Fiscal Note
Fiscal Services Division
SF 2367 – Department of Revenue, Sales Tax (LSB5284SV.1)
Staff Contact: Lora Vargason (515.725.2249) lora.vargason@legis.iowa.gov
Jeff Robinson (515.281.4614) jeff.robinson@legis.iowa.gov
Fiscal Note Version – Final Action
Description
Senate File 2367 makes technical and operational adjustments to Iowa Department of Revenue
(IDR) tax programs and administrative functions. The Bill also relates to sales/use tax, bank
franchise tax, and personal income tax. Provisions of the Bill have various effective dates.
Table 4 at the end of this Fiscal Note summarizes the General Fund fiscal impacts of the
various Bill divisions.
Background — Divisions with Minimal or No Projected Fiscal Impact
• Division III — Distributions of revenue to local governments and school districts.
• Division IV — Liability of sellers using certified service provider.
• Division V — IDR authority to cancel various permits issued by the Department.
• Division VI — Iowa Economic Development Authority (IEDA) sales/use tax refund
incentives.
• Division IX — Motor fuel reporting requirement penalty.
Division I — Sales, Use, and Excise Tax — Returns Due
Description and Background
The Bill provides for administrative changes, technical updates, and other changes affecting the
tax code and program administration. The Bill also exempts from sales tax the purchase of
specified digital products (SDP), prewritten computer software, and related services sold to
public utilities.
Assumptions/Fiscal Impact (Division I)
• The IDR estimates that sales/use tax revenue will increase 3.6% in FY 2023, 3.0% in
FY 2024, 2.7% in FY 2025, 2.6% in FY 2026, 3.0% in FY 2027, and 3.0% in FY 2028.
Those IDR estimates are used for fiscal impact calculations. The changes to items added to
the sales tax base and the removal of exemptions are shown in Table 1 and include impacts
to the Secure an Advanced Vision for Education (SAVE) Fund distributions.
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 Table 1 — Fiscal Impact of Exemption for Purchase of Digital
Goods for Public Utilities
In Millions
Total Projected Change to Change in Net General
Gross Sales/Use Tax Collected SAVE Transfers Fund Impact
FY 2023 $ -0.1 $ 0.0 $ -0.1
FY 2024 -0.2 0.0 -0.2
FY 2025 -0.2 0.0 -0.2
FY 2026 -0.2 0.0 -0.2
FY 2027 -0.3 -0.1 -0.2
FY 2028 -0.3 -0.1 -0.2
The FY 2023 amount is for one half of the fiscal year.
• The change to the exemption will decrease Local Option Sales Tax (LOST) revenue by a
minimal amount.
Division II — Sales and Use Tax Exemptions
Description and Background
The Bill makes the following changes to the sales tax base. All changes are effective
January 1, 2023, except for the removal of exemption for computers and peripherals, which is
effective January 1, 2024.
• Eliminates the sales/use tax exemption on the sales price from the sale or rental of
computers or computer peripherals by an insurance company, financial institution, or
commercial enterprise.
• Exempts from sales tax the purchase of SDP, prewritten computer software, and related
services sold to public utilities.
• Exempts from the sales tax the sale of feminine hygiene products.
• Exempts from sales tax the sale of child and adult diapers.
Assumptions/Fiscal Impact (Division II)
• The IDR estimates that sales/use tax revenue will increase 3.6% in FY 2023, 3.0% in
FY 2024, 2.7% in FY 2025, 2.6% in FY 2026, 3.0% in FY 2027, and 3.0% in FY 2028.
Those Department estimates are used for fiscal impact calculations. The changes to items
added to the sales tax base and the removal of exemptions are shown in Table 2 and
include impacts to the SAVE Fund distributions.
Table 2 — Increase in Sales/Use Tax Collected
In Millions
Removal of Exemption for Exemption for Exemption for Total Projected Change
Computers and Purchase of Feminine Purchase of Adult to Gross Sales/Use Tax Change in Net General
Peripherals Hygiene Products & Child Diapers Collected SAVE Transfers Fund Impact
FY 2023 $ 0.0 $ -1.0 $ -4.7 $ -5.7 $ -1.0 $ -4.7
FY 2024 34.9 -2.0 -9.5 23.4 3.9 19.5
FY 2025 71.6 -2.0 -9.7 59.9 10.0 49.9
FY 2026 72.2 -2.1 -9.9 60.2 10.0 50.2
FY 2027 69.7 -2.1 -10.1 57.5 9.6 47.9
FY 2028 66.2 -2.1 -10.3 53.8 9.0 44.8
The FY 2023 amount is for one half of the fiscal year.
