Iowa sales tax: Potential exemption for telecommunication provider purchases

Companies that provide communications services in Iowa may soon reduce purchase-related costs through Iowa senate bill 1209. If enacted, the proposed legislation will expand the scope of Iowa’s sales tax exemption for telecommunications equipment.

Prepare your business for these potential changes with insights into Senate Bill 1209, its key changes, and other exemptions that can unlock tax-saving opportunities.

Senate bill 1209 background

Iowa currently has a sales tax exemption for central office equipment or transmission equipment primarily used by local exchange carriers and competitive local exchanged service providers, franchise cable television operators, mutual companies, municipal utilities, cooperatives, and other companies furnishing communications services.

The proposed change would strike the word “primarily” from the provision, which could increase the scope of eligible equipment for certain providers.

Key changes

In its current form, Iowa’s telecommunications equipment exemption has a primary use test whereby equipment must be primarily used in furnishing communications service to be eligible. While not defined in the exemption statute, primarily used is commonly understood to mean that greater than 50%.

In modern practice, many service providers make substantial investments in network infrastructure and use that same infrastructure to furnish both telecommunications services and Internet access services.

In its current form, eligibility for the telecommunications equipment exemption is limited to infrastructure where greater than 50% of the use is for telecommunications and less than 50% is for Internet access. This creates burdens on the taxpayer in terms of tracking and documenting the percentage of use to defend its exemption under audit.

If enacted, Senate Bill 1209 would remove the primary use test from existing law. This expands the telecommunications equipment exemption to include network infrastructure used for both Internet access and telecommunications service, even if telecommunications is the minority usage.