Posted on 05/14/2018 at 10:40 AM by Cody Edwards
As part of Iowa’s historic tax reform, the Iowa legislature made significant changes to Iowa’s sales and use tax. The changes to Iowa’s sales and use tax regime was spun as a modernization, and in some instances—such as taxing digital goods and services—it was. However, the redefining of the terms “manufacturer” and “manufacturing” to narrow the sales tax manufacturing exemption is anything but a modernization. Rather, the new manufacturing exemption should be seen as the Iowa Legislature’s, or more likely the Iowa Department of Revenue’s, attempt to overturn a 2010 Iowa Supreme Court case, Sherwin Williams v. Iowa Dep’t. of Revenue, with which the Department disagreed.
The manufacturing exemption is significant because it provides a broad exemption from sales tax for, among other things, manufacturing machinery and equipment and supplies. Under Sherwin Williams, a “manufacturer” for purposes of Iowa’s sales tax did not need to primarily be a manufacturer. According to the court, “it would [not] be absurd for the legislature to accord a retailer a manufacturer's exemption when specific equipment is used by the retailer in the same manner and for the same purpose as such equipment would be used by a taxpayer whose principal business is manufacturing.” As a result, post-Sherwin Williams, retailers, such as food establishments, filed for refund claims under the theory that they were manufacturers. However, the Department continued to take the position that retailers are not manufacturers and denied the refund claims. It is unclear whether the Department’s position had a chilling effect and whether these retailers continued to pay tax on items exempt under the manufacturing exemption.
My first thought when reading the legislation narrowing the manufacturing exemption was whether the change is the Department’s tacit acknowledgement that its previous denial of these refund claims was not substantially justified. Curiously, under the new law, a “manufacturer” must be a “business that primarily purchases . . . property . . . for the purpose of adding to its value by a process of manufacturing. . . .” And, the new definition of “manufacturing” “does not include activities occurring on premises primarily to make retail sales.”
So, under the new law, a manufacturer must be primarily in the business of manufacturing, and manufacturing cannot take place in a location that primarily makes retail sales. Does this mean that prior to the new law the manufacturing exemption applied to business that are not primarily in the business of manufacturing at a location that did make retail sales?
The new manufacturing exemption looks a lot like an overturning of Sherwin-Williams and an acknowledgement of what the law was after Sherwin-Williams. Unless this new law is spun as a clarification of existing law, the State should be prepared to write checks for the refund claims it previously denied and the refund claims that will likely be filed.
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- Cody Edwards