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Sales, Use & Excise Tax
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Income Tax Exemption

Nonprofit entities may request exemption from income tax from the Internal Revenue Service (IRS). See the IRS brochure Applying for Tax-Exempt Status.

Iowa does not make this determination. An entity is automatically exempt from Iowa income tax if exempt status is granted by the IRS.

Iowa corporation income tax forms

An exempt entity does not have to file an Iowa corporation income tax return unless it has unrelated business income. Unrelated business income is taxable at the regular Iowa corporation income tax rates to the same extent it is taxable at the federal level. The exempt entity may also be subject to the Iowa alternative minimum tax.

To report unrelated business income, file Iowa form 1120. Complete form IA 4626 if subject to the alternative minimum tax. Iowa estimated tax payments must be made if an income tax liability of $1,000 or more is anticipated.

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Sales TO Nonprofit Entities

Sales

Nonprofit entities are not automatically exempt from paying sales tax on goods and taxable services, even if they are exempt from state and federal income taxes. Sales tax must be paid unless some other general sales tax exemption applies. Local option sales tax must also be paid on purchases made in jurisdictions that impose the tax.

In other words, a nonprofit entity is treated the same as any other person for sales and use tax purposes.

Purchases for resale

Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Taxable Services

Certain services are subject to sales tax. Nonprofits generally must pay tax on taxable services.

See Iowa Sales and Use Tax: Taxable Services.

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Sales TO Educational Institutions

Iowa private nonprofit schools do not pay sales tax on the purchase of goods and taxable services used for educational purposes.

Note: Schools must pay the 5% state hotel and motel tax and any applicable local hotel and motel tax on sleeping room rental.

Educational Institution

An institution which primarily functions as:

A school, college, or university with students, faculty associated with the institution, and an established curriculum with basic courses offered every year

A library

Purchases for resale

Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Purchases by a school and a church

When goods and taxable services are shared by a school and a church, the primary use determines if the purchase is taxable.

School Organization

Organizations such as a PTA or school booster club are not automatically exempt from paying or collecting sales tax.

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Sales BY Entities/Organizations

When are Sales Exempt?

Sales made by entities or organizations engaged in educational, religious, or charitable activities are exempt on proceeds expended for qualifying educational, religious, or charitable purposes. See below for explanations of educational, religious, or charitable.

Net proceeds must be used by or donated to one of the following to be exempt:

Entity exempt from federal income tax under Internal Revenue Code section 501(c)(3)

Government entity (including public schools)

Private nonprofit educational institution

Is Gambling Taxable?

All receipts from gambling activities sponsored by nonprofit entities are subject to sales tax, regardless of the ultimate use of the proceeds.

What is “Educational Purpose”?

“Educational purpose” includes the following:

  • Acquisition of knowledge to develop and train a person
  • Activity that has as its primary purpose to educate by teaching
  • Activity that has as its primary objective to give educational instruction
  • Activity for which the educational process is not merely incidental
  • Activity where the purpose is systematic instruction
  • School recreational activities and intramural sports
  • Any activity designed to offer culture to the public
  • Tests given to students or prospective students to measure intelligence, ability, or aptitude
  • Municipal or civic science centers
  • Art centers
  • Libraries
  • IRC 501(c)(3) nonprofit youth athletic groups

What is “Religious Purpose”?

“Religious purpose” is any activity that promotes religious worship. In the broadest of terms, religious worship includes all forms of belief in the existence of superior being(s) capable of exercising power over the human race. As commonly accepted, it means the final recognition of a deity. It encompasses forms of worship, reference to one's views about the deity, or the relationship to one's creator. It also includes the use of property by a religious society or by a body of persons as a place for public worship.

For profits to be exempt for religious purposes, they must be used:

By or donated to an IRC 501(c)(3) organization, and

For a religious activity

What is “Charitable Purpose”?

“Charitable purpose” is applied to almost anything that promotes the well-doing and well-being of people. It includes:

  • Performance of services for public good or public welfare
  • Activities for the benefit of a family, an individual, or the public at large
  • Giving of gifts by persons kindly disposed toward others
  • Relief of poverty
  • Advancement of education or religion
  • Promotion of health
  • Provision of a governmental or municipal service
  • Maintenance of public parks
  • Other similar activities

However, there must be no profit to the one performing the service or in any way benefit any private shareholder or individual involved in the activity.

Profit-making organizations may engage in charitable activities, even though they are not charitable organizations.

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Proceeds Used for the Organization's Purpose

An organization will sometimes conduct fundraising activities where the net proceeds are used to further the organization's purpose. In these cases, the net proceeds are exempt if the organization itself is considered educational, religious, or charitable and is exempt from income tax pursuant to IRC 501(c)(3).

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Net Proceeds and Their Taxability

“Net proceeds” are those remaining after direct expenses have been deducted from the gross receipts of the activity or event. The expenses must be necessary and have an immediate bearing or relationship to the fulfillment of the activity.

For example, the cost of food for a fundraising meal is a direct expense; however, the cost of a victory celebration because the fundraising dinner was a success is not a direct expense.

Net proceeds expended for a qualifying religious, educational, or charitable activity are exempt.

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Food and Drink Sales

The gross receipts from the sales of food and beverages for human consumption by an entity or organization primarily engaged in the promotion of food or beverage products that are grown, produced, or raised in Iowa are exempt from tax.

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Sales by Certain Fairs

Sales made and services performed by a state fair organized under Iowa Code chapter 173 or by a county, district, or fair society organized under Iowa Code chapter 174 are exempt from Iowa sales and use tax.

