Effective July 1st, 2016 Iowa Code 423.3(47)(a) now provides an exemption for manufacturers to purchase replacement parts for computers, machinery and equipment without paying Iowa sales and use tax. Manufacturing supplies also now qualify for this exemption. The legislation effecting this change has created new definitions for the terms “replacement parts” and “supplies”. These definitions can be found in Iowa Code 423(47)(d)(7) and (8), respectively.
The new language updates Iowa’s sales tax exemption for the manufacturing industry and broadens it extensively. In practice, these new definitions will enable processors and manufacturers to purchase many more repair and replacement items tax exempt. This change removes the requirement that repair or replacement parts and supplies needed to be depreciable for state and federal income tax purposes. Historically, very few repair or replacement parts and supplies rose to the level of depreciable status. Now these items, which could also be thought of as “consumables”, are eligible to be purchased tax exempt.
Iowa House File 2433, which initiated this change to the Iowa Code, was drafted by the 86th Iowa General Assembly in March of 2016 and was signed by Governor Branstad on March 21, 2016. While Governor Branstad was pleased that this broader sales and use tax exemption “will help Iowa taxpayers and businesses,” he also expressed disappointment that the exemption did not extend further.
Below is a brief summary of the updated definitions for “replacement parts” and “supplies” and examples of qualifying items.
Replacement Parts for Manufacturers:
Iowa manufacturing replacement parts, as now defined, are items of tangible personal property replacing a component of a computer, machinery or equipment. The replacement part must perform the same or similar function as the component it replaces. The replacement part must also restore the computer, machinery or equipment to a working or operational condition or upgrade or improve its efficiency.
Supplies for Manufacturers:
Supplies, as now defined, are items of tangible personal property meeting the following four conditions:
1. Is connected to a computer, machinery or equipment and requires regular replacement because the item is consumed or deteriorates through use.
2. Is used in conjunction with computer, machinery or equipment specifically used in manufacturing products.
3. Comes into physical contact with other items of tangible personal property used in processing and is used to assist or maintain conditions necessary for processing or manufacturing.
4. Is used directly and primarily in processing or manufacturing of goods.
Examples of supplies qualifying for the Iowa manufacturing replacement parts and supplies exemption include: saw blades, drill bits, filters, jigs, dies, tools other than hand tools, cutting fluids, oils and lubricants, coolants, etc.
This is not a retroactive change in this Iowa sales and use tax exemption. It is strictly on a go-forward basis beginning July 1, 2016. Prior to July 1, 2016, Iowa manufacturing replacement parts needed to be depreciable for state and federal income tax purposes. Only those parts which either materially added to the value of the machinery and equipment or appreciably extended their lives would qualify for the sales and use tax exemption. Replacement parts that merely kept manufacturing machinery and equipment in good working condition did not qualify. Historically, Iowa would either require documentation supporting this designation or would accept an audit procedure agreement, which essentially sets a mutually agreed-upon dollar threshold between the state of Iowa and the taxpayer that is used to distinguish between taxable and exempt qualifying purchases.
As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. If you have questions, comments or would like to discuss the specific circumstances you are encountering in regard to this issue or any other sales & use tax issue, please contact us at (888) 350-4TAX (4829) or via email at email@example.com.
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