In 2018, three administrative rulings and court cases provided valuable guidance to businesses regarding the following Iowa sales and use tax issues:
- Sourcing of services provided remotely.
- The types of equipment eligible for the exemption for research and development.
- The scope of the exemption for services related to new construction.
The following summaries provide key takeaways for taxpayers from each of these rulings:
How are taxable services provided remotely sourced for Iowa sales tax purposes?
In a ruling requested by Genetic ID, NA, Inc., the Iowa Department of Revenue provided guidance for determining where testing services provided on-line are considered to be “first used,” and thus whether the sales price of such testing services was subject to Iowa sales tax.
Genetic ID provided laboratory testing services at its facility in Fairfield, Iowa. It had customers throughout the United States and the world. Most test results were provided by Genetic ID to its customers through email, but some were sent by U.S. mail, fax, or a secure data portal.
In deciding whether the services were subject to Iowa sales tax, the Department found the following:
- Services are only subject to Iowa sales tax if the “first use” occurs in Iowa.
- Services are not subject to Iowa sales tax if the results are first delivered via U.S. mail to a customer outside Iowa.
- If the results are delivered by email, the services are taxed if the customer’s mailing address is in Iowa.
- The customer’s ability to access results through a secure portal does not change the sourcing of the services when results are first delivered through mail or email.
- If results are first accessed through the portal, the mailing address of the customer determines the first use.
[In the Matter of Genetic ID, NA, Inc., Declaratory Order, Docket No. 2017-300-2-0217 (March 1, 2018).]
Do prototypes qualify for the research and development exemption?
An Iowa District Court ruled that component parts and fully-operational equipment used for testing qualify for the Iowa sales and use tax exemption provided for equipment utilized in research and development.
CNH Industrial America LLC manufactures agricultural and construction equipment. In facilities located in Burlington and Davenport, Iowa, CNH operated prototype shops and test departments. CNH purchased components to assemble and test prototypes. After testing was completed, the prototypes were scrapped or sold. CNH also rented competitors’ aftermarket, fully-operational equipment to test.
- The component parts qualified as “machinery and equipment” or “materials used to construct materials and equipment.” They are not classified as “supplies,” even though they are destroyed or discarded after a short period of use.
- Both the component parts and fully-operational equipment were used by CNH for “research and development” of new products, and not merely to compare its existing products to those of its competitors. In particular, CNH’s use qualified under the specific definition of “research and development” provided for purposes of this exemption which required only that the “ultimate goal” of the activity be the “development of new products or processes of processing.”
[CNH Industrial America, LLC v. Iowa Dept. of Revenue, No. CVCV055265 (Iowa District Ct., July 10, 2018).]
Are charges for installation labor eligible for the exemption for new construction services?
In Lowe’s Home Centers v. Iowa Department of Revenue, the Iowa Supreme Court ruled the scope and type of work determines whether labor charges are eligible for exemption from Iowa sales and use tax as services related to new construction.
Lowe’s offered installation of custom storm windows and doors, faucets, toilets, built-in dishwashers, ceiling fans, patio doors, interior and exterior doors, sinks, vanities, and garbage disposals. The installation work was subcontracted to third parties.
The dispute involved whether the amounts charged for installation labor were eligible for the Iowa sales and use tax exemption for services used in connection with “new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer.”
The Iowa Supreme Court held the following:
- The improvement projects involving merely the installation of items such as sinks or ceiling fans did not involve the scale or structural changes necessary to be considered “new construction” in and of themselves, and thus did not qualify for exemption from Iowa sales and use tax.
- Instead, the installation of dishwashers, garbage disposals, ceiling fans, faucets, toilets, and sinks fell within the taxable services of “electrical repair and installation” or “plumbing and pipe fitting.”
- In comparison, the Department of Revenue’s regulation defining taxable “carpentry” services omitted the terms “install” or “installation,” and thus expressly limited the scope of such services to “repairs.” Accordingly, Iowa sales tax did not apply to the installation of items such as vanity tops, windows, storm doors, patio doors, and interior and exterior doors, as such services were not considered to be taxable “carpentry.” (NOTE: During the 2019 session, the Iowa Legislature amended the taxable service to include “carpentry repair and installation.” This change is effective as of July 1, 2019.)
- If a project involved both non-taxable carpentry and taxable installation involving electrical or plumbing services, the Iowa sales tax treatment was determined using the “predominant service rule.”
[Lowe’s Home Centers v. Iowa Dept. of Revenue, No. 18-0097 (Iowa Sup. Ct., Dec. 14, 2018).]
The Iowa sales and use tax laws are continually evolving based on court cases and administrative rulings. Nyemaster’s experienced tax specialists stay up-to-date on the latest decisions. Contact a Nyemaster attorney with any tax questions.