Fiscal Note
Fiscal Services Division
HF 2583 – Department of Revenue, Sales Tax (LSB5284HV)
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 – New
Description
House File 2583 makes technical and operational adjustments to Iowa Department of Revenue
(IDR) tax programs and administrative functions. The Bill also relates to sales/use tax and bank
franchise tax. Provisions of the Bill have various effective dates. Table 3 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 II — Local Option Sales Tax (LOST) and Secure an Advanced Vision for Education
(SAVE) distributions.
• Division III — Liability of sellers using certified service providers.
• Division IV — IDR authority to cancel various permits that are no longer in use.
• Division V — Iowa Economic Development Authority (IEDA) sales/use tax refund incentives
through the High Quality Jobs Program deadline procedures.
• Division VIII — Motor fuel reporting requirement penalty.
Division I — Sales, Use, and Excise Tax — Returns Due
Description and Background
The Bill requires a combined sales and use tax permit to allow for combined filing of sales/use
tax returns; requires electronic filing of these returns, with exceptions; and requires returns to be
filed annually or monthly, eliminating the quarterly filing option and thresholds for those filings.
In addition, the Bill makes the following changes to the sales tax base:
• 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 specified digital products (SDP), prewritten
computer software, and related services sold to public utilities.
Assumptions/Fiscal Impact (Division I)
The portion of the Bill providing for changes to sales/use tax permits and filings is estimated to
have no fiscal impact.
• The Department of Revenue 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 calculations of those fiscal years.
• SAVE refunds are 1.0% of sales/use tax collected. LOST distributions are estimated to be
0.97% of sales/use tax collected.
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The fiscal impact of changes in Division I are shown in Table 1 and include impacts to the
SAVE Fund and LOST distributions.
Table 1 — Increase in Sales/Use Tax Collected
In Millions
Professions and Net Increase to Increase in
Occupations SDP Public Utilities SDP Sales/Use Tax Increase in LOST
Taxation Exemption Collected SAVE Refunds Distributions
FY 2023 $ 1.4 $ -0.1 $ 1.3 $ 0.2 $ 0.2
FY 2024 3.0 -0.2 2.8 1.4 1.3
FY 2025 3.1 -0.2 2.9 1.5 1.4
FY 2026 3.2 -0.2 3.0 1.5 1.5
FY 2027 3.4 -0.3 3.1 1.6 1.5
FY 2028 3.6 -0.3 3.3 1.6 1.6
SDP = Specified digital products
The FY 2023 amount is for one-half of the fiscal year.
Totals may not add due to rounding.
An increase in SAVE refunds will have a negative impact on the General Fund.
An increase in LOST distributions will have no impact on the General Fund.
Division VI — 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 VI)
The Department uses a bank profit projection process for the franchise tax 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 rate.
• 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 Department’s projections for future years.
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Based on 2007 through 2021 historical averages of franchise tax payments and Bank Franchise
Tax Credits, the Department 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:
• FY 2023 — $1.4 million
• FY 2024 — $3.8 million
• FY 2025 — $6.4 million
• FY 2026 — $7.4 million
• FY 2027 — $9.6 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 VII — 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 VII)
• 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 trends in 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.
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• 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 2 and includes
impacts to the SAVE Fund and LOST distributions.
Table 2 — Decrease in Sales/Use Tax Collected From Exemption for Manufacturers of
Food Ingredients
In Millions
Decrease to Sales/Use Decrease in SAVE Decrease in LOST
Tax Collected Refunds Distributions
FY 2023 $ -5.0 $ -0.8 $ -0.8
FY 2024 -4.7 -0.8 -0.8
FY 2025 -4.8 -0.8 -0.8
FY 2026 -4.9 -0.8 -0.8
FY 2027 -5.0 -0.8 -0.8
FY 2028 -5.1 -0.8 -0.8
A decrease in SAVE refunds will have a positive impact on the General Fund.
A decrease in LOST distributions will have no impact on the General Fund.
Summary of Fiscal Impact
State General Fund — Table 3 summarizes the Bill’s projected General Fund fiscal impacts.
Table 3 — Projected Increase (Decrease) 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 — Change to SDP Exemption $ 1.4 $ 3.0 $ 3.1 $ 3.2 $ 3.4 $ 3.6
I Sales/Use Tax — Public Utilities Exemption SDP -0.1 -0.2 -0.2 -0.2 -0.3 -0.3
I Sales/Use Tax — SAVE Refunds -0.2 -1.4 -1.5 -1.5 -1.6 -1.6
VI Bank Franchise Tax Rate Reduction -1.4 -3.8 -6.4 -7.4 -9.6 -13.4
VII Sales/Use Tax — Manufactured Food -5.0 -4.7 -4.8 -4.9 -5.0 -5.1
VII Sales/Use Tax — SAVE Refunds 0.8 0.8 0.8 0.8 0.8 0.8
Total Projected Change Compared to Current Law $ -4.5 $ -6.3 $ -9.0 $ -10.0 $ -12.3 $ -16.0
SDP = Specified digital products
Sources
Department of Revenue
LSA Calculations
/s/ Holly M. Lyons
April 8, 2022
Doc ID 1289321
The fiscal note for this Bill was prepared pursuant to Joint Rule 17 and the Iowa Code. Data used in
developing this fiscal note is available from the Fiscal Services Division of the Legislative Services
Agency upon request.
www.legis.iowa.gov
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Statutes affected:
Introduced: 9C.3, 9C.5, 99G.30A, 321.105A, 422.25, 452A.65, 423.3, 423.14, 423.24, 423.31, 423.33, 423.32, 423.36, 423.1, 423.57, 423.43, 423C.4, 423C.3, 728.5, 17A.4, 423B.7, 423F.2, 423.48, 421.17, 15.331A, 15.331C, 15.354, 452A.33