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• The changes to exemptions will impact LOST revenue by the following amounts:
• FY 2023 — Decrease $0.9 million (for one half of the fiscal year)
• FY 2024 — Increase $3.8 million
• FY 2025 — Increase $9.7 million
• FY 2026 — Increase $9.7 million
• FY 2027 — Increase $9.3 million
• FY 2028 — Increase $8.7 million
Division VII — Bank Franchise Tax
Description and Background
The Bill reduces Iowa’s current bank franchise tax rate of 5.0% of net income over five tax
years. The tax rate is first reduced to 4.7% for tax year (TY) 2023 and is reduced over the next
four years until the rate is fixed at 3.5% for TY 2027 and after.
The Iowa franchise tax applies to the net income of financial institutions that is apportioned to
Iowa. The term “financial institution” refers to banks but also includes several other corporate
structures. The term does not include credit unions.
The fiscal impact for a change in the franchise tax consists of two parts:
• Calculating the reduction in the franchise tax.
• Calculating the reduction in the use of the individual income tax Bank Franchise Tax Credit
that is the result of a decrease in the franchise tax rate. The Bank Franchise Tax Credit is a
mechanism used to avoid the double taxation of financial institution profits. Double taxation
occurs if the profits of an institution are taxed first at the entity (corporate) level, and the
owners are then taxed on the profits as income. The credit adjusts an owner’s income to
account for the fact that franchise tax was paid on the profits at the entity level. The Bank
Franchise Tax Credit is a nonrefundable credit.
Assumptions/Fiscal Impact (Division VII)
The IDR uses a bank profit projection process for the franchise tax projection that:
• Begins with a projection of net income at the entity (national) level using data from returns
filed for tax years 2018 through 2020.
• Apportions each entity’s net income to Iowa.
• Applies the current 5.0% tax rate and the proposed tax rate reductions.
• Subtracts tax credits.
• Compares the projected tax liability results using the current tax rate to the results using the
proposed tax rates.
• Applies the projected reduction percentages to current law projections for gross franchise
tax collections based on the most recent Revenue Estimating Conference projections for
FY 2023 and the IDR’s projections for future years.
Based on 2007 through 2021 historical averages of franchise tax payments and Bank Franchise
Tax Credits, the IDR estimates that for each $1.00 of reduced franchise tax, the corresponding
reduction in Bank Franchise Tax Credit usage on Iowa individual income tax returns will
increase individual income tax by $0.35.
The franchise tax rate reductions are projected to reduce bank franchise tax liability and
decrease the use of the Bank Franchise Tax Credit. The annual amounts of the two fiscal
impacts combine to produce the following projected net tax liability and State General Fund
revenue reductions:
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• FY 2023 — $1.9 million
• FY 2024 — $4.2 million
• FY 2025 — $5.5 million
• FY 2026 — $8.4 million
• FY 2027 — $11.4 million
• FY 2028 — $13.4 million
For years beyond FY 2028, the projected tax liability and State General Fund revenue
reductions are expected to increase at the rate of net income growth for banks doing business
in Iowa.
Division VIII — Manufactured Food — Sales Tax Exemption
Description and Background
The Bill expands the exemption of items and services used by a manufacturer to produce
marketable food products for human consumption to include an exemption for a manufacturer of
food ingredients. The change is effective upon enactment and applies retroactively to
January 1, 2019. Due to the retroactive applicability, the Bill requires refund claims to be filed
prior to October 1, 2022, and total refund claims cannot exceed $100,000 for any calendar year.
Iowa Code section 423.3(49) provides an exemption for items or services purchased in the
production of food. Those items and services are considered taxable if used in the production
of food ingredients or other products that could be eaten as food but are not marketable food
products for human consumption.
Items, services, equipment, materials, and facilities used in the production of food are often the
same as those used in the production of food ingredients or other food products that are not
marketable for human consumption. It can be difficult to distinguish an item or service that is
used in the production of food products for human consumption from one that is used for some
other purpose, which can complicate compliance with the provisions of current law. The
difficulty to distinguish has been the source of a number of tax appeals in recent years.
Assumptions/Fiscal Impact (Division VIII)
• The cost of items and services associated with the manufacture of both food and food
ingredients is estimated to have been $445.1 million in 2020, and 80.0% of these costs will
fall under the new exemption. Because of current noncompliance, the fiscal impact of the
change will be 20.0% of the expanded exemption.
• Growth trend projections for future fiscal years are based on the consumer price index (CPI)
and will increase 5.0% in 2021 and 2.0% annually thereafter through 2028.
• SAVE refunds are 1.0% of sales/use tax collected. LOST distributions are estimated to be
0.97% of sales/use tax collected.
• The full $100,000 of refund claims per year, starting with FY 2019 and continuing through
FY 2022, will be utilized, increasing the FY 2023 fiscal impact estimate by $400,000 to
account for four years of refund claims being filed.
