IOWA "REGULAR" LOCAL OPTION SALES TAX (LOST) QUESTIONS AND ANSWERS

For information about:

How is a local option sales tax imposed?
A majority of voters at an election must approve the local option sales tax.

How does the issue of local option sales tax get on the ballot?
There are two ways:

When can a vote on local option tax be held?
The local option tax can be voted on at either a general election or at a special election. The special election can be held at any time other than at a city regular election. The vote cannot be held sooner than 60 days after the notice of the ballot proposition is published.

The question of repeal of the tax or of a rate change can also be voted upon at a general or special election.

Is the election countywide?
The election is countywide, but the tax only applies in the incorporated areas (city) and the unincorporated area of the county where a majority vote in favor of the local option tax.

What happens when cities are contiguous to each other?
All cities contiguous to each other are treated as one large incorporated area, even if located in different counties, subject to a joint county agreement. The tax can only be imposed if the majority of those voting in the total contiguous area approve the tax.

When are two geographical areas contiguous?
They are contiguous when their boundaries are in actual contact or touching. Burd v. Board of Education of Audubon County, 167 N.W. 2nd 174 (IA 1969); City of Walker, et al v. Oxley, et al.

If there is a question whether two geographic areas are contiguous, who will resolve the issue?
The issue must be resolved by the county board of supervisors.

What must the ballot proposition specify?
The ballot must specify:

Questions about elections and ballots should be addressed to the Secretary of State of confirmation; you may telephone at 515/281-5823. Sample ballots are available from the Iowa Secretary of State.

Who needs to be notified of election results?
Imposition, repeal, or change: Within 10 days after the election, the county auditor must give written notice of the results and send an abstract of votes to the Director of the Iowa Department of Revenue. This must be 90 days before the effective date.

If local option is approved by the voters, but a county does not pass the local ordinance as required by law, what happens?
The tax will still be imposed. Passing the ordinance is mandatory. The Linn County District Court in City of Walker, et al vs. Oxley, et al, EQ 93 1 0, June 4, 1986.

How long does a local option sales tax remain in effect once it is imposed?
If a sunset clause is part of the ordinance, the tax remains in effect until that date. If no sunset clause, it stays in effect for an unlimited period. It may also be repealed by election.

For what can the revenue from this tax be used?
Local option tax revenues can be expended for any lawful purpose, but they may not be used for the benefit of a school district.

Can a local option sales tax be repealed?
Yes. To repeal the tax, an election may be called and held in the same manner and under the same conditions as the election which approved the tax. However, only qualified voters of the areas of the county where the tax has been imposed can vote. The tax cannot be repealed before it has been in effect for one year.

The county board of supervisors can, upon its own motion, repeal the local option tax in any unincorporated area of the county where the tax is imposed. For any municipality, the county board of supervisors must, upon receipt of a motion of the governing body of the municipality, repeal the local option tax within that municipality. The tax can be repealed within a municipality which is contiguous to other municipalities.

Can the rate of tax be increased or decreased or a change be made to the designated use of the local option tax revenue?
Yes. The criteria for placing the proposition on the ballot are the same as previously explained. However, only qualified voters of the area of the county where the tax has been imposed can vote. The rate cannot exceed 1 percent.

As of July 1, 2008, a change in the use of local option tax revenues for the purpose of funding an urban renewal project no longer requires an election but can now be done by ordinance of the city council of an eligible municipality.

What are the dates that the tax can be imposed, changed, or repealed?
This tax can be imposed on either January 1 or July 1 only. Repeals can only occur on June 30 or December 31. Any jurisdiction with a repeal date specified in the ballot prior to April 1, 1999, may repeal on the date specified. Imposition or change in rate or use can occur no sooner than 90 days following the election.

The local option tax cannot be repealed or reduced in rate if bond obligations are outstanding unless sufficient funds to pay the principal, interest, and premium, if any, on the outstanding obligation at and prior to maturity have been properly set aside and pledged for that purpose.

What if a tax has been imposed in a portion of a county and now another incorporated or unincorporated area of the county wants to vote on the tax?
 The criteria for placing the proposition on the ballot are the same as previously explained. However, only qualified voters of the area of the county where the tax has not been imposed can vote.

REVENUE ESTIMATES

How can a locality estimate what amount of local option sales tax it might receive?
The Department of Revenue is able to provide an estimate based on general state sales tax data. This estimate would represent the potential collections that would be generated in a county by the retailers collecting local option sales tax for that county.

