Education

Tens of millions in university sales go untaxed

Lower costs help students, but do they hurt competing merchants?

Matt Lage, the book floor manager at Iowa Book & Supply in downtown Iowa City, helps University of Iowa freshman Blake Newsome of Burr Ridge, Ill. find a microeconomics textbook last Monday. The private bookseller must collect sales tax, which is managers say out it at a competitive disadvantage with the UI. (Cliff Jette/The Gazette)
Matt Lage, the book floor manager at Iowa Book & Supply in downtown Iowa City, helps University of Iowa freshman Blake Newsome of Burr Ridge, Ill. find a microeconomics textbook last Monday. The private bookseller must collect sales tax, which is managers say out it at a competitive disadvantage with the UI. (Cliff Jette/The Gazette)
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IOWA CITY — At the corner of downtown’s Clinton Street and Iowa Avenue sits an institution of sorts — Iowa Book & Supply, which for more than 80 years has served University of Iowa coeds seeking course materials and game-day apparel.

Since the 1990s, Virgil “Scooter” Hare has managed textbook sales here, giving him a front-row seat to their decline.

“I’ve seen the sales slowly tapering down,” he said.

A lot of forces are behind the drop — most prominently competition from booksellers and lenders online, where students spend much of their time these days. But an influx in virtual vendors isn’t the only reason the bookstore is struggling, Hare said.

“Some kids make a little bone about the 6-percent sales tax,” he said. “That is a chunk of change when you’re buying $1,000 of books.”

The University of Iowa and Iowa State University have stopped collecting sales tax on items sold at their campus bookstores — everything from text books and supplies to sweatshirts, face tattoos, dog bowls and stuffed animals.

The University of Northern Iowa — which Feb. 27 entered the bookstore business with its purchase of a private shop — also won’t collect sales tax there.

In addition to the campus bookstores, Iowa’s public universities don’t collect sales tax at most of their food vendors — including at convenience-style stores that sell more than food; at coffee carts; and for catering services in Kinnick Stadium suites and at Hancher Auditorium, for example.

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The UI stopped collecting sales tax in February 2017 at its University Athletic Club, and it stopped collecting sales tax in 2009 at its Iowa House, a hotel attached to the Iowa Memorial Union. In addition to its bookstore and food vendors, ISU doesn’t collect sales tax at Reiman Gardens, which sells wind chimes, jewelry, baby toys and garden decor.

Revenue from many of the non-taxable sales topped at least $31.6 million at the UI, according to documents provided to The Gazette in response to an open records request. Including many of ISU’s non-taxable vendors, revenue in the last full budget year topped at least $37 million, according to documents there also requested by The Gazette.

University attorneys interpret Iowa Code as covering all sales at their bookstores and the other venues under an “educational” exemption.

Proponents argue it trims student costs at a time of rising tuition and debt. But opponents, including private booksellers in the university communities they sit, argue the law doesn’t cover non-education-related sales — or, at least, it shouldn’t. And, they say, if text books and supplies are spared sales tax, the exemption should apply no matter where the items are sold.

“Our owners have contacted people in Des Moines and representatives to see if they can alter the language so that any store selling textbook-related material” could apply the exemption,” Hare said. “But I think it should just be on textbooks only.”

Exemption more than sought

The UI, which has operated a bookstore for decades, in January 2017 stopped collecting sales tax at its Hawk Shop after UI Student Government the month before passed a resolution supporting “a tax exemption on course materials purchased from University of Iowa-operated bookstores.”

Upon receipt of the resolution, said UI spokeswoman Anne Bassett, the UI General Counsel’s Office “analyzed that section of the Iowa Code and concluded the university was exempt from collecting sales tax on any purchases.”

The code in question is applicable to the public universities and exempts sales from state tax “where the entire proceeds from the sales, rental, or services are expended for any of the following purposes” — No. 1 being education.

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On the UI Hawk Shop website, the university states that “all proceeds from the Hawk Shop support student programs and success initiatives. The mission of the Iowa Hawk Shop is to support academic excellence and build Hawkeye tradition.”

ISU’s tax-free Reiman Gardens gift shop reports all proceeds directly benefit the gardens.

That university’s bookstore charged sales tax for years “largely because a privately-owned bookstore across the street complained about unfair competition,” according to ISU spokesman John McCarroll.

When that store — Campus Bookstore — closed in 2012, McCarroll said students complained of the tax and the university halted its collection at the store in April 2015.

