Iowa Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

For software companies, SaaS providers, and technology firms conducting business in Iowa, the state's sales and use tax rules present a unique landscape that differs significantly from many other states. Iowa made substantial changes to its taxation of digital products and software effective January 1, 2019, with the implementation of Senate File 2417, making it important for businesses to understand current Iowa tax requirements.

Unlike some states where all digital products remain untaxed, Iowa now imposes sales tax on
prewritten (canned) software regardless of how it's delivered, as well as on Software as a Service (SaaS). This represents a significant shift, as electronically delivered software used to be exempt from Iowa sales tax prior to 2019.

Purpose of This Guide

This guide is designed to help businesses navigate Iowa's sales and use tax rules related to
software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect Iowa
  sales tax due to physical or economic presence under Iowa Code § 423.14A.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings under Iowa Code §
  423.2.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery according to Iowa Administrative Code r. 701-
  205.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance with Iowa Department of Revenue requirements.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability
  through Iowa's Voluntary Disclosure Program.

Why This Matters for Technology Companies

Iowa's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Sales Tax Obligations: Businesses that sell software or related services to Iowa
  customers may have a duty to collect and remit Iowa sales tax, depending on how the
  product is classified under Iowa Code § 423.2(6).
• SaaS Taxability: Unlike many states, Iowa specifically lists "software as a service" as a
  taxable service under Iowa Code § 423.2(6)(bu), creating compliance requirements for
  cloud-based service providers.
• Commercial Enterprise Exemption: Iowa offers a potentially valuable exemption for
  SaaS and digital products sold to commercial enterprises under Iowa Code § 423.3(104),
  which may reduce tax burdens when properly documented.
• Compliance Risks: Failure to correctly assess and collect sales tax can result in
  significant penalties, interest, and extended audit exposure according to Iowa Code §
  423.40.

This guide will walk through Iowa's specific sales tax rules governing software, SaaS, and
technology-related services while referencing applicable statutes, administrative rules, and Iowa Department of Revenue guidance.

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