The tax decrease associated with the expanded exemption is shown in Table 3 and includes
impacts to the SAVE Fund distributions.
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 Table 3 — Fiscal Impact of Exemption for Manufacturers of Food
Ingredients
In Millions
Total Projected Change to Gross Change in SAVE Net General
Sales/Use Tax Collected Transfers Fund Impact
FY 2023 $ -5.0 $ -0.8 $ -4.2
FY 2024 -4.7 -0.8 -3.9
FY 2025 -4.8 -0.8 -4.0
FY 2026 -4.9 -0.8 -4.1
FY 2027 -5.0 -0.8 -4.2
FY 2028 -5.1 -0.9 -4.2
The FY 2023 amount includes $400,000 for refund claims being filed.
The changes to exemptions will decrease LOST revenue by the following amounts:
• FY 2023 — $0.8 million
• FY 2024 — $0.8 million
• FY 2025 — $0.8 million
• FY 2026 — $0.8 million
• FY 2027 — $0.8 million
• FY 2028 — $0.8 million
Division X — Solar Energy System Tax Credit
Description and Background
The Bill allows taxpayers with residential solar energy system installations that were completed
during calendar year (CY) 2021 or are on the wait list to receive the Solar Energy System Tax
Credit. The Bill makes inapplicable the current May 1, 2022, deadline for credit applications to
be filed for CY 2021 installations and instead requires application by June 30, 2022. The
residential installations that are approved for the tax credit under the provisions of the Bill are
not to be counted as part of the annual $5.0 million aggregate tax credit cap for all solar energy
system installations. The changes are effective upon enactment and apply retroactively to tax
year 2022.
The Solar Energy System Tax Credit has been available since January 1, 2012. The Iowa tax
credit is equal to a percentage of the federal tax credit that was available for the same purpose.
For installations completed on or after January 1, 2016, the Iowa credit is equal to the 50.0% of
the federal credit.
The federal tax credit ended for residential installations completed after December 31, 2021.
Iowa law limits the total aggregate amount of tax credits approved under the program in a
calendar year to $5.0 million. The full CY 2021 allocation has been awarded, and a wait list
exists for projects that qualify for the credit but will not receive an award under current law
because of the annual cap.
The tax credits are not transferable or refundable, but unused tax credits may carry forward for
up to 10 fiscal years.
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Assumptions/Fiscal Impact (Division X)
Based on tax credit applications from residential projects completed during CY 2018 through
CY 2020, the IDR estimates that a total of $5.6 million in applications will be approved under the
provisions of the Bill.
The Legislative Services Agency estimates that awarded tax credits will be redeemed over eight
fiscal years as follows:
• FY 2023 — 45.0%
• FY 2024 — 20.0%
• FY 2025 — 10.0%
• FY 2026 through FY 2030 — 5.0% each fiscal year
The redemption of Solar Energy System Tax Credits that are assumed to be issued under the
provisions of the Bill are projected to reduce individual income tax liability and General Fund
revenue by the following amounts:
• FY 2023 — $2.5 million
• FY 2024 — $1.1 million
• FY 2025 — $0.5 million
• FY 2026 through FY 2030 — $0.3 million each fiscal year
There is no projected fiscal impact beyond FY 2030.
Division XI — Individual Income Tax Exclusion — Certain Premium Pay and Bonuses
Description and Background
The Bill provides for State individual income tax exemptions for bonus payments specified in the
Bill. The State individual income tax exemption applies retroactively to tax years beginning on
or after January 1, 2022, but before January 1, 2023.
Fiscal Impact (Division XI)
The fiscal impact is estimated to be a General Fund reduction of $2.8 million in FY 2023
compared to what would have been collected if the identified bonuses would have been subject
to State individual income tax.
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Summary of Fiscal Impact
State General Fund — Table 4 summarizes the Bill’s projected General Fund fiscal impacts.
Table 4 — Projected Net Change in Tax Liability and State General Fund Revenue
In Millions
Division Item FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
I Sales/Use Tax — Public Utilities Exemption SDP $ -0.1 $ -0.2 $ -0.2 $ -0.2 $ -0.2 $ -0.2
II Sales/Use Tax — Change to Computers Exemption 0.0 29.1 59.7 60.3 58.1 55.2
II Sales/Use Tax — Fem. Hygiene Products Exemption -0.8 -1.7 -1.7 -1.8 -1.8 -1.8
II Sales/Use Tax — Diapers Exemption -3.9 -7.9 -8.1 -8.3 -8.4 -8.6
VII Bank Franchise Tax Rate Reduction -2.9 -6.4 -8.4 -12.8 -17.5 -20.6
VII Bank Franchise Tax Credit 1.0 2.2 2.9 4.4 6.1 7.2
VIII Sales/Use Tax — Manufactured Food