Committee Members Present:
Dwayne Vande Krol, Co-Chair
Jason Wilson, Co-Chair
Bruce Baker, Nyemaster Law Firm, via telephone
John Gilliland, ABI
Daryl Jendras, RSM McGladrey, Inc., via telephone
Stephen Roberts, Davis Law Firm
Michael Rubino, Deere & Company, via telephone
Rick Smith, Clow Valve Company
Kimberley Vellenga, Ernst & Young, LLP
Ed Wallace, Iowa Taxpayers Association
Marcia Mason, Attorney General’s Office
Victoria Daniels, Iowa Department of Revenue
Theresa Dvorak, Iowa Department of Revenue
1. Call to Order
The meeting of the Industrial Processing Study Committee was called to order at 10:08 a.m. on Thursday, August 19, 2010, in Rooms 429 and 430 of the Hoover State Office Building, Iowa Department of Revenue.
2. Review Subcommittee Proposals
a. Previously-Approved Regulations
The subcommittee of Victoria Daniels, Marcia Mason, Ed Wallace and Dwayne Vande Krol looked at previous proposals and came up with two regulations. The subcommittee provided the Committee with two proposals (see Exhibit A).
Proposal 1 is the definition of replacement parts. Jason Wilson motioned to make the word change “items may be rebuttably presumed to be” in the first paragraph, making the last sentence in the paragraph read, “Drill bits, grinding wheels, punches, taps, reamers, saw blades, lubricants, coolants, sanding discs, sanding belts, and air filters are nonexclusive examples of items that may be rebuttably presumed to be supplies.” Rick Smith seconded. Motion carried 10-0-3 (Marcia Mason, Victoria Daniels & Theresa Dvorak abstained). Rick Smith discussed the manufacturer’s one-year warranty in proposal 1. Clearly, the part has an expected one-year useful life. Rick Smith made the motion to add item “d. The item is covered by an original manufacturer’s warranty of 12 months or longer.” Steve Roberts seconded. The motion carried 10-0-3 (Marcia Mason, Victoria Daniels & Theresa Dvorak abstained)
Steve Roberts moved amendments to Proposal 1 be sent to the department to consider. Ed Wallace seconded. The motion carried 10-0-3 (Marcia Mason, Victoria Daniels & Theresa Dvorak abstained).
Proposal #2 provides some clarity. Steve Roberts moved to accept the proposal as is. Kimberley Vellenga seconded. The motion carried 10-0-3 (Marcia Mason, Victoria Daniels & Theresa Dvorak abstained).
The Services subcommittee met via conference phone on Monday August 16th to discuss what recommendations to make to the full committee. The Subcommittee is made up of the following members: Daryl Jendras, Victoria Daniels, Ed Wallace, Denton Childs, and Dwayne Vande Krol. Ed Wallace provided a summary of the subcommittee meeting via e-mail (see Exhibit B).
The language discussed at the meeting was to add a new paragraph c as follows: “The sales price from the sale of otherwise taxable services used in an exempt manner as described in paragraph “a,” subparagraphs (1), (2), (3), (5), or (6).”
Ed will send this out to the committee and it can be voted on electronically.
Mike Rubino indicated that the subcommittee met once. Mike provided a summary of the subcommittee meeting via e-mail (see Exhibit C). After a lengthy discussion, Marcia recommended to just put in the statute to exempt cutting oil; do not try to make something a sorbent that is not a sorbent. Mike will go back to the subcommittee to work to put together a new proposal with cutting oil and the likes.
d. Recycling and Packaging
Kimberley Vellenga chaired this subcommittee and provided the committee via e-mail (see Exhibit D) with their proposed changes to 423.3(45) which add the last sentence to be “Materials used to self-construct the listed items are also exempt.”
Jason moved to accept the changes. John Gilliland seconded. The motion carried 10-0-3 (Marcia Mason, Victoria Daniels & Theresa Dvorak abstained).
3. Discussion of Next Steps
Ed will send the Services language to the Committee via e-mail for review and the Coolant/Sorbent subcommittee will go back to the drawing board.
4. Next Meeting Date
Assuming we can get a lot done electronically or via a conference call, the December meeting will be a full committee meeting. Ed will check with the West Des Moines Sheraton, which is where the ITA’s Annual meeting is being held, to see if they have a meeting room available on Monday, December 6, from 9:00-10:00 am.
