In 2018, the Iowa legislature passed a new law, SF 512, effective July 1, 2018, which creates a Water Service Excise Tax (WET). Prior to the enactment of this law, the sale of water was subject to the 6% state sales tax. The WET exempts the sale of water service from state sales tax, but imposes a 6% excise tax on the sale of water service.
Some entities that make sales of water service and other goods or services will now have to separately collect and remit the 6% excise tax on water service sales in addition to state sales tax on other goods or services. For example, if an entity that sells both sewage and water services is currently collecting and remitting state sales tax on sewer charges to nonresidential commercial customers, they will continue to collect this portion as sales tax plus any applicable local option sales tax. However, the entity will no longer collect state sales tax on the sale of water service, but will collect the WET on the sales of water service.
Over the life of the WET, a portion of the total taxes collected will be distributed into two funds—the water quality infrastructure fund and the water quality assistance fund—which will provide money to the Department of Agriculture and Land Stewardship and the Iowa Finance Authority. These funds will be used to improve water quality in Iowa. The remaining portion of WET that is not distributed into either of these funds will be deposited into the General Fund.
The WET applies to the sale of water service by water utilities.
Water service means the delivery of water by a piped distribution system. A water utility means any person, partnership, business association, or corporation, including municipally owned corporations, domestic or foreign, who owns or operates any facilities for making sales of water service to the public for compensation.
For purposes of WET, a facility is any storage tanks, water towers, wells, plants, reservoirs, aqueducts, hydrants, pumps, pipes, or any other similar devices, mechanisms, equipment, or amenities designed to hold, treat, sanitize, or deliver water.
When Water Service is Furnished for Compensation
Water service is furnished for compensation when water service is 1) sold for a separately itemized price, or 2) when the price of the water service is identifiable from an invoice, bill, catalog, price list, rate card, receipt, agreement, or other similar document, including where the total sales price increases when water service is included in the sale. Water service is not furnished for compensation when the provision of water service is incidental to the rental of real property.
Itemized Sale of Water Service
1) A Homeowners Association (HOA) owns or operates a well located in a small community. Homes in the community are connected to the well via pipes, and every home pays $20 to the HOA for access to the water and associated maintenance on the water distribution system. Only homes who pay the $20 are provided water service. The HOA is a water utility because it owns or operates a facility (the well) and provides water service for compensation. The HOA must therefore collect and remit WET on the $20 monthly fee paid by each member.
2) An apartment owner purchases water from a city water utility and distributes the water to each unit through a system of pipes. The city meters the apartment owner’s use of water each month and charges the apartment owner for the water service. The apartment owner separately bills each of the tenants $40 per month for water service, including the cost of water and maintenance on the water distribution system. The apartment owner is a water utility and must collect and remit water service excise tax on the $40 monthly charge for water service. The apartment owner may purchase the water from the city tax exempt as a sale for resale.
Identifiable Sale of Water Service
3) A campground provides three campsite packages to its customers:
Package A includes only campsite access for $10 per night.
Package B includes campsite access and an electrical hookup for $20 per night.
Package C includes campsite access, an electrical hookup, and water service for $30 per night.
Sales of Package C by the campground include sales of water service. The campground must collect and remit water service excise tax on $10—the identifiable sales price of water service.
Water Service Incidental to Rental of Real Property
4) Water service sold with real estate rental for one non-itemized price. A Manufactured Housing Community (MHC) owner owns a well and pipes water to the lots. The MHC owner charges tenants $500 per month for each unit. Water from the well is included in the $500 rental charge. The MHC owner does not charge a flat water fee, does not charge tenants based on their actual water used, and does not offer comparable lots at a lower price that do not have access to water service. The MHC owner is not required to collect or remit water service excise tax because water is not being furnished for compensation; it is incidental to the rental of real property.
