February 22, 2018 Iowa tax reform proposal introduced: includes sales tax nexus expansion, taxation of digital products, individual income tax changes On February 13, 2018, Governor Kim Reynolds and Lt. Governor Adam Gregg announced a proposal for tax reform in Iowa. This proposal was introduced in the Iowa Legislature in the form of two study bills — HSB 671 and SSB 3195. In addition, on February 21, 2018, the Senate proposed its tax reform study bill — SSB 3197. In Iowa, a "study bill" is a proposal regarding certain issues. If approved by the appropriate legislative committee, a study bill can be refiled as a legislative bill. The governor's proposal focuses on Iowa individual taxes and includes the following provisions: — A phased-in 23% reduction in the individual income tax rates with the highest marginal rate going from 8.98% to 6.9% by 2023. In addition, the highest marginal rate, which currently applies to income above $73,260, would only apply to income above $160,965. — The number of individual income tax brackets would be reduced from nine to eight. — Starting in 2019, the standard deduction would increase from $2,070 to $4,000 for single filers and from $5,090 to $8,000 for married filers with additional deductions for the elderly and blind of $1,500 in 2019, increasing to $2,070 by 2021. — Iowa business owners would be able to deduct from their Iowa taxable income 25% of the new federal qualified business income deduction allowed under new IRC Section 199A. — The Iowa-specific IRC Section 179 expensing limit would increase immediately from $25,000 to $100,000. — The Iowa alternative minimum tax (AMT) would be eliminated. — The deduction for federal taxes would be phased out. Some other changes contained in SSB 3195 that, for the most part, were not specifically mentioned in the Governor's tax reform proposal announcement would: — Expand sales and use tax nexus provisions that include economic nexus, marketplace provider, cookie nexus, click-through nexus, and affiliate nexus (Governor's proposal mentions putting main street businesses on a level playing field with online out-of-state retailers) — Expand the reach of the sales and use tax to include specified digital products and digital codes as well as a number of services including services related to digital products, Software as a Service (SaaS), video game services and tournaments, ride sharing services, photography, storage of electronic files and documents, information services, among others — Impose hotel and motel excise tax on lodging facilitators — Impose the automobile rental excise tax on a rental facilitator — Decouple from bonus depreciation provisions contained in the Tax Cuts and Jobs Act (PL 115-97) — Couple to the IRC as of January 1, 2018 for individual income tax purposes (decouple from certain provisions) — Limit industries eligible to receive the research activities credit to manufacturers, life sciences, software engineering, and aviation/aerospace The Senate proposal, SSB 3197, includes some of the above mentioned changes but also includes corporate tax changes. Notably, Iowa would change the method in which it conforms to the IRC from the fixed-date method (current corporate conformity date is January 1, 2015), to a rolling conformity adopting the IRC of 1986 "as amended." Thus, Iowa would conform to the recent changes made to the IRC by the Tax Cuts and Jobs Act, unless specifically decoupled from a particular change — here the state would decouple from bonus depreciation. SSB 3197 also would: (1) provide for corporate income tax rate cuts; (2) repeal the separate calculation of net operating losses at the state level; (3) repeal the corporate AMT, as well as most deductions and exclusions previously allowed (including the deduction for federal income tax); and (4) amend various franchise tax provisions for financial institutions, including credit unions. The current session of the Iowa Legislature is scheduled to adjourn by April 17, 2018, with March 16, 2018 being the final date for legislation to be reported out of committee. Implications Although the Governor's proposal doesn't contain changes to Iowa's income taxation of corporations, the Senate study bill includes a corporate rate cut and proposes changing Iowa from an IRC fixed-date-of-conformity state to a rolling or automatic conformity state. EY will continue to monitor these study bills as they are considered by the Iowa Legislature, and issue additional Tax Alerts as necessary. ———————————————
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