Updates to Commercial Enterprise exemption could mean savings for Iowa businesses

January 1, 1970

Recent sales/use tax changes in Iowa relating to computer software have created confusion on taxability. Iowa businesses should be aware of the Commercial Enterprise exemption and how it relates to their business's software contracts. Software - Prior Law Prior to Jan. 1, 2019, prewritten computer software (i.e. “canned”) software was treated as taxable if delivered in the form of tangible property such as a disc. Software delivered to the purchaser digitally, electronically or by other non-tangible means was exempt. Regarding Software as a Service (SaaS); Iowa did not explicitly list that as taxable. Under the SaaS model, a consumer purchases access to a software application that is owned, operated and maintained by a SaaS provider. The consumer accesses the application over the Internet. The software is located on a server that is owned or leased by the SaaS provider. The software is not transferred to the customer, and the customer does not have the right to download, copy or modify the software. Under the Commercial Enterprises exemption, the state provided an exemption for specified digital products, prewritten computer software and certain otherwise taxable services. This exemption essentially covered most businesses, but explicitly did not include “professions and occupations.” Current Law Senate File 2417 effective Jan. 1, 2019 expands taxability of prewritten computer software no matter what the method of delivery, even if delivered electronically. Also, SaaS products are now specifically listed as taxable. The Commercial Enterprises exemption for computer software has been expanded to include “professions and occupations.”  Therefore, although software of all types is normally taxable, businesses would be exempt from paying the sales/use tax due to the Commercial Enterprises exemption. Computer Hardware The Commercial Enterprise exemption allows most businesses except “professions and occupations” to purchase computers and peripheral equipment (such as printers, monitors, scanners, etc.) free from sales/use tax. It does not cover portable devices such as tablets or smartphones. Laptop computers are covered. Recommendations Clients should review any computer software and hardware invoices paid for sales tax. If tax has been paid, present each supplier with an executed Iowa sales tax exemption certificate (form 31-014) and ask for a refund of the tax. If the client’s suppliers are unable to provide a refund (for example, in cases where the supplier as already remitted the collected tax to the state), they should file an Iowa sales/use tax refund claim (form IA 843) with the state to request the refund. They will need to include copies of all relevant invoices showing the tax paid.