On October 8, 2010, the Iowa Supreme Court issued a landmark decision
in Sherwin-Williams, Inc. v. Iowa Department of Revenue providing taxpayers with much-needed clarification related to several aspects of the Iowa sales and use tax exemption for manufacturing machinery and equipment. The taxpayer in the case, Sherwin-Williams, was represented by Nyemaster Goode attorney Bruce Baker
Sherwin-Williams is an Ohio-based paint manufacturer with 38 retail stores in Iowa. The Company also supplies paint products to national home supply stores like Home Depot and Lowe's. Sherwin-Williams filed refund claims for Iowa sales and use taxes paid on certain machinery used to mix base paint with colorant in the company's Iowa retail outlets. The Company argued that this equipment qualified for Iowa's exemption for manufacturing machinery and equipment (which is now codified at Iowa Code § 423.3(47)(a)(1)).
The Iowa Department of Revenue initially granted Sherwin-Williams' refund claims, then reversed its decision and issued a notice demanding repayment of the refunds. Sherwin-Williams protested, and an Administrative Law Judge ruled in its favor, holding that the Company was a "manufacturer" and the paint mixing equipment was used in "manufacturing." The Department of Revenue appealed to the Director of the Department of Revenue, who reversed the ALJ's decision. Sherwin-Williams sought review by the District Court, which reversed the Director's decision and ruled that the Company was entitled to the exemption. The Department appealed, and the Iowa Court of Appeals upheld the District Court's decision in favor of Sherwin-Williams. At the request of the Department, the Iowa Supreme Court granted further review.
The Department argued that the exemption should not apply to the paint-mixing equipment because Sherwin-Williams was not "principally engaged" as a manufacturer at its retail locations. The Department also argued that granting the exemption for machinery used at Sherwin-Williams' retail outlets would have the "absurd result" of including as manufacturers "restaurants, bars, lemonade stands, and various home improvement stores." The Supreme Court disagreed with the Department and sided with Sherwin-Williams. The Court began its analysis noting that, because the Iowa Legislature had provided its own unambiguous definition of "manufacturer," the Department's interpretation of the term was not entitled to deference, and thus the proper scope of review was whether the Department's decision was based on an "erroneous interpretation" of the law.
The Court then analyzed a 1997 change in the Iowa sales tax code by which the Legislature expanded the scope of the exemption for manufacturing machinery and equipment. The Court found that nothing in the Iowa statutes granting the exemption imposed a requirement that the establishment in which the machinery and equipment is used be "principally" or "primarily" involved in manufacturing. Accordingly, Sherwin-Williams' paint-mixing equipment qualified for exemption from Iowa sales and use tax, despite the fact that such equipment was used in the Company's retail locations.
Finally, the Court analyzed Sherwin-Williams' use of spectrographic color-matching machines and held that, despite the fact that such machines did not come into direct contact with the paint, such machines were "directly used" in processing due to their immediate proximity in time and space to the paint mixing process and their use to initiate such processes.