Terry O’Neill Matt Bishop Iowa Sales Tax Issues for Manufacturers Terry O’Neill Matt Bishop

What is a Manufacturer? Person, firm, or corporation Obtains tangible personal property for the purpose of adding to its value by: any process of manufacturing, refining, purifying, combining of different materials, or packing of meats With an intent to sell at a gain or profit.

Examples of Manufacturers Lumber Mills Printers Book Binders Producers of Drugs or Agricultural Supplies Contract Manufacturers Quarrying or mining after raw materials are severed from the ground crushing, washing, sizing, and blending of aggregate materials.

“Manufacturing” Exemptions: Computers, Machinery, & Equipment Computers, machinery, & equipment are exempt if used directly and primarily in processing by a manufacturer Includes qualifying replacement parts & supplies Applies to sales, leases, or rentals

2013 Law Change to Exemption 2013 Iowa Acts Senate File 452, Section 127: “This subparagraph (4) shall not be construed to require that a person be primarily engaged in an activity listed in this subparagraph in order to qualify as a manufacturer for purposes of this subsection.” What does this mean? You can primarily be a retailer and still meet the definition of “manufacturer” to qualify for the exemption Machinery & equipment must be used directly and primarily in processing

What is “Processing” for Purposes of the Machinery & Equipment Exemptions? A series of operations in which materials are ultimately changed (in some way) into tangible personal property Begins with receiving or producing raw materials Ends at the point the products are delivered for shipment or transferred from the manufacturer or other business Sometimes referred to as “door-to-door processing”

What’s Included in Processing Refinement or purification Treatment to change form, context, or condition Maintenance of quality or integrity including quality control activities environmental conditions Construction of packaging and shipping devices Placement into shipping device or medium Movement until shipped

What is Considered Machinery? Basic unit of the machinery Attachment for the basic unit to function Devices to control, regulate, or operate machinery directly connected or an integral part of the machinery Does not include buildings designed to house or support machinery; or other real property

What is Considered Equipment? Coolers that do not change the materials inside Equipment that eliminates bacteria Palletizers Storage bins Property used to transport raw, semi-finished, or finished goods within a manufacturing plant Vehicle-mounted cement mixers if used by a manufacturer, but not contractor (May be subject to a 5% one-time registration fee)

More Equipment Examples Packaging and bagging equipment, conveyor systems Quality control equipment Core and mold-making equipment Sand-handling equipment used in the mold-making process by a foundry Containers, pallets, packing cases, shipping cases, wrapping materials, etc. used for packaging or transportation when property to be sold at retail or for resale

Primarily Used Machinery & equipment is primarily used in manufacturing / processing when it is used more than 50% of the time in those activities.

Directly Used physical proximity active causal relationship Initiate, sustain, or terminate the transformation of any activity. Considerations: physical proximity active causal relationship Just because a particular piece of property may be essential to the activity because its use is required by law or practical necessity does not, in and of itself, mean that the property is directly used

Not Considered Directly Used Exclusively for the comfort of workers, such as air cooling, air conditioning, and exhaust systems. Support operations where production machinery is assembled, maintained, or repaired. Administrative, accounting, personnel department use Plant security, fire prevention, first aid, and hospital stations Cleaning, disposal of scrap and waste, plant communications, lighting, safety, or heating

Design & Installation The services of design and installation of exempt machinery and equipment for sale or rent are exempt from sales tax if the machinery and equipment are: New, not used, AND Used in processing by a manufacturer New means never having been used or consumed by anyone and does not include reconstructed, rebuilt, repaired, or previously-owned machinery or equipment. The charges for design or installation must be separately identified, charged separately, and reasonable in amount.

Machine Repair Machine repair is a taxable service, even when performed on exempt machinery Exception for food processors

Taxable Purchases Hand Tools Point-of-Sale Equipment Vehicles Subject to Registration Centrally-assessed property

Exempt Fuels Electricity Coal Gas Steam Water Heat

Exempt Chemicals, Solvents, Sorbents & Reagents Must be directly used, consumed, dissipated, or depleted during processing. Must change the product or become part of the product. These restrictions do not apply to manufacturers of food for human consumption.

