales to Iowa customers and on taxable sales to customers in other states, if the retailer meets or exceeds the thresholds in those states. Retailers who have expanded their online sales presence due to the challenging circumstances should make sure they are in compliance with the sales tax requirements in Iowa and all other states.
Iowa is a full member of the Streamlined Sales Tax Governing Board (Streamlined) along with 23 other states. Streamlined member states have worked with the business community for over 20 years to make state sales and use tax systems simpler, more uniform, and more efficient for sellers to administer. Streamlined compiled this table of economic nexus thresholds in all states as a resource for remote sellers.
In addition to this information about economic nexus thresholds for sales tax collection, to assist you in complying with the registration, collection, and remittance requirements, Iowa and other Streamlined member states have:
- Developed the Streamlined Sales Tax Registration System (SSTRS) that allows you to register with any or all of the 24 Streamlined states, by completing one simple online application at no cost to you.
- Entered into contracts with certified service providers (CSPs) and agreed to compensate the CSPs for handling your sales and use tax calculation, reporting, and remittance requirements for each of the member states in which you sell goods and services.
- Completed a taxability matrix that helps you determine the taxability of various categories of products in their state.
- Developed rate and jurisdiction databases that identify the state and local tax rates that apply in their state based on the street address or zip code.
- Adopted a uniform Sales and Use Tax Exemption Certificate that can be used to claim applicable exemptions from sales tax in the Streamlined states.