Effective July 1, 2018, in the state of Iowa is a new Water Service Excise Tax (“WET”), which was passed as SF 512. Iowa landlords who furnish water in any way to their tenants, as well as other companies that could be deemed to be providing water service, need to take note of the new WET. The Iowa Department of Revenue (“IDOR”) has provided some guidance regarding WET, including written materials and will continue to provide guidance in the future. The IDOR has indicated that proposed regulations, although not in final form, will be available on the IDOR’s website on or before July 1, 2018.
WET is a newly created excise tax—that is, a tax that applies to the sale or furnishing of a specific type of product or service—that applies to water service. Currently, water service is generally subject to sales tax. As of July 1, 2018, WET replaces the six percent (6%) sales tax and imposes a six percent (6%) excise tax on the sale of water service. Thus, as an initial matter, from the IDOR’s perspective, WET is not an additional tax or a tax increase; rather, it takes the place of sales tax for water service only. WET is also not subject to Local Option Sales Tax.
WET applies to the sale of “water service” by “water utilities,” as those terms are defined in Chapter 423G. WET defines “water service” as the delivery of water by piped distribution system and defines “by piped distribution” as all deliveries of water where the water passes through a piped distribution system to its point of delivery. The term “water utility” is defined as any person, partnership, business association, or corporation, including municipally owned corporations, domestic or foreign, who own or operate any facilities for making sales of water service to the public for compensation. Per the IDOR’s interpretation of WET, compensation or fees received for the sale of “water service” include fees relating to water service, which would include, for example, water connection fees, fees for upkeep of the piped distribution system, or administrative fees associated with the water service. Finally, the term “facilities” is defined to include the following: storage tanks, wells, plants, reservoirs, aqueducts, hydrants, pumps, or any other similar device, mechanism, equipment, or amenity designed to hold, treat, sanitize or deliver water. Notably, “facilities” does not include interior plumbing.
Based on these statutory definitions, WET will apply if the following conditions are satisfied (and no exemptions apply):
- A person, partnership, business association or corporation, including municipally owned corporations,
- owns or operates,
- any facility,
- for the delivery of water by a piped distribution system,
- for compensation.
Iowa apartment owners are likely not subject to WET because the above-noted “internal plumbing” exemption appears to apply to essentially all apartment complexes; however, the IDOR has yet to introduce regulations interpreting this exemption. Specifically, in our conversations with the IDOR, the IDOR has explained that Iowa apartment landlords are likely exempted from WET, but have also noted that this question will not be definitively answered until the finalized IDOR regulations are published, which will occur later this summer or fall. When the IDOR’s final regulations are published, we will update you regarding applicability of WET to apartment landlords, but at this point it appears that Iowa apartment owners will be exempt.
In addition, water service sold for resale or distribution to end consumers is also exempt from WET. For example, the transaction of a municipality or rural water association selling water to a manufactured housing community to be distributed to end residents would generally be exempt from WET, so long as an exemption certificate was obtained by the manufactured housing community (and provided to the municipality or rural water association).
This same exemption has existed under the current sales tax applicable to water service. If you are a manufactured housing community owner who is subject to WET and a municipality or rural water association charges you WET on the purchase of your water (to be distributed to your residents) after July 1, 2018, you should consult an attorney to discuss a tax exemption. Other exemptions not relevant to landlords also appear in the new WET.
It is important to note that IDOR has expressed the view that water being provided to residents of manufactured housing communities is subject to WET one way or another, but that WET should never result in a double taxation of such water service. Further, the IDOR has interpreted and will continue to interpret the delivery of water for compensation to be much broader than many landlords believe. In particular, the IDOR has interpreted the sale of water service to mean water service being provided to tenants along with other products or services in exchange for compensation as part of a single transaction. Most relevant in this context, the IDOR interprets the sale of water service to include a manufactured housing community charging a flat fee for rent, so long as water service is provided from the landlord as a part of the rental transaction.
