On May 30, 2018, Iowa’s Governor signed Senate File 2417. Among other things, it applies Iowa’s 7% sales tax to sales over the internet in Iowa. 1
Retailers with nexus to Iowa were already required to collect and remit sales taxes for sales of goods to Iowans based on the U.S. Supreme Court decision in Quill Corp. v. North Dakota. Generally, a seller has nexus to a state if it has a regular physical presence in the state. 2
Iowa’s new internet sales tax is applicable to all retailers, regardless of nexus, who sell and deliver taxable goods or services into Iowa and is not effective until January 1, 2019. This gives the Iowa Department of Revenue time to draft rules and to design and install systems to identify and communicate with out-of-state retailers about registration. More importantly, it gives the U.S. Supreme Court time to issue its decision in South Dakota v. Wayfair, Inc. which is expected in June. If the Supreme Court allows South Dakota to require Wayfair to collect and remit sales taxes to South Dakota, then the Iowa Department of Revenue intends to commence enforcing its new internet sales tax on New Year’s Day 2018.
Internet Marketplace Facilitators, Sellers, Referrers, and Specified Digital Products
If Iowa’s plan to tax nonresident internet retailers is legal, here is an overview of how it works. Generally, companies like Amazon and eBay, and all internet sellers, referrers, or “facilitators” who receive some direct or even indirect value for facilitating an internet sale, will be required to collect and remit Iowa sales taxes for taxable sales of personal property, services, and “specified digital products” shipped or downloaded into Iowa above a certain threshold. If they do not collect and remit, then the Iowans receiving the products and services are liable for the tax. More specifically, new Iowa Code § 423.14A applies the Iowa sales and use tax to “sales of tangible personal property, services or specified digital products sourced to this state…or that are otherwise sold in this state or for delivery into this state. It defines four new important terms: “marketplace facilitator,” “marketplace seller,” “referrers,” and “specified digital products.” Marketplace facilitators and referrers help marketplace sellers make sales and generally are required to collect and remit the Iowa sales tax upon the sales price of all taxable property and services, now including specified digital products. 3
A party is a marketplace facilitator if it does two things:
Directly or indirectly makes available for retail sale in Iowa, on behalf of a marketplace seller, tangible personal property, taxable services, or specified digital products through any, “forum including a shop, store, booth, catalog, internet site, or similar forum.”
Collects the sales price, processes the payment, or receives “other consideration” related to a retail sale in Iowa including by any way of either actual or virtual currency.
Marketplace facilitators include Amazon, eBay, etsy, as well as some traditional stores such as Wal-Mart and Sears, because they make money facilitating internet sales for themselves or third-parties. 4
A “marketplace seller” is anyone who makes a retail sale through a “marketplace facilitator” or a “referrer”. For example, any retailer such as Under Armour which routinely uses Amazon to put its merchandise into e-commerce is a marketplace seller. When Under Armour sells merchandise to Iowans from orders placed through its own website, it is both the marketplace facilitator liable to collect and remit the tax and the marketplace seller using the e-commerce facilities.
A “referrer” is a person or company that lists or advertises for sale on its electronic or physical medium a seller’s products or services and thereby refers potential Iowa customers to the seller and receives any kind of consideration from the retailer, seller or marketplace facilitator for the service, but who does not collect the sales proceeds from the buyer for the seller. A referrer includes electronic platforms where the buyers and sellers find each other, but which do not touch the money. Amazon and eBay are referrers when they advertise and facilitate private sales for third parties.
As a catch-all, Senate File 2417 also taxes retailers paying click-fees and the like to “solicitors” located in Iowa. It presumes that a retailer has a solicitor resident in Iowa if the resident, “directly or indirectly refers potential customers, whether by link on an internet site or otherwise, to the retailer.” For example, if an out-of-state lawn equipment or supply retailer seller pays me to link its website on my Iowa gardening blog, then it must collect and remit sales taxes on any related sales, regardless of whether it has any other nexus to Iowa. Retailers with Iowa gross sales of $10,000 or less in the preceding and current year are exempt for sales tax on sales associated to an Iowa solicitor.
Specified Digital Products
Senate File 2417 introduces the Iowa sales tax to “specified digital products.” These are “electronically transferred digital audio-visual works, digital audio works, digital books, or other digital products” including all music, movies, ringtones, apps, greeting cards, games, news, and the like. This new sales tax will apply to all of the online sources you use daily like Netflix, hulu, Spotify, Google Play Store and Apple. Apple has charged sales tax on online purchases of their physical goods like laptops and iPhones since the opening of their first Apple store in Iowa in 2004. Under Iowa’s new law, it will also be required to charge sales tax on apps, music, movies, books, software and other digital products. If you are the parent of a child in college, you are probably familiar with the online access codes needed to access specific textbook content online. These book publishers, including Cengage, Harcourt, Palgrave MacMillian, and others, will have to contend with the new law as well.
