Iowa Department of Revenue Explains Sales Tax Responsibilities of Food Manufacturer Remote Seller

The Iowa Department of Revenue issued a ruling to explain the sales tax implications of a remote seller that sells baked goods and other products into the state. Fairytale Brownies, Inc. is an Arizona corporation that manufacturers and sells pre-made and packaged brownies and cookies, and certain keepsake containers. The company receives orders from its own website, its Amazon page, and over the telephone. Products are packaged in Phoenix and shipper to customers via common carrier. Fairytale Brownies does not have offices, warehouses, employees, inventory, or other property in Iowa that create physical nexus. The taxpayer believes that its products are exempt from Iowa sales tax and has therefore never registered to collect and remit Iowa sales or use tax.

The Department first addressed whether the company’s sale of prepackaged food products to Iowa customers establishes economic nexus. Effective January 1, 2019, sellers without physical presence in Iowa are required to collect and remit sales tax on sales into the state if they have gross revenue that exceeds $100,000 or 200 or more separate transactions into the state in the immediately preceding or current calendar year. Remote sellers must include sales made through an online marketplace, such as Amazon, in determining whether they meet the threshold. Fairytale Brownies did not provide volume or gross revenue information to the Department so it could not be determined if the company exceeded either threshold and must begin collecting.

Fairytale Brownies asserted that its sales were exempt from Iowa sales and use tax based on Iowa’s “food and food ingredients” exemption found in Iowa Code section 423.3(57). Prepared food is excluded from food and food ingredients and is subject to tax; however, “bakery items sold by the seller which baked them” (which fall under prepared food) are exempt from Iowa sales tax. The Department believes the company’s brownies and cookies would fall under this exemption.

When customers purchase keepsake boxes along with baked goods, sales tax must be collected on the containers as they are taxable. Iowa imposes sales tax on bundled transactions when two distinct products are sold for one non-itemized price. Fairytale Brownies should continue to separately state its products as to only pay sales tax on the taxable product, the containers.

Going forward, Fairytale Brownies must obtain an Iowa sales tax permit and file Iowa sales tax returns if: (1) the company exceeds the remote seller thresholds, and (2) the company makes taxable retail sales into Iowa.

This declaratory order is a great example of the importance of being mindful of economic nexus thresholds as a remote seller, examining the taxability of your products, and understanding the tax implications of bundled transactions. (Declaratory Order 2018-300-2-0440, Iowa Department of Revenue, January 16, 2019)

Posted on February 11, 2019