City governments offer a wide range of services to their citizens, some of which require direct payment. Utility charges, admission to recreational and athletic facilities and concession stand sales are just a few of the transactions that cities are involved in. It is important for city officials to know which charges must include sales tax and which do not, as well as when to impose a local option sales tax if one is in place.
Beginning July 1, 2018 cities must include a new Water Service Excise Tax (WET) when it sells or furnishes water services to both commercial and residential customers. This replaces the state sales tax on such charges and cities are required to apply for a new tax permit through the Iowa Department of Revenue. In addition, the authorizing legislation prohibits cities from including Local Option Sales Tax on water service charges. Please consult the WET page on the Iowa Department of Revenue Web site for additional guidance.
Gas and electric charges must include the sales tax when sold to nonresidential customers. Sewer and solid waste charges billed to nonresidential commercial operations must impose the sales tax. The Code of Iowa defines nonresidential commercial operations as any, “industrial, commercial, agricultural or mining operation.” These operations are not restricted to for-profit organizations and include churches, charities and fraternal organizations that are involved in the purchasing and selling of goods and services in the marketplace. On the other hand, residential customers are exempt from sales tax on sewer and electric/gas charges. This includes single and multi-family dwellings, mobile home parks, manufactured home communities and apartment complexes.
Governmental entities, such as schools, are exempt from sales tax on purchases and would not be charged sales tax on utility bills.
Solid Waste Collection
If a city operates the garbage collection service, it must include sales tax on charges to nonresidential commercial operators (similar to sewer services). Sales tax would not be included on bills to residential customers.
If a city has contracted with a company to provide garbage collection and disposal, the company must collect sales tax for the service performed on behalf of nonresidential commercial operations located within the city.
Athletic or Recreational Facilities and Events
There are several charges related to recreational activities that are subject to sales tax while others are exempt. One basic rule to note is fees for the use of an athletic facility must include the sales tax. Municipal golf courses, for example, must include sales tax on greens fees. The same is true for municipal swimming pool admissions (season passes for the golf course or swimming pool must also charge sales tax). Entry fees that are paid to the city, such as a team entry fee for a softball league, must include sales tax.
However, fees paid to learn how to improve in a sport, such as golf lessons or swimming lessons, are not subject to sales tax. Fees paid for the rental of sports equipment, such as golf carts, are also exempt from sales tax.
Concession Stand Sales
Another related activity to consider is concession stand sales. If the city operates the concession stand, they cannot charge sales tax on items sold. However, if a third party vendor operates the stand, they are required to collect sales tax.
Yard Waste Bags
If the yard waste bags are sold by the city directly to customers, such as at city hall, the sales are exempt from taxation. Many cities make yard waste bags available for purchase at local stores. In this case, the sales would be exempt from taxation if the store sells the bags and gives all of the proceeds to the city. However, if the store keeps a percentage of the sales, it would then be required to include sales tax.
Cities that provide cable television are required to include sales tax on related charges. Cities also will occasionally sell office equipment and furniture and these sales would be exempt from taxation. Some cities sometimes sell t-shirts or other items to promote a city-sponsored event. These sales would also be exempt.
Local Option Sales Tax
Local Option Sales taxes must still be included for city sales of gas, electricity and heat to residential customers, even though the customer is exempt from the state sales tax. As for sewer and garbage collection charges, residential customers are exempt.
If a city offers residents and customers the ability to make purchases online, it simply needs to ensure that the proper amount of sales tax is being charged prior to posting the bill online (while also making sure exempt sales do not include the sales tax).
Cities can also review the sales tax status of various transactions with the Iowa Department of Revenue, which provides guidance for local governments.
|Good/Service||Subject to Sales Tax|
|Water||*Subject to Water Service Excise Tax (beginning July 1, 2018)|
|Electric, Gas & Heat – Residential Customers||Exempt|
|Electric, Gas & Heat – Nonresidential Customers||Yes|
|Sewer – Residential Customers||Exempt|
|Sewer – Nonresidential Commercial Customers||Yes|
|Garbage Collection – Residential Customers||Exempt|
|Garbage Collection – Nonresidential Commercial Customers||Yes|
|Athletic Equipment Rental||Exempt|
|Use of Athletic Facility||Yes|
|Concession Stand||Exempt (unless operated by third party vendor)|
|Use of Nonathletic Facility||Exempt|
|City Office Equipment/Furniture||Exempt|
|City Promotional Items||Exempt|