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

2. 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.

3. 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.

4. “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

5. 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

6. 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”

7. 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

8. 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

9. 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)

10. 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

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

12. 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

13. 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

14. 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.

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

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

17. Exempt Fuels
Electricity
Coal
Gas
Steam
Water
Heat

18. 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.

19. 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

20. 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

21. 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

22. Exemption Certificates

23. Exemption Certificates

24. Recent Changes

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

26. 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

27. 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

28. 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.

29. 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.

30. 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

31. 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

32. 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

33. 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)

34. 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.

35. 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.

36. 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.

37. 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.

38. New Rules
Definitions and general provisions for the manufacturing exemptions
Exempt property directly and primarily used in processing by a manufacturer

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

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

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

42. Resources

43. Information Online

44. Information Online

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51. 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.

52. THANK YOU!!