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Tax And Business Climate In Iowa



Iowa Tax Climate

This month we travel to the Midwestern state of Iowa, the Hawkeye State. Sitting between the Missouri and Mississippi Rivers, the state is known for its rolling plains and cornfields.

Iowa has a humid continental climate throughout the state with extremes of both heat and cold. The average annual temperature at Des Moines is 50 degrees Fahrenheit. Winters are often harsh and snowfall is common. Iowa summers are known for heat and humidity, with daytime temperatures reaching 90 degrees.

Spring ushers in the beginning of severe weather season. Iowa averages about 50 days of thunderstorm activity per year. Iowa averages about 47 tornadoes per year. However, 2008 had the most tornadoes ever in a year: 105!

Most of the state consists of rolling hills. Iowa can be divided into eight landforms based on glaciation, soils, topography, and river drainage. The Loess hills lie along the western border of the state, some of which are several hundred feet thick. These hills are a clastic, predominantly silt-sized sediment that is formed by the accumulation of wind-blown dust. Northeast Iowa, along the Mississippi River is part of the Driftless Zone, consisting of steep hills and valleys which appear almost mountainous. The state’s northwest area has remnants of the once common wetlands, such as Barringer Slough.

Business Climate

While Iowa is often viewed as a farming state, in reality agriculture is a small portion of a diversified economy, with manufacturing, biotechnology, finance and insurance services, and government services contributing substantially to Iowa’s economy. This economic diversity has helped Iowa weather the late 2000s recession better than most states, with unemployment substantially lower than the rest of the nation.

Manufacturing is the largest sector of Iowa’s economy. Major manufacturing sectors include food processing, heavy machinery, and agricultural chemicals. Sixteen percent of Iowa’s workforce is dedicated to manufacturing.

Food processing is the largest component of manufacturing. Besides processed food, industrial outputs include machinery, electric equipment, chemical products, publishing, and primary metals. Companies with direct or indirect processing facilities in Iowa include ConAngra Foods, Wells Blue Bunny, Barilla, Heinz, Tone’s Spices, General Mills, and Quaker Oats. Meatpacker Tyson Foods has 11 locations, second only to its headquarter state Arkansas.

Agriculture has been a major component of Iowa’s economy. The state’s main agricultural outputs are hogs, corn, soybeans, oats, cattle, eggs and dairy products. Iowa is the nation’s largest producer of ethanol and corn and is one of the largest growers of soybeans.

Tax Climate

The top individual income tax rate is 8.53% and the top corporate income tax rate is 9.8%.

Apportionment: Iowa taxpayers apportion income using a sales formula.

In Iowa, receipts from services are sourced based on the location of the taxpayer’s market for the service, also known as market-based sourcing.

Sales Tax Structure

The state sales tax rate is 6% and the highest combined rate is 6.94%.

Generally, sales of digital products in Iowa are taxable. Iowa imposes sales and use tax on sales of prewritten computer software delivered electronically. Iowa also imposes sales and use tax on sales of custom computer software delivered electronically. The state imposes sales and use tax on sales of software as a service (SaaS), with a few exceptions. How products are produced, sold and delivered is critical to determining the tax status.

Iowa has an economic nexus law where if an out of state seller sells $100,000 in sales only into the state, sellers need to collect and remit sales tax on those transactions. This threshold applies to all transactions in the current or previous calendar year. Transactions that are included in the threshold include gross revenue from sales of tangible personal property, specified electronically delivered products, electronically delivered services into the state, exempt sales and exempt services. There are no excluded transactions in the threshold. This legislation went into effect on January 1, 2019.

A marketplace facilitator that meets the economic nexus threshold and makes or facilitates Iowa sales on behalf of itself or one or more marketplace sellers must collect and remit sales tax on each facilitated taxable Iowa sale. The Iowa Department of Revenue is authorized to establish and impose notice and reporting requirements for remote retailers, including marketplace facilitators who don’t collect and remit sales and use tax. However, it hasn’t done so. This legislation was enforced on January 1, 2019.

Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Iowa has a yearly holiday that is held the first Friday and Saturday of August. For more information on this holiday, click here.

Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Iowa or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Call us to help you achieve the best tax efficiencies.

Random Facts

  • The famous actor John Wayne was born in Winterset on May 26, 1907.
  • Kalona is the largest Amish community west of the Mississippi River.
  • The world best-renowned dance and gymnastics school is situated in Iowa.
  • Herbert Hoover, of Iowan descent, was the 31st president of the United States (1929-1933) and the first one born west of the Mississippi River.
  • Iowa is the only state name that begins with two vowels.
  • Iowa is the only state whose east and west borders are formed entirely by rivers.
  • Decorah hosts Nordic Fest, a three-day celebration of Decorah’s Scandinavian Heritage.
  • Iowa has more golf courses per capita, than any other state.

Have a question? Contact Monika Miles.

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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