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Water Service Excise Tax

Where Does this Money Go?

Who is Subject to the WET?

What is Suject to WET?

Permits

Filing of Returns & Deposits/Payment of Tax

Questions and Answers



Updated Sept 28, 2018











In 2018, the Iowa legislature passed a new law, SF 512, effective July 1, 2018, which creates a Water Service Excise Tax (WET). Prior to the enactment of this law, the sale of water was subject to the 6% state sales tax. The WET exempts the sale of water service from state sales tax, but imposes a 6% excise tax on the sale of water service.

Some entities that make sales of water service and other goods or services will now have to separately collect and remit the 6% excise tax on water service sales in addition to state sales tax on other goods or services. For example, if an entity that sells both sewage and water services is currently collecting and remitting state sales tax on sewer charges to nonresidential commercial customers, they will continue to collect this portion as sales tax plus any applicable local option sales tax. However, the entity will no longer collect state sales tax on the sale of water service, but will collect the WET on the sales of water service.

NOTE: Beginning July 1, 2018 - water utilities must separately collect and remit WET under a new permit number.
Beginning January 1, 2019 - the sale of water service and WET must be separately itemized on bills and receipts. 

Watch this site for periodic updates to information regarding WET. To receive information about WET, sign up here. After providing your email, choose the Water Service Excise Tax option under the Tax Information drop down. You also can subscribe to other tax information at the same time.  Email us if you have questions not answered below.

Where Does this Money Go?

Over the life of the WET, a portion of the total taxes collected will be distributed into two funds—the water quality infrastructure fund and the water quality assistance fund—which will provide money to the Department of Agriculture and Land Stewardship and the Iowa Finance Authority. These funds will be used to improve water quality in Iowa. The remaining portion of WET that is not distributed into either of these funds will be deposited into the General Fund.

Who is Subject to the WET?

The WET applies to the sale of water service by water utilities.

Water service means the delivery of water by a piped distribution system. A water utility means any person, partnership, business association, or corporation, including municipally owned corporations, domestic or foreign, who owns or operates any facilities for making sales of water service to the public for compensation.

For purposes of WET, a facility is any storage tanks, water towers, wells, plants, reservoirs, aqueducts, hydrants, pumps, pipes, or any other similar devices, mechanisms, equipment, or amenities designed to hold, treat, sanitize, or deliver water.

When Water Service is Furnished for Compensation

Water service is furnished for compensation when water service is 1) sold for a separately itemized price, or 2) when the price of the water service is identifiable from an invoice, bill, catalogue, price list, rate card, receipt, agreement, or other similar document, including where the total sales price increases when water service is included in the sale. Water service is not furnished for compensation when the provision of water service is incidental to the rental of real property.

Itemized Sale of Water Service

1) A Homeowners Association (HOA) owns or operates a well located in a small community. Homes in the community are connected to the well via pipes, and every home pays $20 to the HOA for access to the water and associated maintenance on the water distribution system. Only homes who pay the $20 are provided water service. The HOA is a water utility because it owns or operates a facility (the well) and provides water service for compensation. The HOA must therefore collect and remit WET on the $20 monthly fee paid by each member. 

2) An apartment owner purchases water from a city water utility and distributes the water to each unit through a system of pipes. The city meters the apartment owner’s use of water each month and charges the apartment owner for the water service. The apartment owner separately bills each of the tenants $40 per month for water service, including the cost of water and maintenance on the water distribution system. The apartment owner is a water utility and must collect and remit water service excise tax on the $40 monthly charge for water service. The apartment owner may purchase the water from the city tax exempt as a sale for resale.

Identifiable Sale of Water Service

3) A campground provides three campsite packages to its customers: 

Package A includes only campsite access for $10 per night. 
Package B includes campsite access and an electrical hookup for $20 per night. 
Package C includes campsite access, an electrical hookup, and water service for $30 per night. 

Sales of Package C by the campground include sales of water service. The campground must collect and remit water service excise tax on $10—the identifiable sales price of water service. 

Water Service Incidental to Rental of Real Property

4) Water service sold with real estate rental for one non-itemized price. A Manufactured Housing Community (MHC) owner owns a well and pipes water to the lots. The MHC owner charges tenants $500 per month for each unit. Water from the well is included in the $500 rental charge. The MHC owner does not charge a flat water fee, does not charge tenants based on their actual water used, and does not offer comparable lots at a lower price that do not have access to water service. The MHC owner is not required to collect or remit water service excise tax because water is not being furnished for compensation; it is incidental to the rental of real property.

5) Water service purchased sold with real estate rental for one non-itemized price. A manufactured housing community (MHC) purchases water from a city water utility, and distributes the water to each lot in the community through a system of pipes. The city meters the MHC’s use of water each month and charges the MHC for the water service and the applicable water service excise tax. The MHC charges its tenants $500 for lot rental. As in the previous example, the MHC owner does not charge a flat water fee, does not charge tenants based on their actual water used, and does not offer comparable lots at a lower price that do not have access to water service. The MHC owner is not required to collect or remit water service excise tax because water is not being furnished for compensation; it is incidental to the rental of real property.