A draft of the Annual Report will be available by the next meeting.
Steve Roberts requested an updated roster be placed on the website. Diane will work with Mark to complete this request.
Steve Roberts made a motion to adjourn. John Gilliland seconded. The motion carried 13-0.
Dwayne adjourned the meeting at 11:20 am.
PROPOSAL 1: Amend Iowa Rule 701-18.58(1) as follows:
“Replacement parts.” A “replacement part” is any machinery, equipment, or computer part which is substituted for another part that has broken, has become worn out or obsolete, or is otherwise unable to perform its intended function. “Replacement parts” are those parts which materially add to the value of industrial machinery, equipment, or computers or appreciably prolong their lives or keep them in their ordinarily efficient operating condition. Excluded from the meaning of the term “replacement parts” are supplies, the use of which is necessary if machinery is to accomplish its intended function. Drill bits, grinding wheels, punches, taps, reamers, saw blades, lubricants, coolants, sanding discs, sanding belts, and air filters are nonexclusive examples of items that may be rebuttably presumed to be supplies. Sales of supplies remain taxable.
Tangible personal property with an expected useful life of 12 months or more which is used in the operation of machinery, equipment, or computers is rebuttably presumed to be a “replacement part.” Tangible personal property used in the same manner with an expected useful life of less than 12 months is rebuttably presumed to be a “supply.” The following is a non-exclusive list of factors that may be used to rebut the presumption that an item with an expected useful life of less than 12 months is a “supply:”
a. The item is subjected to extreme levels of temperature, friction, pressure, or other similar physical or chemical stress.
b. The item is used in an operation that runs continuously and with little downtime.
c. The item is used in an operation that runs for more than one eight-hour shift per day.
d. The item is covered by an original manufacturer’s warranty of 12 months or longer.
The accounting treatment for financial statement or income tax purposes shall not be the determining factor as to whether such items qualify as replacement parts.
PROPOSAL 2: Amend Iowa Rule 701-26.29 as follows:
Persons engaged in the business of repairing machines of all kinds are rendering, furnishing or performing a service, the gross receipts from which are subject to tax. “Machine” shall include all devices having moving parts and operated by hand, powered by a motor, engine, or other form of energy, as well as replacement parts for such devices. It is a mechanical device or combination of mechanical powers and devices used to perform some function and produce a certain effect or result. A musical instrument does not constitute a machine and therefore, musical instrument repairs are not subject to tax. Repair of supply items or other items not meeting the definition of machine or a replacement part for a machine are not taxable as machine repair. Examples of nontaxable services include, but are not limited to, the modification of tooling if no enumerated services (such as welding) are part of the modification process, and the sharpening of blades and tooling if the blades and tooling are not considered replacement parts for the machine to which they are attached. The definition and factors used in Rule 701-18.58(1) for distinguishing between a “supply” and “replacement part” in the context of the exemption for manufacturing machinery and equipment should be consulted for purposes of defining taxable “machine repair.”Exhibit B
From: Edward Wallace
Sent: Thursday, August 19, 2010 5:24 AM
To: Steveroberts@davisbrownlaw.com; email@example.com; firstname.lastname@example.org; Denton.Childs@tyson.com; email@example.com; firstname.lastname@example.org; email@example.com; Joel.Lunde@iowa.gov; firstname.lastname@example.org; John.Riches@alcoa.com; Kimberley.Vellenga@ey.com; MMASON@ag.state.ia.us; email@example.com; firstname.lastname@example.org; email@example.com; firstname.lastname@example.org; Denton.Childs@tyson.com; email@example.com; Edward Wallace; firstname.lastname@example.org; email@example.com; Joel.Lunde@iowa.gov; firstname.lastname@example.org; John.Riches@alcoa.com; Kimberley.Vellenga@ey.com; MMASON@ag.state.ia.us; email@example.com; firstname.lastname@example.org; Rubino Michael C
Cc: Stoecker, Diane [IDR]
Subject: RE: Industrial Processing Study Committee - Services Subcommittee Summary
The Services subcommittee met via conference phone on Monday August 16th to discuss what recommendations we’d like to make to the full committee.
