Policy Letter; Re: Bank Service Charges, Your Letter, 11/4/94

Topic Code: B011Bank Service Charges (ST)          Document Reference:

Policy letter; Re: Bank Service Charges, Your Letter, 11/4/94

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Dear Redacted Content:

Thank you for your continuing confidence in my ability to answer your questions about Iowa sales and use tax law. I have included with my letter a copy of department rule 701-26.8 for easy reference since I will be citing to that rule on a number of occasions. In answer to "Q1" I think that if, as explained in subrule 26.8(2), the lawyer's trust or real estate trust account is a checking account, the amount by which interest earned on the account is reduced is a taxable receipt upon which sales tax must be computed.

As an explanation for this, I begin with Iowa Code, § 422.43(11) which states in relevant part: "The following enumerated services are subject to the tax imposed on gross taxable services... service charges of all financial institutions...." (Emphasis added.) "Gross taxable services" is defined in § 422.42(4) of the Iowa Code as follows: "Gross taxable service" means the total amount received in money, credits, property, or other consideration, valued in money, from services rendered, furnished, or performed in this state...." If the sums in question are withdrawn from trust checking accounts for services described in subrule 26.8(3) which are performed with reference to those trust checking accounts then those sums are "gross taxable services" upon which sales tax is computed, even though the amount of gross taxable services is limited by the amount of interest earned in an account.

Concerning "Q2", fees for garnishments and levies are not taxable, as explained in subrule 26.8(4)"f". If such a fee is charged to a government agency, it is doubly nontaxable, since almost all sales of services to government agencies are exempt from tax under Iowa Code, §§ 422.45(5) or (44).

In answer to "Q3", my comment is that your belief is erroneous. A fee charged to a Minnesota account would not be excluded from tax if that fee were for services rendered, furnished or performed "in this state" as explained in Iowa Code, § 422.42(4). Taxation is determined by where the services are performed, not the situs of the account. Since there is an interstate element to the situation which you describe, the "four prong" test of Complete Auto Transit, v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed. 2d 326 (1977) would have to be satisfied before tax could be imposed on the Minnesota account holder. An application of the "four prong" test to a service transaction is described in the case of Department of Revenue v. Moki Mac River Expeditions, Inc., 773 P.2d 474 (C.A. Ariz. 1989), and a copy of that case is included with this letter. See also my answer to "Q6".

The answer to "Q4" is yes, if the ATM card can be used to withdraw money from any "checking account" as described in subrule 26.8(2). See also subrule 26.8(3)"c".

In answer to "Q5", lockbox fees are not taxable. Our regulations do not state that "special" lockbox fees are taxable, but rather state specifically at subrule 26.8(4)"g" that they are not taxable. Examples of "special lockbox fees" would be charges for drilling out a lockbox or charges for changing the key on one or charges for adding a new key holder.

In answer to "Q6", neither alternative proposal in your letter quite describes the Department's answer to your question. As I earlier stated, the sales tax on the service charges of a financial institution is imposed where that service is rendered, furnished or performed. In the case of a bank checking account, it is the Department's position that services with reference to such an account are performed at the bank where checks and deposit records are kept, where mathematical computations concerning the account are performed and from which the monthly statements are sent to the account holder. Tax is assessed based on the location of the bank I have described and not upon the location of the ATM or a customer.

In closing, I must issue my usual warning. The opinions which I have expressed in this letter are informal only. Because of this, the Department could, in the future, take a position contrary to them.

Sincerely, Darwin D. Clupper Tax Specialist, Policy Section Compliance Division