What is subject to WET?

The tax on water service applies to any fees or charges that are integral to the furnishing of water by piped distribution system. Below are examples of types of fees that are and are not subject to WET. Importantly, if a fee is not subject to WET, it still may be subject to sales or use tax and the applicable local option tax. 

Note: The terminology used to refer to various water services may differ from utility to utility. Regardless of how water utilities refer to these services, the Department will look to the substance of the service to determine if it is subject to tax. 

Fees/charges subject to WET. In general, includes sales that are integral to the furnishing of water service by a water utility, even if itemized.

Non-itemized sales of tangible personal propertyIf the sale of tangible personal property is not sold for an itemized price, and is instead bundled with the sale of water service, then the entire sales price is subject to WET.
Water chargeThe actual cost of the amount of water purchased by the customer, whether metered or not.
Service/account charges and administrative feesIncludes new customer account charges and minimum charges for access to water service whether the customer uses the water or not. If these fees are shared for different services, only that portion charged for water service is subject to WET.
Connection, disconnection, and reconnection feesFees related to the connection or reconnection to, or disconnection from, a water supply or water distribution system.
Maintenance, inspection, and repair feesIncludes such fees as they are related to the water distribution system, water supplies, and facilities, including fees for labor and non-itemized fees for materials.
Water meter fees & tap feesFees charged for use of water meters & taps (note: the sale, including rental, of water meters is the sale of tangible personal property).
Water distribution system infrastructure and improvement feesFees charged for the overall improvement of the water distribution system. 

Fees/charges not subject to WET. In general, must be sold for an itemized price and distinguished on bills and receipts. 

Itemized and separately charges sales of tangible personal propertySales or rentals of tangible personal property by a water utility that has a separetly itemized price on a water bill are not subject to the water service excise tax, but may be subject to sales and use tax. 
Residential service contracts (Chapter 523C)Includes optional “water line insurance” coverage. 
Returned check feesFees charged for returned checks.
Deposit feesIncludes check deposit fees and meter deposit fees.
Fees for printed bills, statements, labels, and other documentsFees paid for printed copies of documents provided by a water utility.
Delinquent account feesIncludes late charges and non-payment fees.
Leak detection feesFees charged for leak detection services

Other enumerated services not subject to WET. In general, includes other enumerated services found in Iowa Code section 423.2(6)(a). May be subject to sales tax.

Paint for hydrantsPainting of hydrants constitutes painting services under Iowa Code section 423.2(6)(a), and is subject to sales tax, not WET.
Plumbing/pipefitting Some repairs of a water distribution system may constitute plumbing and pipefitting under Iowa Code section 423.2(6)(a), and are subject to sales tax, not WET. 

Importantly, all sales tax exemptions in Iowa Code section 423.3, except the water service exemption, apply to WET. For example, qualifying sales related to new construction (Iowa Code section 423.3(37)) and environmental testing (Iowa Code section 423.3(102)) are exempt from WET.

Permits

All water utilities must apply for and obtain a new permit to collect and remit WET. The process to obtain a WET permit is very similar to the process for obtaining a sales tax permit, and the requirements for sales tax permits under Iowa Administrative Code chapter 701-13 will apply to WET permits. Simply print and complete this form and submit it to the following:

Fax:  515-281-3906

Mail: Registration Services
         Iowa Department of Revenue
         PO Box 10470
         Des Moines, IA  50306-0470

All applications for WET permits must be submitted via mail. There is no electronic permit application.

Filing of Returns & Filing of Deposits/Payment of Tax

Except as otherwise stated on this website, the requirements for filing returns and deposits for sales tax under Iowa Administrative Code chapter 701-12 will apply to WET.

With respect to filing of returns, all water utilities must file quarterly returns. However, if you expect that your annual tax liability for water sales will not exceed $120, you may apply to the Director to file annual returns.

WET filing and payments are handled through the Iowa Department of Revenue eFile & Pay system, found here. The same criteria for determining your filing frequency for sales tax apply to determining your filing frequency for WET. For purposes of determining your filing status, the Department will use the following criteria based on your combined WET and sales tax remittances:

Deposit Filing Status

Threshold

Test Criteria

Semimonthly

Greater than $60,000 in combined annual WET and sales tax (more than $2,500 in a semimonthly period).

Tax (WET + sales) remitted in 3 of most recent 4 quarters examined exceeds $15,000 per quarter.

MonthlyBetween $6,000 and $60,000 in combined annual WET and sales tax (more than $500 in a monthly period).Tax (WET + sales) remitted in 3 of most recent 4 quarters examined exceeds $1,500 per quarter.
QuarterlyBetween $120 and $6,000 in combined annual WET and sales tax.Tax (WET + sales) remitted in 3 of most recent 4 quarters examined exceeds $30 per quarter.
AnnuallyLess than $120 in combined WET and sales tax for the prior year.Tax (WET + sales) remitted in prior year is less than $120.