The Subcommittee is made up of the following members: Daryl Jendras (alliantgroup), Victoria Daniels (IDR), Ed Wallace (Iowa Taxpayers Assoc.), Denton Childs (Tyson Foods), and Dwayne VandeKrol (Nyemaster & Goode).
As reference, beginning in 2005 we discussed 21 specific issues with regard to Service. On our conference call we primarily focused on Rebuild versus Repair, Sharpening Services, Calibration, and “Processing” (as defined by manufacturing). We also discussed bundled transactions and lump sum billing (as it pertains to SST).
It is our subcommittee’s recommendation to create (legislatively) an exemption that we will dub THE SIMPLE APPROACH. THE SIMPLE APPROACH will mirror the laws enacted in Tennessee and Pennsylvania. The heart of THE SIMPLE APPROACH is to create a category called “otherwise taxable services on M&E” that will be a one size fits all approach.
Dwayne did a good job of illustrating how this would work with a Forklift in a manufacturing setting and I hope that he can explain that more fully today.
Our committee believes that THE SIMPLE APPROACH makes the most sense rather than providing 4 or 5 separate recommendations. The statutory language change is still in the works because Ed Wallace has yet to finish the agreed upon changes to 423.2(6). That statutory language change will be forthcoming and can be discussed in greater detail today.
Diane: If you could print this email for the group to have at the meeting, I’d be most appreciative.
From: Rubino Michael C [mailto:RubinoMichaelC@JohnDeere.com]
Sent: Wednesday, August 18, 2010 5:45 PM
To: Stoecker, Diane [IDR]; Steveroberts@davisbrownlaw.com; email@example.com; firstname.lastname@example.org; Denton.Childs@tyson.com; email@example.com; firstname.lastname@example.org; email@example.com; firstname.lastname@example.org; Lunde, Joel [IDOM]; email@example.com; John.Riches@alcoa.com; Kimberley.Vellenga@ey.com; Mason, Marcia [AG]; firstname.lastname@example.org; email@example.com
Cc: Wilczynski Peggy S; Schrader Christine
Subject: RE: Industrial Processing Study Committee Meeting
I will not be able to attend in person but will call in to the meeting. We had only one meeting of the sorbent sub- committee but it was very interesting. Marcia provided the sub-committee the information that she obtained from the professor at Iowa state which was extremely helpful in understanding the issue. Thank you Marcia for the information. I told the group that I would visit with some experts in the area from Deere and get their take on the issue. I met with one of our engineers who works with these kinds of materials and is familiar with how cutting oils and coolants are used in the factory. He is also an Iowa State graduate and he had a different view of the issue. Simply put, his opinion is that the professor was focused on the definition of sorbents which the professor defined as “A sorbent captures molecules”. This is an extremely narrow definition of what a sorbent is. The professor goes on to say that since Thermal energy (Heat) is not a molecule it cannot be absorbed. It is my personal opinion and the opinion of the engineer that I talked to that this definition is excessively narrow. The example that the Deere engineer gave was that if you took the temperature of the cutting oil before and after manufacturing began, it is clear that the cutting oil absorbed the heat. Something had to happen because the cutting oil was hotter after manufacturing began. It was absorbed.
In summary, when the legislature wrote the legislation to exempt chemicals, solvents, sorbents, and reagents they were not thinking of this in the same sense that a physics professor would define the items. In fact, they were thinking of it in more of a layman’s terms in that if you put your hand in a pot of boiling water, your hand would absorb the heat and get burned.
I think we have 2 ways to address the issue the first is through regulation and if not acceptable then through a statutory change. Attached is a rough draft of both. The sub-committee has not reviewed either of these documents. I am only presenting them to discuss the entire groups thoughts on this issue.
Diane – Can you make a copy of the drafts to hand out at the meeting.
It will be interesting to discuss this issue with the group.
423.3.51. The sales price of tangible personal property sold for processing. Tangible personal property is sold for processing within the meaning of this subsection only when it is intended that the property will, by means of fabrication, compounding, manufacturing, or germination, become an integral part of other tangible personal property intended to be sold ultimately at retail; or for generating electric current; or the property is a chemical, solvent, sorbent, or reagent, which is directly used and is consumed, dissipated, or depleted, in processing tangible personal property which is intended to be sold ultimately at retail or consumed in the maintenance or repair of fabric or clothing, and which may not become a component or integral part of the finished product. The distribution to the public of free newspapers or shoppers guides is a retail sale for purposes of the processing exemption set out in this subsection and in subsection 50.
