Sales tax on invoices in Iowa

Iowa splits a contractor’s work in two. On new construction, reconstruction, alteration, expansion or remodeling, the contractor pays tax on its materials and charges the customer no sales tax; on repairs and installations that don’t rise to that level, it charges tax on the materials and on any taxable labor.

Iowa sales and use tax permit

The seller of taxable goods or services collects, reports and remits Iowa sales tax. Retailers that sell taxable tangible personal property, services and products in or into Iowa need a sales and use tax permit, applied for through the Iowa Department of Revenue’s Business Registration System. A business that makes taxable purchases without paying sales tax may also need one to remit use tax, and anyone owing $1,200 or more in Iowa use tax a year must register.

Construction and remodeling: no tax to the customer

Contractors, meaning general contractors, subcontractors and builders, are generally final consumers of building materials, supplies and equipment and pay sales tax when they buy them. When an Iowa contractor performs new construction, reconstruction, alteration, expansion or remodeling, it pays tax on the materials and supplies, collects no tax from the customer, and charges no sales tax on the labor.

Iowa’s construction rule, Iowa Administrative Code 701—219, says a contractor can’t buy building materials for resale even if it later itemizes materials and labor on such a contract, and that holding an Iowa sales tax permit doesn’t change that unless the items are bought for resale. It defines remodeling as much more than repairs or minor changes: reforming or reshaping a structure or a substantial part of it until it is in large part the equivalent of a new structure. A repair mends, restores, maintains, replaces or services something that has become imperfect.

Jobs for most nonprofit organizations, churches included, aren’t exempt, though some jobs for specific organizations may be.

Repairs and installations: taxable labor and materials

Iowa taxes services only when its law specifies them (Iowa Code §423.2(6) is the official list), and the Department’s list includes many building trades: carpentry repair and installation; electrical and electronic repair and installation; pipe fitting and plumbing, including drain cleaning; roof, shingle and glass repair; painting; excavating and grading; and landscaping, lawn care and tree trimming and removal. That labor is exempt when performed on or connected with new construction, reconstruction, alteration, expansion or remodeling, and taxable in all other cases, such as repairs and installations.

The Department’s examples of taxable repairs and installations include replacing damaged roof shingles, repairing garage doors, replacing broken faucets, installing new light fixtures, repairing broken water heaters, furnaces or central air conditioning units, and replacing or repairing a building’s original wiring. Replacing the entire roof on an existing structure, by contrast, is reconstruction, and its labor is exempt. If a job mixes the two, such as replacing a broken window while adding a room, itemize the bill and charge tax on the repair’s materials, supplies and labor.

Replacing a furnace or water heater: two sources, two wordings

• The Iowa Contractors Guide asks whether the item being replaced is defective. If a building’s existing furnace isn’t defective and the owner has a new, more energy efficient one installed, the service is reconstruction or remodeling; if the furnace is defective, replacing it is a repair.
• The rule, 701—219.13, lists “replacing or repairing a broken water heater, furnace, or central air conditioning compressor” as a repair, and “replacing an entire water heater, water softener, furnace, or central air-conditioning unit” among new construction, reconstruction, alteration, expansion or remodeling. It adds that the intent of the parties and the scope of the project are factors that determine whether certain enumerated services are exempt.

The two don’t use the same test, so for a replacement job that could fall either way, check with the Iowa Department of Revenue before you decide whether to charge tax on the job’s materials and labor.

What an Iowa invoice shows

• Retail sales: the retailer adds the tax to the price and collects it, and can’t say the tax is being “absorbed.” It may include the tax in the price, but must then post a notice or state on the invoice that the price includes sales tax.
• Construction contracts: under 701—219.2(2), a contractor bidding a contract should expect tax to add to its materials cost, unless the sponsor is a designated exempt entity, and shouldn’t identify the tax as a separate item in its formal bid, because it can’t charge sales tax.
• Repair work: you may itemize labor and materials and collect tax on all charges; billed as one lump sum, the entire amount is taxable. Your markup on materials is part of the taxable sale.
• Itemized nontaxable services: separately itemized brick laying, concrete finishing, siding installation, flooring and carpet installation, tiling, project management and architect or engineer services aren’t taxable. A repair business that itemizes charges tax on labor only when a taxable service is involved, and a non-itemized repair invoice is taxable in full.

Landscaping, lawn care and cleaning

Landscaping, lawn care, and tree trimming and removal are taxable in Iowa, and providers need a sales tax permit; snow removal isn’t a taxable service. A landscaper is the retailer of the landscaping materials it uses (sod, dirt, trees, shrubbery, bulbs, sand, rocks, woodchips), and a lump-sum job to furnish and install sod is taxable in full. Iowa’s rule exempts landscaping services performed on or in connection with new construction, reconstruction, alteration, expansion or remodeling of a building or structure; the landscaper still collects tax on the landscaping materials.

Erecting a structure, such as a retaining wall, lawn lighting or irrigation system, pool or walkway, is construction contracting and generally exempt, but only if the invoice states the construction charges separately from the landscaping charges; the landscaper pays sales and local option tax on those construction materials. Lawn care, including mowing, trimming, watering, fertilizing, reseeding and killing weeds, insects or fungi, is taxable on the total charge, itemized or lump sum.

Janitorial and building maintenance or cleaning is taxable for non-residential property only. Carpet, rug and upholstery cleaning, furniture cleaning and swimming pool cleaning and maintenance are on the Department’s taxable list without that limit.

Local option sales tax

Many Iowa cities and counties add a 1% local option sales tax, which applies only to sales sourced to the cities and unincorporated areas that voted for it; there is no local option use tax. Charge the local option tax that applies where the customer receives the item, and on a taxable service, where its first use occurs or could occur, wherever the contract was signed. Contractors pay local option tax on building materials when they take delivery in a taxing jurisdiction.

Watch-out: repair businesses and contractors buy differently

Under the rule, repairpersons normally buy building materials tax free for resale to their customers, but contractors who make repairs pay tax when they buy, even with a sales tax permit. The Department looks at the whole business, not one part of it, and changing a business’s classification from job to job to avoid tax isn’t lawful.