Like all other states, Iowa has a use tax as a parallel to its sales tax. Senate File 2417 extends the Iowa use tax to users of specified digital products. If a nonresident retailer does not collect and remit the sales tax when required, the buyer is then responsible for this parallel tax, which is called the use tax when its assessed upon the user of the merchandise. Use tax has always applied to tangible personal property. Now it also applies to music, movies, ringtones, apps, greeting cards, games, news feeds, etc.
The State of Iowa expects the sales tax increases in SF 2417 to produce an additional $67 million in 2019 and grow to an additional $178 million in 2024.
An Exception for Small and Low Volume Players, Facilitators, Referrers, and Sellers
There is a di minimis exception from the requirement to collect and remit sales taxes for small and small volume marketplace facilitators, referrers, and marketplace sellers. Such a facilitator, seller, or referrer without Iowa nexus is exempt if it has less than $100,000 in Iowa sales and less than 200 Iowa sales during the preceding or current calendar year. I don’t know what a non-resident facilitator, seller or referrer is supposed to do if it unexpectedly passes the threshold on New Year’s Eve.
Note, there is a difference in expectations for sellers to collect sales tax if the sales platform used has higher volumes. For example, a specialty retailer in Wyoming may use both its own website and Amazon to sell products that Iowans can purchase. The sales facilitated exclusively by its own website are exempt if total sales into Iowa are less than the dollar and unit volume thresholds. However, its sales to Iowans through Amazon are never exempt because of Amazon’s high dollar and unit volumes given all its many unrelated products marketed to Iowans.
The Snitch List
Referrers like Amazon and eBay can push their sales tax collection and remittance liabilities over to buyers by posting a conspicuous notice on their platforms and collecting and delivering a detailed monthly list of Iowa buyers to the Iowa Department of Revenue. I am calling it the snitch list. Presumably, Iowa buyers on the monthly snitch list will be getting use tax invoices, including penalty assessments, from the Department of Revenue. You used to love Amazon and eBay because they helped you find great products from far-away locations. Now, they have the choice of either becoming Iowa’s unpaid tax administrators, or selling you out to the Department of Revenue.
The Internet Tax Freedom Act
Iowa’s application of its sales tax to internet sales may prove to violate federal law. The Internet Tax Freedom Act is a federal statute made permanent in 2016. It does not prohibit state taxation of sales over the internet. Instead, it prohibits Iowa from taxing retailers without a physical presence in Iowa more than it taxes Iowa retailers for the same or similar merchandise. It also prohibits shifting the obligation for the tax to a person other than the retailer or the buyer. On its face, the new Iowa law appears to violate the foregoing prohibitions. Senate File 2417 discriminatorily taxes all sales facilitated by the internet, “even if such seller would not have been required to collect and remit sales and use tax had the sale not been made through such marketplace.” It also shifts the burden for collecting and remitting, or otherwise paying, Iowa sales tax to market facilitators and referrers like Amazon and eBay. Typically, a seller’s agent would not be responsible to collect and remit sales tax. Perhaps the U.S. Supreme Court will address the Internet Tax Freedom Act and these issues in its ruling in South Dakota v. Wayfair, and perhaps it will not. Iowa’s new internet sales tax will have to withstand scrutiny under the Internet Tax Freedom Act.
States like Iowa are counting on the taxation of e-commerce to balance their budgets and subsidize local income tax cuts. If the U.S. Supreme Court allows South Dakota to tax Wayfair, then the Iowa Department of Revenue will be busy drafting rules to implement Iowa’s new internet sales tax laws before the January 1, 2019 effective date. The changes in Iowa code brought by SF 2417 are complex, and the new rules are going to be at least as complex. The Iowa Department of Revenue routinely expands the scope of new tax laws when it adopts rules. Until these rules are drafted and available, no one can be totally sure about how the Department of Revenue will interpret SF 2417. We will be busy interpreting and helping shape the new rules for our retailer clients.
Including 6% state wide sales tax plus 1% local option tax.
504 U.S. 298 (1992)
Marketplace facilitators and marketplace sellers subject to Iowa’s internet sales tax will be required to collect and remit taxes based both on the general Iowa sales tax rate of 6% for all sales, plus the local option sales tax rate of 1%. Sales to buyers located in counties and municipalities having elected the local option sales tax will have to collect the additional 1% sales tax. Presently, although Iowa has only 99 counties, there are 1,371 local option sales tax jurisdictions, 1,299 of which have elected the local option tax.
Interestingly, Craigslist may not be a marketplace facilitator or “referrer” because in most cases, including sales in Iowa, it does not charge any fee or receive other consideration. However, if it changes its policy and begins even to accept banner ads viewable in Iowa, then it may become a marketplace facilitator required to either collect and remit the tax, or snitch on its sellers as discussed herein.