By August 15 of each fiscal year, a written notice of the monthly estimated local option payments for the fiscal year will be sent to localities.

Since the local option sales tax and the state sales tax are imposed differently based on each transaction, the data is adjusted. For example, the local option sales tax is imposed on goods delivered into a locality. State sales tax statistics are kept on the basis of sales made by merchants within a locality. Local option sales tax is not imposed on room rental or on the sale of natural gas or electric energy in a city where these receipts are subject to a users fee or a franchise fee, to mention just a few differences.

If a locality has made its own estimates, will the Department of Revenue review them?
Yes. Often, local officials are better economic predictors, because they are familiar with the occupation, purchasing and spending patterns in a locality. The Department will review the logic and the variables considered in compiling the estimate.

Can a locality obtain information about sales tax payments made by specific retail establishments?
 Yes. The Department may enter into a written information exchange agreement for tax administration purposes with a county entitled to receive local option sales tax funds. The agreement allows no more than two paid county employees to have access to actual return information. This information cannot be shared with anyone else due to confidentiality requirements.

Note: There are severe penalties in place for any illegal disclosure of this information to any unauthorized individuals. [IA Code "Information Confidential Penalty" 422.20,72, IRS Code 6103(b)]

DISTRIBUTION OF FUNDS

How soon after a local option sales tax is imposed will a locality get its money?
 By August 15 of each fiscal year, a written notice of the monthly estimated local option payments for the fiscal year will be sent to localities.

Ninety-five percent of estimated tax receipts are paid monthly. For example, localities’ estimated monthly tax distributions will be issued for July by August 31.

A final payment of any remaining tax due to a locality for the fiscal year will be made before November 10 of the next fiscal year. If an overpayment to a locality exists for the fiscal year, a reduction of monthly distributions to reflect the overpayment will begin with the November payment.

Will a jurisdiction receive the actual amount of tax collected by merchants in the locality?
 No. The local option tax collected within a county is placed in a special distribution fund. The fund is distributed on the basis of population and property tax levies.

How does the distribution formula work?
Each county's account is distributed on the basis of population (75 percent) and property tax levies (25 percent). The population factor is based on the most recent certified federal census. The property tax factor is the sum of property tax dollars levied by boards of supervisors or city councils for the three years from July 1, 1982 , through June 30, 1985 . The property tax data is compiled from city and county tax reports available in the State Department of Management. Only population and property tax levies of the jurisdiction imposing the tax are used in figuring percentages.

The actual distribution is computed as follows:

D = (.75 x P x Z) + (.25 x V x Z)
D = distribution for the taxing jurisdiction
P = jurisdiction percentage of the population
V = jurisdiction percentage of the property tax levied
Z = the total collections for the county in which the jurisdiction is located.

Examples of an actual distribution are in 701 Iowa Administrative Code § 107.10.

Who will receive the distribution check?
 Checks will be made out to each city and each unincorporated area (county) that imposed the tax.

Is it possible for a jurisdiction without the tax to receive a distribution of local option tax money?
 No. Only the jurisdictions in which the tax is imposed can participate in the distribution.

Are any adjustments made to the monthly remittance of local option tax prior to distribution?
 Adjustments are possible. For example, local option taxes can be refunded to governmental units if imposed on materials associated with construction projects. Erroneous collections can occur which are also subject to refund. Amended sales tax returns will also be filed. Refunds will most likely be identified after distributions for a given tax period have been made; therefore, account adjustments will be necessary.

When a local option tax is repealed, the local option tax monies, penalties, or interest received or refunded within 180 days after the repeal date are distributed; more than 180 days after repeal, funds are deposited into or withdrawn from the state general fund.

What happens to local option taxes which are collected, but it cannot be determined which county is the origin of the money?
 The funds will be allocated to active counties based on special rules filed by the Department. The rules specify distribution be made based on individual county population to total active county population.

NOTIFICATION

Once local option sales tax is imposed, how are businesses informed?
 The Department regularly e-mails newsletters and notices to anyone who has signed up on the Department’s Web site to receive free information by e-mail. A current jurisdiction list is also maintained on the Department’s Web site.

RELATED COSTS

Who pays for reprogramming computers and cash registers for businesses in a jurisdiction imposing a local option tax?
 Businesses are responsible for all programming changes and costs.