UNI just last month acquired nearby privately-owned University Book & Supply, which for 80 years had been serving the Cedar Falls campus. The store’s vice president at the time, Doug Johnson, has said he his colleagues wanted to sell in light of challenges in the industry.

‘Not a high-enough priority’

For Iowa Book in Iowa City, the sales tax issue has fanned those strengthening industry headwinds.

“We’re very slowly going away here,” said Peter Vanderhoef, Iowa Book’s chief financial officer.

To remove any competitive edge universities have because of the sales tax exemption, Vanderhoef said, some have suggested private sellers pay the tax they’re obligated to collect out of their own pocket — and spare the customers.

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“If we gave away (6) percent, we’d be bankrupt,” he said. “That’s how close it is. That’s a fact.”

Iowa Book now is downsizing, laying off employees and curtailing temporary hires.

“We had to let go an employee who’s been with us 40 years,” Vanderhoef said. “We had to let go two employees who’ve been with us over 20 years. That’s not a lot of fun.”

He believes the university is not following the letter or the spirit of the law in exempting all sales from its bookstores.

“I do think they’re doing something they shouldn’t be doing,” Vanderhoef said. “But that’s not a high-enough priority for the people in Des Moines to get excited about. … The state government doesn’t need the money so that’s not important for them.”

On the contrary, lawmakers have considered taking back millions in appropriations already committed for this budget year — including from the regent universities — to address a projected budget shortfall.

Gov. Kim Reynolds originally expected a gap of $34.5 million for the budget year ending June 30. But the federal tax rewrite could benefit the state enough to nearly erase the shortfall, stalling legislative approval on any midyear cuts.

In the meantime, Senate Republicans have unveiled a state tax plan that would cut individual and corporate income taxes by more than $1 billion a year when phased in and expand the sale tax base by capitalizing on more online transactions.

Sen. Bob Dvorsky, D-Coralville, said considering the state pulls its resources primarily from sales and income tax and provides appropriations to the public universities, the institutions should have “a really strict approach” to exempting sales from the state tax.

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“Definitely only education-related items should be exempt,” he said. “Certainly not apparel … and that’s a huge amount.”

For items like clothes and toys and home décor and accessories, Dvorsky said, university-owned bookstores should operate on a level playing field with private sellers.

“I think they should be subject to sales tax, as well as any other retailer who’s selling those things,” he said, noting, “The state is looking for all the dollars it can get.”

And yet, Dvorsky said, he doesn’t think lawmakers have a great awareness of how its public universities do or do not collect sales tax. He suggested it might be an issue they should take up.

However, Sen. Jeff Danielson, D-Waterloo, said he’s all for measures aimed at cutting costs for students — including nixing sales tax on items not required for class.

“When you look at the unacceptable large tax giveaways that have been implemented recently, this is a small measure of help for our college students,” he said. “I’m fully supportive of the bookstores not charging sales tax.”

‘The tipping point’

Despite the competitive edge of not charging sales tax, records show ditching the tax has not created a surge in sales.

UI bookstore sales in the 2017 budget year continued their decline, from $9.4 million in 2015 to $9.2 million in 2016 to $9.1 million in the most recent full budget year.

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At ISU, bookstore revenue has slipped from $32.8 million in 2015 to $31.7 million in 2016 to $28.4 million in the most recent full budget year.

And many students told The Gazette they aren’t aware of the sales tax difference, reporting shopping for books where they’re available and most convenient.

Thus the revenue declines could be indicative of larger shifts in the textbook marketplace, which has seen some states pass “open education materials” legislation urging free online resources for students, and some colleges and universities close their bookstores altogether.

California in 2012 signed into law measures directing the state’s public higher education systems to create an online library with open educational resources and textbooks to increase “faculty adoption of high quality, affordable or free materials to save students money,” according to the California Open Educational Resources Council.

Iowa moved closer to taking a similar step Wednesday when the Senate passed a measure requiring the state’s higher education systems consider opportunities to “mitigate the marginal costs of new editions of existing textbooks,” in part by developing five-year plans aimed at upping courses that use “open educational resources.”

Final passage of such legislation might be the final nail in the slowly-closing coffin for brick-and-mortar bookstores, according to Iowa Book’s Hare — regardless of the sales tax issue.

“I think that could be the tipping point,” he said. “That would destroy the textbook industry as a whole.”

l Comments: (319) 339-3158; vanessa.miller@thegazette.com

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