In addition, IDOR has expressed the following general principles to Davis Brown regarding the applicability of WET to manufactured housing companies, even though these principles are not expressly set forth in the statutory language regarding WET. First, per discussions with the IDOR, any time a manufactured housing community’s residents are charged for water service directly by a municipality or rural water association, the WET should be collected and remitted by the municipality/water association and not the manufactured housing communities. Conversely, any time a manufactured housing community’s residents are not charged for water service directly by a municipality or rural water association, the manufactured housing community is subject to WET, regardless of the landlord’s billing practices and policies regarding water being provided to residents (subject to a public use exception that likely does not apply, as is discussed below).
The following examples will illustrate these principles in regard to the applicability of WET to manufactured housing communities. Please note that these are only general examples and are based upon the IDOR’s current interpretations and communications to Davis Brown regarding of WET. You should consult an attorney regarding your specific situation.
First, per the IDOR’s current interpretation, WET does not apply to manufactured housing communities in situations where a municipality, rural water association, or other water supplier bills the residents directly. For example:
A manufactured housing community owns or leases its pipe distribution system, but its residents are charged for water service directly by the municipality or rural water association. In this instance, the manufactured housing community would not be subject to WET. Instead, the municipality/water association would be the entity subject to WET. Presumably, the municipality/water association would be including the 6% WET charge in its bills to residents and then submitting all WET funds to the State.
Second, per the IDOR’s current interpretation, WET does apply to manufactured housing communities whose water service is sub-metered and who bills their residents for their water usage. For example:
A manufactured housing community has a sub-metered water distribution system to its residents and sends each resident a monthly bill for water. In this instance, the manufactured housing community is subject to WET, just as the community was subject to sales tax for the sale of water to its residents prior to July 1, 2018.
Likewise, and by way of further example:
A manufactured housing community that bills residents a flat fee of $10 a month for water. In this instance, the manufactured housing community is subject to WET, just as the community was subject to sales tax for the sale of water to its residents prior to July 1, 2018.
Remember that in any situation in which the manufactured housing community is subject to WET (including in the above two examples as well as the below example), the transaction of the manufactured housing community purchasing the water from the municipality or rural water association is exempted from WET. If you are being charged WET by a municipality or rural water association in this situation, you should consult an attorney.
Third, per the IDOR’s current interpretation, WET also applies to manufactured housing communities in essentially all other situations in which its residents are not charged for water service directly by a municipality or rural water association (subject to the public use exception), including where a manufactured housing community does not actually charge the residents for water. This principle is illustrated by the following example:
Residents of a manufactured housing community are not charged for water service directly by a municipality or rural water association. In this manufactured housing community, the lease provides and/or the landlord states that it does not charge for water and/or purports to provide water to its residents free of charge. In this example, assume monthly lot rent is a flat fee of $400 per lot, with no additional charge for water. In this instance, the IDOR’s current position would be that the landlord’s flat rental charge is compensation received by the landlord for the landlord’s bundled services and products provided to all residents, including rental of the home sites, access to community amenities, access to community services, as well as water service. Thus, the manufactured housing community is subject to WET, as it is providing water service for compensation to its residents. Under the new law, the manufactured housing community must remit the 6% WET on the estimated portion of the rent that is charged or allocated for the water service provided to the residents. Such communities can collect that 6% WET from its residents.
Please note that the IDOR has indicated that there is an exception to the above scenario and/or similar scenarios (such as the campground scenario provided by the IDOR on its website) in the seemingly unlikely event that a manufactured housing community or other landlord provides water service to the general public free of charge; in such situation, the company would not be subject to WET. However, the IDOR will decide this on a case-by-case basis, and the IDOR has indicated to us that, at the very least, the water service purportedly being provided by a manufactured housing community to the public free of charge would need to be greater than a public restroom or drinking fountain, and, further, there would need to be clear signage indicating that the water service was available and free to the general public.
Fourth, we have several manufactured housing community clients that charge residents for wastewater and/or sewerage discharge, rather than charging for water directly. We have discussed this specific scenario with the IDOR. According to the IDOR, this practice would still constitute selling water service for compensation, as water service would be part of the bundled services/products being provided by the landlord in exchange for the lump sum rental amount, and, accordingly, would be subject to WET. To be clear, according to the IDOR, the charges purportedly for wastewater and/or sewerage discharge are not subject to WET, but the IDOR still views the landlord as selling water service to its residents as part of its bundled services/products provided to residents in exchange for the monthly rental compensation.
