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Sales and Use Taxes

July 15, 2009

We all know about sales taxes. What most of us don't know is how complicated the rules are. In Iowa, for example, services are exempt from sales taxes. Unless, of course, they are "enumerated" services, in which case they are taxable (sorry, foot reflexologists). An item that is taxable if purchased by a consumer is exempt if bought by a manufacturer, but only if the item is incorporated in the final product. Milky Way bars are tax-exempt in Iowa because they use flour, but a flour-free recipe makes Milky Way Midnight bars taxable.

Which is a long way of saying: find out whether what you are selling is taxable. The base Iowa sales tax rate is 6%. Few things are more unpleasant than having a sales tax examiner present a bill for 6% of your gross for the last three years.

If customers say they are buying for resale, demand a valid resale certificate. Otherwise their non-compliance could become your liability.

"Use taxes" are a backstop for the sales tax system. If you purchase an item that would be subject to sales tax in your home state, but you buy it free of sales tax from another state - maybe over the Internet - you are supposed to pay a use tax for the item to your home state. While the rule is widely ignored by consumers, businesses ignore it at their peril. If you are an Iowa business, for example, it's only a matter of time before you host a use tax examiner. When they go through all of your internet purchases, it's amazing how quickly the delinquent tax can add up. Get in the habit of paying use tax on your catalog and internet purchases if you don't pay sales tax at the source.

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While the Tax Update takes its summer vacation, we are serializing my chapter in "How Business Gets Done: Words of Wisdom by Central Iowa Experts." You can buy your own copy at Lulu.com by clicking on the link.

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