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The Iowa Department of Revenue has made corrections to an article issued in the June 2008 edition of eNews, discussing the taxability of complimentary beverages and meals provided by bars, restaurants, and hotels/motels. The corrections clarify that complementary alcoholic beverages, soft drinks, candy, and other items that are not tax exempt as food are taxable as goods consumed when given to customers or employees because these items are normally subject to tax. Prepared meals are also subject to tax when given to customers. However, food consumed without charges by at-work employees is not taxable because it is intended for the employee’s consumption pursuant to an employer’s agreement, not intended for sale. Meals and beverages sold to employees at a reduced price that are not tax exempt as food are subject to tax based on the reduced selling price. When hotels or motels advertise complimentary meals as part the room rental, the tax is already being paid because it’s included in the room rate. Therefore, the hotel would not owe additional use tax. However, if the customer is ordering food from the hotel’s restaurant or room service, where there is a separately stated charge and the person received the meal free, it would then be subject to use tax. (E-mail, Iowa Sales or Use Tax on Complimentary Items Given to Customers or Employees, Iowa Department of Revenue, February 12, 2009


The Iowa Court of Appeals upheld a decision made by a district court that exempted a spectrographic color-matching machine from Iowa’s sales and use taxes. The machine determines the precise formula for mixing the exact shades of paint color desired. The court determined that the taxpayer was a manufacturer and that the machine is used in the direct process of manufacturing paint under Code Sec. 428.20 and 422.45(27). (The Sherwin-Williams Co. v. Iowa Department of Revenue, Iowa Court of Appeals, No. 8-254/07-1534, October 15, 2008)


Effective July 1, 2008, the state sales and use tax rate will increase from 5% to 6%, and the School Local Option Sales Tax (SILO) will cease to exist as a separate tax. These changes will be represented on the July-September quarterly tax return due in October. The additional 1% replaces SILO, and will continue to be apportioned to school districts and used for property tax relief. Because of this, businesses will continue to report sales by county to provide for correct distribution to school districts. The state rate for hotel and motel lodging, certain construction equipment, and the short-term auto rental tax will remain at 5%. (Notice, Iowa Department of Revenue, June10, 2008)


In order to comply with the Streamlined Sales and Use Tax Agreement (“the Agreement”), the Iowa Department of Revenue has amended a rule regarding the determination of a sale and sale price. Previously, if an exemption certificate was not taken in good faith by a retailer, both the seller and the buyer who presented the certificate could be held liable for the tax if that buyer used the purchased good or service for a purpose that was taxable. Under the new rule, the “good faith” requirement on the part of a seller is replaced by a different standard, a “relaxed good-faith standard.” A seller can accept a properly completed exemption certificate, but does not need to follow up with the buyer to ensure that the claimed exemption applies to the buyer. A retailer who accepts a properly completed exemption certificate with an absence of fraudulent intent and who has not solicited a buyer to unlawfully claim an exemption is protected by the certificate in the event that a buyer makes a taxable use of a purchase. (Rule 701-15.3, Iowa Department of Revenue, effective January 9, 2008)


The state recently provided guidance with respect to computer purchases by professional companies. In a policy letter issued by the Iowa Department of Revenue, the state indicated that purchases of computers by commercial enterprises for processing or data storage are exempt from sales and use tax. The taxpayer, an architectural company, did not qualify as a commercial enterprise, but rather a professional corporation. Factors used for this interpretation included: the incorporation under Chapter 496C and using “P.C.—Professional Corporation” as part of the entity’s name, or deriving all/substantially all of its revenue from the practice of a licensed profession. The firm’s unlicensed support staff did not change the interpretation. Therefore, the firm did not qualify for the computer purchase exemption.

In a recent Declaratory Order, the state provided a similar interpretation, but this time the entity was an accounting firm. The accounting firm was considered a professional corporation as it provided accounting services, employing professionals with four-year degrees that require extensive training and experience. Therefore, any purchase of computers and computer equipment made by accounting firms are also subject to Iowa sales and use tax. (Policy Letter 07300004, Iowa Department of Revenue, January 9, 2007); (Iowa Department of Revenue, IA —Declaratory Order 07-30-6-0009, Sales and Use (Feb. 23, 2007)



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