Instructions for filing returns can be found on our website:

Semi-Monthly/Monthly Return Instructions
Quarterly Return Instructions
Amended Quarterly Return Instructions
Annual Return Instructions
Amended Annual Return Instructions

Questions and Answers

Q: Is WET an additional tax on top of sales and use tax for water service

A: No. WET replaces the sales and use tax for sales of water service only.

Q: Is WET subject to the Local Option Sales Tax (LOST)?

A: No. There is no LOST on the WET.

Q: My sales of water service were previously exempt from sales tax. Are my sales of water service still exempt from WET?

A: All of the sales tax exemptions found in Iowa Code section 423.3 that applied to the sale of water service apply to WET.

Q: I have a sales tax exemption certificate because I was previously exempt from paying sales tax on water service. I am now also exempt from paying WET. Can I use this certificate, or must I obtain a new WET exemption certificate?

A: If you are exempt from WET, then an exemption certificate must be on file with the seller. An existing, valid Iowa Sales Tax Exemption Certificate which is currently on file is acceptable. However, if the reason for exemption has changed, you will need to complete a new exemption certificate. The current Iowa Sales Tax Exemption Certificate can be found on our website.

Q: I do not currently collect sales tax for the sale of water service. Must I now collect WET?

A: It depends. Only sales of water service for compensation by certain entities (see “Who is required to collect” above) are subject to WET. Any sales of water service that are 1) sold for an itemized price or 2) separately identifiable on bills, receipts, etc. are subject to WET. Water service that is incidental to the rental of real property or freely available to the public at no cost or compensation with no requirement that users be customers is not subject to WET.

Example: Campground A charges $10 per night for its campsites, which includes access to water service. Campground A only grants access to that water for paying customers. Campground A is therefore making sales of water service for compensation, and must separately collect and remit WET on that portion of the $10 per-night campsite fee that is charged for water service.

Example: Campground B charges $10 per night for its campsites, and on the premises provides access to water service for the public; any member of the public, whether they are a paying customer or not, may use the water service as desired. No portion of Campground B’s $10 per-night campsite fee would be subject to WET.

Where water service is provided in connection with the rental of real property, such as with an apartment unit or lot in a manufactured housing community, water service is not furnished for compensation if the inclusion of water service is incidental to the rental. For example, lot or unit rental prices do not change based on whether water service is included in the rental and water service is not otherwise listed for an itemized or identifiable price on a rental agreement or monthly bill. 

Example: An apartment owner purchases water from a city water utility and distributes the water to each unit through a system of pipes. The city meters the apartment owner’s use of water each month and charges the apartment owner for the water service. The apartment owner separately bills each of the tenants $40 per month for water service, including the cost of water and maintenance on the water distribution system. The apartment owner is a water utility and must collect and remit water service excise tax on the $40 monthly charge for water service. Importantly, the apartment owner may purchase the water from the city tax exempt as a sale for resale.

Example: A Manufactured Housing Community (MHC) owner owns a well and pipes water to the lots. The MHC owner charges tenants $500 per month for each lot rental. Water from the well is included in the $500 rental charge. The MHC owner does not charge a flat water fee, does not charge tenants based on their actual water used, and does not offer comparable lots at a lower price that do not have access to water service. The MHC owner is not required to collect or remit water service excise tax because water is not being furnished for compensation; it is incidental to the rental of real property.

Q: I currently sell water service to my customers, but I do not list it as a separate item. Does this mean I am not required to collect and remit WET?

A: No, you are still subject to WET. Beginning July 1, 2018, water utilities must separate WET from sales tax for collection and remittance to the Department beginning July 1, 2018. By January 1, 2019, WET must be separately itemized and stated on all bills and receipts, and must be identified separately from any other taxes collected, if any. The Department will not monitor how water utilities decide to separately collect and remit WET prior to January 1, 2019.

Q: I charge a minimum cost for water service, regardless of whether the consumer uses that service in a given billing period. Is that cost subject to WET?

A: Yes, the minimum charge for water service is subject to WET. WET is an excise tax on the provision of water service, not only on the metered sale of water. If the minimum charge is for the service itself, then it is subject to WET.

Q: I bill my customers on a cycle that does not begin on the first of the month. Therefore,  the billing period spans across the WET effective date of July 1, 2018. How should I handle this billing?

A: The billing rules for changes in the rate of sales tax on water found in Iowa Administrative Code Rule 701—14.3(9) apply with respect to the switch from sales tax to the water service excise tax. Refer to this rule and the accompany examples to determine how to handle billing periods that span across July 1, 2018.

Q:  It appears that I should have been collecting sales tax on the sale of water piped for compensation previously but I have not. What do I need to do to get into compliance?

A:  You should apply for a Sales Tax Permit and file past returns with your sales information and the amount of tax due. You should also pay any tax, penalty, and interest that is due. You may be a candidate to utilize our voluntary disclosure program.  More information about this program can be located here

Q:  How do I determine my filing frequency for filing and paying WET? 

A: The same criteria for determining your filing frequency for sales tax apply to determining your filing frequency for WET. WET filing and payments are handled through the Iowa Department of Revenue eFile & Pay system, found here