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Designated Exempt Entities

Designated exempt entities awarding construction contracts may issue special exemption certificates to contractors and subcontractors, allowing them to purchase or withdraw from inventory materials for the contract free from sales tax. This special exemption certificate also allows a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials. Iowa Code section 423.4 lists the entities that may be considered a “designated exempt entity.”

"Designated Exempt Entity" Includes Only the Following:

  • Private nonprofit educational institution in Iowa
  • Nonprofit private museum in Iowa
  • Tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation, and recreational lake and water quality districts.
  • Municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility
  • All divisions, boards, commissions, agencies, or instrumentalities of state, tribal, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder
  • A nonprofit Iowa affiliate of a nonprofit international organization whose primary activity is the promotion of the construction, remodeling, or rehabilitation of one-family or two-family dwellings for low-income families, such as Habitat for Humanity
  • Rural water districts organized under Iowa Code Chapter 357A
  • An entity that is an instrumentality of a county or municipal government, including an agent of the entity, if the instrumentality or agent was created for the purpose of owning real property located within a reinvestment district established under Iowa Code Chapter 15J. Such entities are entitled to a sales tax exemption on building materials, supplies, or equipment that are completely consumed in the performance of a construction contract to construct a project, which project has been approved by the economic development authority board in accordance with Chapter 15J.

Nonprofit hospitals are NOT designated exempt entities for this purpose.

See Construction Contracts with Designated Exempt Entities and the Construction Contractor’s Guide for additional information.

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Use Tax

What is Use Tax?

The Iowa use tax complements the Iowa sales tax. It is imposed on goods purchased out-of-state for use in Iowa and on taxable services when the first use occurs, or potentially could occur, in Iowa or where the product or result of the service is used in Iowa.

The Iowa use tax rate is the same as the state sales tax rate: 6%

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

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Vehicles and Registration

Entities engaged in educational, religious, or charitable activities are not exempt from paying the 5% fee for new registration on the purchase or lease of vehicles subject to registration. All cars, trucks, truck tractors, road tractors, trailers, and semi-trailers are subject to this fee instead of the state sales tax.

All organizations must pay the fee unless it is exempt under a specific provision of the Iowa Code. 

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Gambling Activities

Gambling receipts are subject to sales tax, regardless of the ultimate use of the proceeds. Nonprofit organizations and churches that conduct games of skill, games of chance, raffles, bingo, and other games are required to obtain a gambling license and sales tax permit.

To obtain a gambling license, see Social & Charitable Gambling on the Iowa Department of Inspections & Appeals Website.

To obtain a sales tax permit, complete the Business Tax Registration form on the Iowa Department of Revenue Website.

Exempt:

  • Gambling activities conducted by county and city governments. (Exempt under Iowa Code section 423.3(32)). 
  • Gambling activities held by the Iowa State Fair, Iowa state fair authority, or Iowa state fair foundation (organized under Iowa Code chapter 173), including gambling activities that occur outside of the annual scheduled fair event. (Exempt under Iowa Code section 423.3(35)). 
  • Gambling activities held by a fair (as defined in Iowa Code section 174.1(2)), including gambling activities that occur outside of scheduled fair events. (Exempt under Iowa Code section 423.3(23)).
  • Raffles held by a licensed qualified organization at a fair as defined under Iowa Code section 99B.1 and pursuant to the requirements specified in Iowa Code section 99B.24. (Exempt under Iowa Code section 423.3(62)).
  • Raffles—whether or not they are conducted at a fair event—where the proceeds are used to provide educational scholarships by a qualifying organization representing veterans as defined in Iowa Code section 99B.27(1)(b). (Exempt under Iowa Code section 423.3(97)).

Receipts

Gambling receipts include charges paid to participate, admissions, and ticket sales. Sales tax is computed on the entire gross receipts without any deductions.

See Iowa Tax on Gambling.

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Local Option Sales Tax

Most Iowa towns and rural areas impose the 1% local option sales tax (LOST). There is no local option use tax.

Organizations identified as exempt from paying state sales tax are also exempt from paying local option sales tax.

See Iowa Local Option Tax Information.

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Hotel and Motel Tax

Certain cities and counties in Iowa have imposed a local hotel and motel tax.

The local hotel and motel tax is in addition to the 5% state hotel and motel tax. Lodging is not subject to local option sales tax, whether or not a local hotel and motel tax is imposed. Nonprofit organizations and corporations, churches, schools, and religious organizations are not exempt from state or local hotel and motel taxes.

See Iowa Hotel and Motel Tax.

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Motor Fuel Taxes

Gasoline, gasohol, liquefied petroleum gas dispensed into a vehicle, and undyed diesel fuel are subject to Iowa fuel tax at the time of purchase. If a fuel tax is imposed, no state sales tax is imposed.

Motor Fuel Taxes Are Paid By:

  • Nonprofit entities
  • Churches
  • Religious organizations
  • Private nonprofit educational institutions

See Fuel Tax Description and Rates.

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Corporations as Governmental Units

If certain requirements are met, a corporation can be considered a governmental unit for purposes of receiving a sales or use tax exemption on its purchases. A determination of whether a corporation is a government instrumentality is made on a case-by-case basis by the Iowa Department of Revenue.

Sales are exempt when the following occur:

Net proceeds are expended for educational, religious, or charitable purposes, AND

The organization selling or receiving the profits is exempt from income tax pursuant to IRC 501(c)(3)

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