One of the states with distinct tax laws for various software categories is Iowa. Software as a Service, or SaaS, is a category of software that has seen tremendous growth in recent years. It is a cloud-based application that companies may subscribe to and use online. Does SaaS in Iowa incur a sales tax, is the question.
Yes, to answer briefly. SaaS is subject to sales tax in Iowa. It is crucial to remember that the taxability of SaaS varies depending on the type used by a corporation. Whether software is regarded as prewritten or bespoke software in Iowa affects whether it is taxable.
Software that has already been produced and is sold to many users rather than one particular client is known as prewritten software. Custom software, on the other hand, is software that is created especially for a certain client. Custom software is exempt from sales tax in Iowa, while prewritten software is. In Iowa, there is a consumer use tax.
The use of tangible personal property or taxable services that have not been subject to sales tax is liable to the consumers use tax. Consumer use tax is imposed in Iowa on purchases made online, out-of-state, and from businesses that are not authorized to remit sales tax to the state.
Iowa’s Des Moines levies a 7% sales tax. This includes both the 1% local choice sales tax and the 6% state sales tax. Local projects like roads, schools, and other public services are paid for locally using the local option sales tax. Rate of Iowa State Tax in 2021
What Is the Procedure for Local Option Sales Tax?
A charge called the local option sales tax is imposed on top of the state sales tax to pay for neighborhood initiatives. Cities or counties in Iowa have the authority to enact local option sales taxes. The state collects the tax and gives the money to the local governments that levied it. The local choice sales tax rate might vary from 0.5% to 1% depending on the city or county.
In conclusion, SaaS is subject to sales tax in Iowa, but whether a service is taxable will depend on whether the software is prewritten or custom. Sales tax applies to prewritten software but not to custom software. Additionally, Iowa levies a use tax on consumers for goods that are not subject to sales tax. The 2021 state tax rate for Iowa is 5%, compared to Des Moines’ 7% sales tax rate. The local option sales tax, which can be levied by cities or counties, is a tax that is levied in addition to the state sales tax and is used to finance local projects.