Iowa Law Firms and Other Professional Firms are Paying Too Much Sales Tax

Pssst. I have a secret that the Iowa Department of Revenue does not want Iowa law firms and other professional firms to know. Iowa professional firms—law firms, accounting firms, doctor and dentist offices, architectural firms—are probably paying too much sales tax on their sophisticated (and expensive) research tools such as WestLaw, Lexis, BNA; other software; and file storage services and such firms are entitled to a refund of that tax paid.

Iowa Code § 423.3(104) exempts from sales tax “the sales price of specified digital products and of prewritten computer software,” “optional service or warranty contracts for computer software maintenance or support services,”  “storage of tangible or electronic files, documents or other records,” “information services,” and “software as a service” if such services are purchased and used by a “commercial enterprise.” 

Historically, professional firms were not deemed to be a “commercial enterprise.” However, a 2019 law change defined “commercial enterprise” for purposes of Iowa Code § 423.3(104) to include law firms and other professional firms (architects, accountants, doctors, etc.). As a result of this change, certain services providers began charging tax on research tools and software, with professional firms likely not realizing the change. Furthermore, professional firms likely did not take advantage of other exemptions due to the historical non-applicability of the exemptions.  

Law firms and other professional firms should review their purchases to ensure they are taking full advantage of the sales tax exemptions that are applicable to them. Specifically, professional firms should review their invoices for the following purchases to ensure they are not paying sales tax:

• Online research tools
• Software
• Software maintenance contracts
• Off-site file storage

If the law firm or other professional firm has been paying tax on these purchases, it can claim a refund of sales tax paid over the past three years by using a Form 843. The law firm or other professional firm should also provide the vendor an exemption certificate so that it does not improperly pay tax in the future.