NONCOMPLIANCE

What happens if a business fails to collect or refuses to collect local option tax?
 Anyone aware of a problem may contact our Taxpayer Service Section by e-mail or by calling 1-800-367-3388. In most cases, the problems are the result of misunderstandings and not intentional noncompliance.

Whenever the Department audits for state sales tax, it will also audit for local option taxes. The penalties associated with the nonpayment of local option sales tax are the same as those for state sales tax.

APPLYING THE LOCAL OPTION SALES TAX

Is the local option sales tax imposed on the same items as state sales/excise tax?
 Yes, except on:

Are local option sales taxes imposed on cars and trucks?
 No. Vehicles subject to registration are subject to a 5% one-time registration fee rather than a state sales tax. However, the receipts from the rental of cars and trucks can be subject to local option tax. Also, sales of parts and repair services are subject to tax.

Can a county with a local option sales tax impose the tax on items and services not subject to state sales tax?
 No. A local option sales tax cannot be imposed on any property or service not subject to state sales tax, with the exception of residential energy on which the state tax has been phased out, but on which local option tax still applies.

When local option sales tax is figured, is it imposed “on top” of the state sales tax?
 No. It is imposed in addition to, but not on top of, the state sales tax. A taxable sale will be subject to the state sales tax and the local option tax. However, the amount of the sale for purposes of determining the amount of local option sales tax does not include any amount of state sales tax or other local option taxes if a jurisdiction imposes more than one local option tax.

Do retailers have to obtain a special sales tax permit in order to collect local option sales taxes?
 No tax permit other than the state sales tax permit is required or available. Local option tax is remitted to the State of Iowa along with the state sales tax; retailers make no payment directly to a locality.

How and when is local option sales tax remitted to the Department?
 Local option taxes are remitted whenever state sales tax is remitted. Retailers show a breakdown of local option taxable sales and tax by county on quarterly and annual returns. Paper deposits and returns are not mailed; filing is through eFile & Pay. (Note that the amount of local option tax collected is not used to determine how frequently a retailer should file.)

When does the tax apply to a sale?
 As with the state sales tax, the local option sales tax is remitted for the tax period in which the tangible personal property is delivered to the customer. Even if the customer has not paid for the merchandise, the tax is due when delivery occurred.

For taxable services, the retailer remits the local option tax for the tax period in which the service is rendered, furnished, or performed.

What does delivery have to do with the taxability of a sale?
 Where tangible personal property is delivered determines whether or not a sale is taxable. If delivery occurs within a local option jurisdiction, the local option sales tax may be due. If delivery does not occur in a local option jurisdiction, local option tax is not due.

Delivery usually occurs when the seller transfers physical possession of the property to the buyer. In most instances, this transfer takes place at the seller’s place of business. If the seller transfers the property to the buyer from the seller’s own vehicle, then delivery is considered to take place at the place of transfer. Finally, if the seller transfers the property to a common carrier or the U.S. Postal Service for subsequent transport to the buyer, the “delivery” of the property occurs at the customer’s location.

How is the delivery or sale of tangible personal property affected by the use of FOB or a similar term when it is moved by a common carrier?
 It does not affect the sourcing of a transaction, but an FOB designation will determine whether it is a sales tax or a use tax, and whether local option applies.

If residents in a local option tax jurisdiction shop in a city that does not have a local option sales tax, does that mean that they avoid paying the local option tax?
 Maybe. If a resident of a taxing jurisdiction takes physical possession of the item in a non-taxing jurisdiction, no local option tax can be imposed. However, if the Iowa seller delivers it by the seller’s vehicle or through a common carrier to the purchaser who lives in a local option tax jurisdiction, then the seller must collect the local option tax applicable in the buyer’s location.

If Iowa sellers send items through the mail or by common carrier to the purchaser and the sellers do not have “nexus” in the purchaser’s location, must they charge the local option tax?
 Yes. The seller will charge the local option tax applicable where the customer receives the item.

What happens if the seller is located in a taxing jurisdiction and delivery of an item is made into a jurisdiction where no local option tax has been imposed?
 Local option tax cannot be charged on a transaction where delivery occurs in a non-taxing jurisdiction.

What happens when an item is purchased outside Iowa? Would local option sales tax be due?

If the out-of-state retailer is registered to collect Iowa tax, the state rate is charged as well as any local option tax imposed by the destination jurisdiction.

What about vending machines?
 The location of each individual vending machine determines whether or not the local option sales tax applies. If it is in a local option jurisdiction, the tax applies.