423.3.51.a “Sorbents” include substances that absorb thermal energy.
For the purposes of this definition, the sales price from a rental or lease includes rent, royalties, and copyright and license fees.
"Sales tax" means the tax levied under 2005 Iowa Code sections 423.2 to 423.4.
"Seller" means any person making sales, leases, or rentals of personal property or services.
"Services" means all acts or services rendered, furnished, or performed, other than services used in processing of tangible personal property for use in retail sales or services, for an employer who pays the wages of an employee for a valuable consideration by any person engaged in any business or occupation specifically enumerated in 2005 Iowa Code section 423.2. The tax shall be due and collectible when the service is rendered, furnished, or performed for the ultimate user of the service.
"Services used in the processing of tangible personal property" means the reconditioning or repairing of tangible personal property of the type normally sold in the regular course of the retailer's business and which is held for sale.
"Solvent" means a substance in which another substance can be dissolved and which is primarily used for that purpose.
"Sorbent" means a material whether liquid, gas or solid, , which acts to retain another substance including thermal energy, usually on the sorbent's surface. The sorbent and the second material may bond together at the molecular or atomic scale via physiochemical interactions or have the ability to absorb heat or thermal energy.
"State" means any state of the United States and the District of Columbia.
"System" means the central electronic registration system maintained by Iowa and other states which are signatories to the agreement.
"Tangible personal property" means personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.
"Tangible personal property" includes electricity, water, gas, steam, and prewritten computer software.
"Tax" means the tax upon retail sales or use of tangible personal property or taxable services.
"Taxpayer" means any person who is subject to Iowa sales and use tax, whether acting on the person's own behalf or as a fiduciary.
"Trailer" means every trailer, as is now or may be hereafter so defined by Iowa Code chapter 321, which is required to be registered or is subject only to the issuance of a certificate of title under Iowa Code chapter 321.
"Use" means and includes the exercise by any person of any right or power over tangible personal property incident to the ownership of that property. A retailer's or building contractor's sale of manufactured housing for use in this state, whether in the form of tangible personal property or of realty, is a use of that property.
"User" means the immediate recipient of the services who is entitled to exercise a right of power over the product of such services.
"Use tax" means the tax levied under 2005 Iowa Code chapter 423, subchapter III, for which the retailer collects and remits tax to the department.
"Value of services" means the price to the user exclusive of any direct tax imposed by the federal government or under these rules.
"Vehicles subject to registration" means any vehicle subject to registration pursuant to Iowa Code section 321.18.
From: Kimberley.Vellenga@ey.com [mailto:Kimberley.Vellenga@ey.com]
Sent: Wednesday, August 18, 2010 1:56 PM
To: Dwayne Vande Krol
Cc: Bruce W. Baker; firstname.lastname@example.org; Denton.Childs@tyson.com; Stoecker, Diane [IDR]; email@example.com; firstname.lastname@example.org; email@example.com; firstname.lastname@example.org; Lunde, Joel [IDOM]; John.Riches@alcoa.com; email@example.com; Mason, Marcia [AG]; firstname.lastname@example.org; email@example.com; Steveroberts@davisbrownlaw.com
Subject: RE: Industrial Processing Study Committee Meeting - Packaging Subcommittee
The packaging subcommittee is proposing the following change to the Iowa statutes to allow an exemption for materials used to self-manufactured packaging materials. Currently the Code allows an exemption only for purchased packaging materials. The current exemption is found in Iowa Code, section 423.3(45), our proposed changes are added in and bolded.
The sales price from the sale of property which is a container, label, carton, pallet, packing case, wrapping paper, twine, bag, bottle, shipping case, or other similar article or receptacle, or materials acquired to self construct such items, sold to retailers or manufacturers for the purpose of packaging or facilitating the transportation of tangible personal property sold at retail or transferred in association with the maintenance or repair of fabric or clothing.
If anyone has any suggestions or comments please let me know or we can discuss tomorrow at the meeting.