June 20, 2022
Iowa enacts additional tax legislation changing bank franchise tax rate and sales and use tax
On June 17, 2022, Governor Kim Reynolds signed into law Senate File 2367 (SF 2367), which phases in rate reductions for Iowa's Bank Franchise Tax, changes the state's sales and use tax exemptions and filing periods, and enacts other tax law changes. SF 2367 is the second1 piece of tax legislation signed this year. Before adjourning its 2022 session, the legislature did not, however, act on a proposal that would have restored an Iowa-specific computation of net operating losses for corporate income taxes.
Rate reductions for Bank Franchise Tax
SF 2367 reduces the Bank Franchise Tax rate from 5% to 3.5% over five years. For tax year 2023, the rate will decrease from 5% to 4.7%. The rates will then decrease to 4.4%, 4.1% and 3.8% for tax years 2024, 2025 and 2026, respectively. The rate will then decrease to 3.5% for tax year 2027 and thereafter.
Sales and use tax changes
Iowa Code Section 423.3(49) exempts from sales tax certain goods and services used by manufacturers of food products for human consumption. SF 2367 clarifies that this exemption also applies to manufacturers that primarily manufacture food ingredients. SF 2367 makes this change retroactive to January 1, 2019, and limits refunds of taxes, interest and penalties that may otherwise result from these changes to $100,000 for any calendar year. Refund claims based on these changes must be filed by October 1, 2022.
SF 2367 also changes the sales tax base. Effective January 1, 2023, sales tax does not apply to the following purchases: specified digital products; prewritten computer software and related services sold to public utilities; feminine hygiene products; and child and adult diapers. Effective January 1, 2024, sales tax applies to computers and peripherals that an insurance company, financial institution or commercial enterprise under Iowa Code Section 423.3(47)(a)(4) uses to process or store data or information.
SF 2367 changes certain sales and use tax compliance procedures as of the date of enactment. Sales and use taxes must now be reported on a single return instead of separate returns for each tax. Additionally, persons owing $1,200 or less in sales or use tax per calendar year must file annually, while all others must file monthly (changed from quarterly filing). These changes are effective immediately and the Iowa Department of Revenue (Department) may adopt emergency rules to implement them. SF 2367 also includes a temporary grace period for interest and penalties. Taxpayers that cannot file returns and remit tax in accordance with these new filing periods may file returns and pay tax for periods ending on or before September 30, 2022, according to their registration as of June 30, 2022, without penalty and with interest suspended until October 1, 2022.
SF 2367 allows the Department to simultaneously contact Certified Service Providers and sellers registered under the Streamlined Sales and Use Tax Agreement if a payment or filing issue arises.
Motor fuel reporting requirements
Motor fuel dealers must file periodic reports detailing their total gallonage as required by the Department and Iowa law. SF 2367 allows the Department to require these reports to be filed electronically and allows the Department to impose a maximum $100 penalty for each instance of noncompliance.
Authority to cancel certain permits due to inactivity
SF 2367 authorizes the Department to cancel a taxpayer's permits for income tax withholding, sales and use tax, and motor fuel tax upon verifying that the permits are no longer in use.
Net operating losses — no action taken in SF 2367
SF 2367 does not include a proposal to "restore" an Iowa-specific computation of net operating losses for corporate income taxes, which will be eliminated as of January 1, 2023. Starting in 2023, Iowa Code Section 422.35 will define "net income" as taxable income properly computed for federal income tax purposes under IRC Section 63 (see Tax Alert 2021-1094). This change will require members of a federal consolidated group to determine the federal net operating loss available to them by preparing a pro forma federal return as if they were separate taxpayers or members of a nexus-consolidated group, as the case may be. In computing their Iowa net operating losses under these rules, Iowa taxpayers will also need to consider other disconnects between Iowa and federal tax law, such as Iowa's exclusion of global intangible low-taxed income from Iowa taxation.
SF 2367 contains a mix of tax law changes that are both favorable (Bank Franchise Tax rate reductions and clarification of sales and use tax exemption for food ingredients) and unfavorable (repeal of sales tax exemption on computer peripherals) to taxpayers. Businesses should consider all changes that become effective in 2023 in computing their Iowa net operating loss carryovers.
1 The first piece of tax legislation was House File 2317, which was signed on March 1, 2022 (see Tax Alert 2022-3531).