Iowa (June, 2016)

The existing rule and the proposed amendments implement Iowa Code sections:

• 423.3(47) – Exempting the sale or rental of computers, machinery, and equipment, including replacement parts, and materials used to construct or self-construct computers, machinery, and equipment from the sales tax.
• 423.3(48) – Exempting the furnishing of the design and installation of new industrial machinery or equipment, including electrical and electronic installation, from the sales tax.
• 423.2(1)(b) – Subjecting the sales of building materials, supplies, and equipment to owners, contractors, subcontractors, or builders for the erection of buildings or the alteration, repair, or improvement of real property to the sales tax.
• 423.2(1)(c) – Relating to the taxation of building materials, supplies, and equipment in the performance of construction contracts.

The existing rules related to the manufacturing sales tax exemption were promulgated in response to the enactment of Iowa Code sections 423.3(47) and 423.3(48) in HF 126 (Sales and Use Tax Exemptions Act of 1997). Enactment of those two Iowa Code sections replaced an existing and similar manufacturing exemption that was originally enacted in 1985 (see SF 395, section 85, Sales and Local Option Taxes and Wine Sales Act of 1985). Many of the terms used for the exemption are not defined in the Iowa Code and their definition, interpretation, and enforcement has been a function of Department of Revenue rules and procedures. Under the existing Department rules:

• Supplies are specifically excluded from the definition of “replacement parts.” Drill bits, grinding wheels, punches, taps, reamers, saw blades, lubricants, coolants, sanding discs, sanding belts, and air filters are listed within the rules as nonexclusive examples of supplies. The existing rule specifies that supplies are taxed.
• Replacement parts are generally required to have a longer lifespan (12 months or more). Items that do not have the required lifespan are generally defined as supplies and therefore subject to sales tax. Supplies that last 12 months or longer are generally considered machinery equipment replacement parts and not subject to sales tax. Under the proposed rules:
  • The term “equipment” is defined to include “supplies” and therefore exempt from sales tax. According to the proposed rules, the types of supplies that are to be considered equipment and therefore exempt from sales tax are items such as drill bits, grinding wheels, punches, taps, reamers, saw blades, lubricants, coolants, sanding discs, sanding belts, and air filters.
• The 12-month lifespan presumption for replacement parts is eliminated. Beginning January 1, 2016, all items that can be considered replacement parts will become tax exempt under the rule.
• Changes the categorization of certain types of property installed by a building contractor from the current category of real property, to the category of personal property. This change will allow additional construction value to be defined as manufacturing machinery and equipment and therefore exempt from the sales tax.

The IOWA Legislature

 

If you would like additional information on this topic or have any questions, please contact taxdesk@thesaltgroup.com.