Computer Exemptions For manufacturers and other specified for-profit businesses Hardware Terminals, Printers Scanners, Monitors Some Software Custom Software Modified Canned Software Separately itemized Exclusive to customer

Taxable Computer Related Items Hardware Repair Point-of Sale Equipment Applications Software Canned Software Electrical Installation (unless new construction) Support & Maintenance Contracts Non-optional: Taxable Optional, separately itemized Support: Exempt Maintenance: Taxable Optional, lumped together 50% Taxable

How to Claim Exemptions Sellers must obtain a completed exemption certificate from the purchaser to verify the purchase qualifies for exemption. Also on our website: Exemption Certificates: How and When to Use Them

Exemption Certificates

Exemption Certificates

Recent Changes

Background Information Prior to July 1, 2016 Replacement parts were exempt Supplies were taxable “Replacement parts” and “supplies” were not defined in the statute

Background Information Early 2016 IDR adopted new rules in ARC 2349C. ARC 2349C reorganized and modernized the rules for the manufacturing exemptions Notably, ARC 2349C classified “supplies” as exempt items ARC 2349C was scheduled to apply beginning July 1, 2016

Background Information 2016 Legislative Session Iowa enacted House File 2433. HF 2433 rescinds the rules in ARC 2349C. ARC 2349C never applied to any sales. HF 2433 exempts “supplies.” HF 2433 creates definitions for “replacement parts” and “supplies.” The exemption and definitions took effect July 1, 2016

Exempt Replacement Parts & Supplies (Beginning July 1, 2016) “Computers, machinery, equipment, replacement parts, supplies, and materials used to construct or self-construct computers, machinery, equipment, replacement parts, and supplies” are exempt when used for an exempt purpose.

Replacement Parts (Prior to July 1, 2016) Replacement parts were not defined in the statute. Replacement parts were presumed to have a useful life of at least 12 months.

Definition of Exempt Replacement Parts (Beginning July 1, 2016) “Replacement part” means tangible personal property other than computers, machinery, equipment, or supplies, regardless of the cost or useful life of the tangible personal property, that meets all of the following conditions: The item replaces a component of a computer, machinery, or equipment, which component is capable of being separated from the computer, machinery, or equipment The item performs the same or similar function as the component it replaced The item restores the computer, machinery, or equipment to an operational condition, or upgrades or improves the efficiency of the computer, machinery, or equipment

Definition of Exempt Supplies (Beginning July 1, 2016) “Supplies” means tangible personal property, other than computers, machinery, equipment, or replacement parts, that meets one of the following conditions: The item is connected to a computer, machinery, or equipment and requires regular replacement because the property is consumed or deteriorates during use The item is used in conjunction with a computer, machinery, or equipment and is specially designed for use in manufacturing specific products and may be used interchangeably and intermittently on a particular computer, machine, or piece of equipment The item comes into physical contact with other tangible personal property used in processing and is used to assist with or maintain conditions necessary for processing The item is directly and primarily used in an exempt activity

Exempt Supplies (Beginning July 1, 2016) Examples of exempt supplies: Saw blades Drill bits Filters Jigs Dies Tools (but not hand tools) Cutting fluids Oils Coolants Lubricants Prototype materials Testing materials

Exempt Replacement Parts & Supplies (Beginning July 1, 2016) Bottom line: Many, but not all, items used in manufacturing are exempt Exempt items must be used in an exempt activity (e.g., directly and primarily used in processing by a manufacturer)

Taxable vs. Exempt (Beginning July 1, 2016) Taxable: Property exclusively used for the comfort of workers, such as air cooling, air conditioning, and exhaust systems. Exempt: Machinery used for heating or cooling that is directly and primarily used to maintain the proper temperature of the product or other exempt computers, machinery, or equipment.

Taxable vs. Exempt (Beginning July 1, 2016) Taxable: Property exclusively used in support operations where production machinery is assembled, maintained, or repaired. Exempt: Jigs, dies, tools, and other items produced in support operations, including materials that actually make up those items.

Taxable vs. Exempt (Beginning July 1, 2016) Taxable: Property exclusively used for purposes other than manufacturing, such as in administrative, accounting, and personnel departments. Exempt: Computers used in processing or storage of data or information by a commercial enterprise. But, computer supplies, such as toner and paper, remain taxable.

Taxable vs. Exempt (Beginning July 1, 2016) Taxable: Property exclusively used in janitorial or otherwise for general cleaning. Exempt: Computers, machinery, equipment, replacement parts, and supplies that are directly and primarily used to maintain the integrity of the product or to maintain unique environmental conditions required for the product.

New Rules 701-230.14 Definitions and general provisions for the manufacturing exemptions 701-230.15 Exempt property directly and primarily used in processing by a manufacturer

New Rules 701-230.16 Exempt property directly and primarily used by a manufacturer to maintain integrity or unique environmental conditions 701-230.17 Exempt property directly and primarily used in research and development of new products or processes of processing

New Rules 701-230.18 Exempt computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise 701-230.19 Exempt property directly and primarily used in recycling or reprocessing of waste products

New Rules 701-230.20 Exempt pollution-control equipment used by a manufacturer 701-230.21 Exempt fuel or electricity used in exempt property 701-230.22 Exempt services of designing or installing new industrial machinery or equipment

Resources

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Information Online

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Purpose of this Presentation This presentation is intended for general educational purposes only. Anyone involved in an audit or protest must contact the Department representative they are working with on that issue.

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