5) Water service purchased sold with real estate rental for one non-itemized price. A manufactured housing community (MHC) purchases water from a city water utility, and distributes the water to each lot in the community through a system of pipes. The city meters the MHC’s use of water each month and charges the MHC for the water service and the applicable water service excise tax. The MHC charges its tenants $500 for lot rental. As in the previous example, the MHC owner does not charge a flat water fee, does not charge tenants based on their actual water used, and does not offer comparable lots at a lower price that do not have access to water service. The MHC owner is not required to collect or remit water service excise tax because water is not being furnished for compensation; it is incidental to the rental of real property.
The tax on water service applies to any fees or charges that are integral to the furnishing of water by piped distribution system. Below are examples of types of fees that are and are not subject to WET. Importantly, if a fee is not subject to WET, it still may be subject to sales or use tax and the applicable local option tax.
Note: The terminology used to refer to various water services may differ from utility to utility. Regardless of how water utilities refer to these services, the Department will look to the substance of the service to determine if it is subject to tax.
Fees/charges subject to WET. In general, includes sales that are integral to the furnishing of water service by a water utility, even if itemized.
Non-itemized sales of tangible personal property – If the sale of tangible personal property is not sold for an itemized price, and is instead bundled with the sale of water service, then the entire sales price is subject to WET.
Water charge – The actual cost of the amount of water purchased by the customer, whether metered or not.
Service/account charges and administrative fees – Includes new customer account charges and minimum charges for access to water service whether the customer uses the water or not. If these fees are shared for different services, only that portion charged for water service is subject to WET.
Connection, disconnection, and reconnection fees – Fees related to the connection or reconnection to, or disconnection from, a water supply or water distribution system.
Maintenance, inspection, and repair fees – Includes such fees as they are related to the water distribution system, water supplies, and facilities, including fees for labor and non-itemized fees for materials.
Water meter fees & tap fees – Fees charged for use of water meters & taps (note: the sale, including rental, of water meters is the sale of tangible personal property).
Water distribution system infrastructure and improvement fees – Fees charged for the overall improvement of the water distribution system.
Fees/charges not subject to WET. In general, must be sold for an itemized price and distinguished on bills and receipts.
Itemized and separately charges sales of tangible personal property – Sales or rentals of tangible personal property by a water utility that has a separately itemized price on a water bill are not subject to the water service excise tax, but may be subject to sales and use tax.
Residential service contracts (Chapter 523C) – Includes optional “water line insurance” coverage.
Returned check fees – Fees charged for returned checks.
Deposit fees – Includes check deposit fees and meter deposit fees.
Fees for printed bills, statements, labels, and other documents – Fees paid for printed copies of documents provided by a water utility.
Delinquent account fees – Includes late charges and non-payment fees.
Leak detection fees – Fees charged for leak detection services
Other enumerated services not subject to WET. In general, includes other enumerated services found in Iowa Code section 423.2(6)(a). May be subject to sales tax.
Paint for hydrants – Painting of hydrants constitutes painting services under Iowa Code section 423.2(6)(a), and is subject to sales tax, not WET.
Plumbing/pipefitting – Some repairs of a water distribution system may constitute plumbing and pipefitting under Iowa Code section 423.2(6)(a), and are subject to sales tax, not WET.
Importantly, all sales tax exemptions in Iowa Code section 423.3, except the water service exemption, apply to WET. For example, qualifying sales related to new construction (Iowa Code section 423.3(37)) and environmental testing (Iowa Code section 423.3(102)) are exempt from WET.
All water utilities must apply for and obtain a new permit to collect and remit WET. The process to obtain a WET permit is very similar to the process for obtaining a sales tax permit, and the requirements for sales tax permits under Iowa Administrative Code chapter 701–202 will apply to WET permits. Apply for a WET permit using GovConnectIowa. Applications must be submitted online.
Except as otherwise stated on this website, the requirements for filing returns and deposits for sales tax under Iowa Administrative Code chapter 701–201 will apply to WET.
WET filing and payments can be made using GovConnectIowa. For purposes of determining your filing status, the Department will use the following criteria based on your combined WET and sales tax remittances:
| Deposit Filing Status | Threshold |
|---|---|
| Monthly | More than $1200 in combined annual WET and sales tax. |
| Annually | Less than $1200 in combined WET and sales tax for the prior year. |