Effective July 1, 2019, Grain Bins are Exempt From Sales Tax; Complexity, Unanswered Questions Remain
Posted on 07/16/2019 at 02:57 PM by Cody Edwards
After years of confusion about whether grain bins are subject to sales tax, this past legislative session the Iowa legislature clarified that grain bins are exempt from sales tax. In doing so, the Iowa legislature—likely unknowingly—increased the complexity of sales tax compliance for construction contractors. Although the new legislation achieves its ultimate goal of exempting from sales tax grain bins used by farmers and manufacturers, the Iowa legislature should have taken a different approach in achieving its goal.
Effective July 1, 2019, the “sales price from the sale of a grain bin, including material or replacement parts used to construct or repair a grain bin” is exempt from sales tax. Iowa Code § 423.3(16A). For purposes of the statute, “grain bin” means “property that is vented and covered with corrugated metal or similar material, and that is primarily used to hold loose grain for drying or storage.” Id. This means that grain bin materials can be purchased tax so long as the grain bin will be primarily used to hold loose grain for drying or storage.
New Complexity, Unanswered Questions
Although the exemption ultimately exempts from sales tax materials used to build and repair grain bins, it does so in a way that adds more complexity to Iowa’s already complex construction contractor sales tax law. Indeed, Iowa administrative rules regarding sales tax for construction contractors is a dense 17 pages long. See IAC r. 701—219.
Under the new law—assuming grain bins are real property after installation—whether a construction contractor must pay sales tax on the grain bin materials depends on the use by the contractor’s customer. Given this lack of information at the time of the contractor’s purchase, the contractor must decide whether it should either:
- Purchase the grain bin materials exempt from sales tax and accrue use tax if the customer does NOT use the grain bin primarily to hold loose grain for drying or storage; or
- Pay sales tax on all grain bin materials and file for a refund each quarter for the sales tax that was paid on materials that were subsequently used by the contractor’s customer primarily to hold loose grain for drying or storage.
If the latter, how does the contractor prove the grain bin is used by its customer in an exempt manner? The contractor could take an exemption certificate from its customer who claims the bin will be used in an exempt manner, but because contractors are consumers of the grain bin materials and cannot charge tax on construction contracts under IAC r. 701—219.2 (again, assuming grain bins are real property), an exemption certificate provided by the customer is not warranted.
Additionally, the new law leaves much to be desired with respect to what is and is not part of the “grain bin.” For example, are the ladders attached to the grain bin part of the grain bin? How about the concrete pad to which the bin is attached? What about augers, sweeps, spreaders, fans, heaters, floors, conveyors, legs, bucket elevators, and air systems? Contractors, and not the end users, are affected by this ambiguity, even though they do not benefit from this law. This is especially true if the aforementioned items are deemed not to be part of the grain and the grain bin is considered real property, since the contractor would be deemed to be the consumer of the materials and would be subject to sales or use tax on the cost of the materials. The legislation does not address these questions; hopefully the administrative rules do.
A Better Approach
Although the new legislation achieves its ultimate goal of exempting from sales tax grain bins used by farmers and manufacturers, the burden of complying with this law falls on construction contractors even though they do not benefit from the new law.
A better approach to achieving the goal would have been for the Iowa legislature to clarify that grain bins and attachments are tangible personal property after installation while also providing an exemption for grain bins primarily used to hold loose grain for drying or storage. Under this approach, construction contractors could simply purchase the grain bins and attachments exempt for resale under Iowa Code § 423.3(2). The contractor would then charge sales tax to its customers unless the customer provided the contractor an exemption certificate.
During the next legislative session, as a way to simplify sales tax compliance for construction contractors while maintaining the sales tax exemption for grain bins, the Iowa legislature should consider the Better Approach, as explained above, to exempting from sales tax grain bins and attachments primarily used to hold loose grain for drying or storage.
Categories: Agribusiness Law, Table SALT, Cody Edwards, Agricultural Law, Taxation Law
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