Finally, where a water utility or other company charges a minimum cost for water service, regardless of whether the end consumer uses the service, the cost is still subject to WET.
The above examples are general examples and do not equate to legal advice in regard to any landlord’s specific situation. Landlords should consult an attorney with any specific questions regarding the applicability of WET.
PERMITTING, REGISTRATION AND PAYMENT
All landlords and other “water utilities” that are required to collect and remit WET must register for a WET permit. All WET reports and remittances must be made under that WET permit number. The WET permit registration form can be found on the IDOR’s website. There is no electronic registration, and the registration form must be completed and mailed to:
Iowa Department of Revenue
PO Box 10470
Des Moines, IA 50306-0470
Please note that a landlord or other water utility cannot use a sales tax permit for WET. For utilities that make sales of both water and other products/services, the sales tax report/remittance must be filed under the appropriate sales tax permit, and the WET report/remittance must be filed under the WET permit.
Most companies subject to WET will file quarterly returns, while others may be required to file annual or monthly returns, as is shown on the permit registration form. However, if the annual tax liability for combined WET and sales tax will not exceed $120.00, a water utility may apply to the IDOR to file annual returns. Returns must be filed electronically online. Instructions for filing returns can be found on the IDOR website.
With regard to billing, by January 1, 2019, a water service fee, along with the 6% water service excise tax amount, must be separately itemized and stated on all bills and receipts, and must be identified separately from any other taxes collected. If a landlord or other water utility fails to separate the sale of water service from other charges or services, the IDOR will assume that the cost for the water service subject to WET is a pro rata portion of the total price, which generally results in a landlord paying much more WET than it should. Thus, manufactured housing communities and other landlords subject to WET should proactively take the necessary steps to start breaking out an appropriate charge for water to their residents, as well as expressly noting the 6% WET amount applicable to such water charge. The IDOR provides the following example for its pro rata determination on the compensation a company receives for water service.
A water utility is a campground that provides the following services for $20.00: campground access; electricity; sewage; water; and trash removal. The campground does not bill its customers separately for any service. The IDOR will assume that the cost of each service is $4.00 (total cost of $20.00, divided by five separate services) and the campground will be billed accordingly.
Thus, landlords subject to WET who do not separately meter a resident’s water consumption and do not currently break out a charge for water on its monthly charges to residents should determine a reasonable estimation as to how the entity’s total water amount is allocated amongst its residents and should separately itemize water on the monthly bills, so that the IDOR does not make that determination for you.
Finally, WET applies to water service/usage on and after July 1, 2018. For bills reflecting water usage prior to July 1, 2018, WET does not apply.
WHAT IF I SHOULD HAVE BEEN COLLECTING SALES TAX FOR MY WATER SERVICE?
In the event you believe you should have been collecting sales tax on water, or anything else, please consult an attorney to discuss the possibility of filing past returns with past sales information, the amount of sales tax owed (together with tax, penalty, and interest that is due), and your other options in this regard.
WILL WET AFFECT CERTAIN IOWA IDNR’S REGULATIONS RE: MANUFACTURED HOUSING COMMUNITIES?
It is an open and unanswered question as to if and how WET--and the billing changes that will need to be made by manufactured housing communities to itemize water service subject to WET-- will apply to or otherwise affect the Iowa Department of Natural Resources’ Drinking Water Regulations (“IDNR Regulations”) and the classification of communities as public water supply systems. However, at this early stage it appears that a manufactured housing community’s actions in complying with WET, including in the new billing requirements, could very well have an effect on the classification of that community as a public water supply system under the current IDNR regulations. In other words, it is certainly possible that payment of WET by a manufactured housing community could cause classification of that community as a public water supply system subject to all of the testing, monitoring, and other IDNR Regulations applicable to public water supply system, which is unfortunate. Thus, you should consult with an attorney and your industry associations regarding the potential applicability of the IDNR Regulations to your community.
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