Water Service Excise Tax
Sales tax on water didn’t change at all. It just has a new name. Now people aren’t charged local option sales tax on water. The charge is a Water Service Excise Tax.
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.
The City of Storm Lake makes sales of water service as well as other goods and services. The City 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.
For the City of Storm Lake’s customers, basically, water service, as of July 1st, was no longer subject to a 6% sales tax and a 1% local option sales tax, it was changed to a 6% excise tax. Tax on water went down. Since it is now an excise tax on a specific good as opposed to a sales tax, it is no longer subject to the local option. That tax is now remitted to the State of Iowa for water quality infrastructure, wastewater and drinking water treatment, nutrient reduction projects, etc. However, for the first year, only 1/12th of the Excise Tax goes into a water quality infrastructure fund and 1/12th goes into water quality assistance. The bulk of it still goes into the State General Fund.
For the public, it has very little effect outside of lowering the tax they pay for water service from 7% to 6%. If you look at any news or press on the subject, it is the “water quality initiative bill.” But, that does not mean there is no effect at all.
Last fiscal year, the City of Storm Lake collected just under $25,000 in Local Option Sales Tax from water sales and we can no longer charge or collect that tax. That is several million dollars of Local Option Sales Tax that is redirected from local Iowa Governments to the State of Iowa.
More WET information and FAQ’s can be found here https://tax.iowa.gov/WET.