What happens when a business uses its own inventory?
 If a retailer located in a taxing jurisdiction purchases items for resale or processing and later withdraws them from inventory for other purposes, the local option tax is imposed. It does not matter where or when the items were first purchased.

Owners, contractors, subcontractors, or builders purchasing building materials, supplies, and equipment for use in a construction project must pay local option sales tax on these items if they take delivery in a taxing jurisdiction.

Contractors, subcontractors, or builders who are also retailers located in a taxing jurisdiction must pay local option tax when they withdraw building materials, supplies and equipment from their resale inventory for construction projects in Iowa, even if the construction project is outside the taxing jurisdiction.

Manufacturers of building materials located in a taxing jurisdiction who are principally engaged in manufacturing and selling building materials and who withdraw them from inventory for use in a construction contract must pay local option tax if the construction contract is within Iowa. The tax is computed on fabricated cost. They must pay local option tax when they withdraw building materials, supplies and equipment from inventory for construction purposes even if the construction project is outside the taxing jurisdiction.

What if a construction contract is entered into prior to the imposition of local option tax?
 It makes no difference when the contract is signed or where it is signed. "Delivery" is the taxing event. If tangible personal property subject to state sales tax is delivered into a jurisdiction after the date local option sales tax has been imposed, local option sales tax is due. If a taxable service is rendered, furnished, or performed after the date local option sales tax has been imposed, local option sales tax is due.

If a local option tax is imposed or increased after a construction contractor enters into a written contract, the contractor may apply for a refund of additional local option sales tax paid as a result of the imposition or increase if all the following circumstances exist:

  1. The additional tax was paid on tangible personal property incorporated into an improvement to real estate in fulfillment of a written construction contract entered into prior to the date local option sales tax is imposed or its rate increased, and
  2. The contractor has paid the full amount of both state and local option sales tax due to the Department or to a retailer, and
  3. The claim is filed with the Department within one year of the date the tax was paid. The IA843 (pdf) Claim for Refund is used for this purpose.

This local option tax right of refund is not applicable to equipment transferred under a mixed construction contract.

What about motor fuel and special fuel?
 Motor fuel and special fuel are subject to local option tax when sales tax applies if delivery occurs in a taxing jurisdiction. Fuel subject to motor fuel tax is not subject to sales tax at the time of purchase.

SERVICES

How is local option sales tax imposed on services?
 Local option sales tax is imposed on any service subject to state sales tax which is rendered, furnished, or performed within a taxing jurisdiction.

Does it matter when a contract for services is signed?
 No. Sometimes services are contracted before the local option sales tax becomes effective. The tax still applies when the service is performed.

Does it make any difference if the service contract is signed outside the taxing jurisdiction?
 No. Local option tax is due on all taxable services performed in the taxing jurisdiction regardless of where the contract was entered into.

What if there is a single contract and services are performed both within and outside a taxing jurisdiction?
 The local option tax is imposed if the contract is substantially performed in the taxing jurisdiction. However, if service charges are separately stated, separately billed, and reasonable in amount and can be distinguished between those performed in the taxing jurisdiction and those performed outside the taxing jurisdiction, tax is only imposed on services performed in the taxing jurisdiction.

Lease and Rental

How is local option sales tax computed on rented or leased property?
 The general rule is that payments associated with periods when the property is used within a taxing jurisdiction are subject to local option tax. Motor vehicle, recreational vehicle and recreational boat rentals where state sales tax is imposed are subject to local option sales tax only if pursuant to the rental contract, possession of the vehicle or boat is transferred to the customer within the taxing jurisdiction and payment is made within the same taxing jurisdiction.

Utilities

How are utility payments taxed?
 Delivery of gas and water occurs and the services of electricity, heat, communication, and pay television are rendered, furnished, or performed at the address of the subscriber who is billed for the purchase of this property or services. If that billing address is located in a local option taxing jurisdiction, the tax will apply.

What about telephone credit card calls made outside a taxing jurisdiction and billed to an address within a taxing jurisdiction?
 Assuming that it is an intrastate call (within Iowa) local option tax applies if the call is billed to an address within a taxing jurisdiction.

What date controls whether local option tax applies?
 Local option taxes, and state sales tax, on utility payments are imposed based on the “billing date.”

Do pay television franchise fees imposed by a local jurisdiction exempt cable television charges from local option taxes?
 No. Only franchise fees and users fees for natural gas and electric energy trigger the exemption.

Updated 8/27/08