Iowa enacts sales tax exemption for supplies used in manufacturing
Defines supplies and replacement parts for exemption purposes
TAX ALERT |
On March 22, 2016, Iowa Gov. Terry Branstad signed HF2433, which exempts supplies used directly and primarily in manufacturing and research and development from the state’s sales and use tax. Additionally, the law provides specific definitions for manufacturing ‘supplies’ and ‘replacement parts’ for sales and use tax exemption purposes. Lastly, the law rescinds many of the Iowa Department of Revenue’s amendments to its Administrative Rules relating to manufacturing machinery and equipment that were published on Jan. 6, 2016.
For the purposes of the manufacturing supplies exemption, HF2433 defines the term supplies as tangible personal property other than exempt equipment or replacement parts that is used in conjunction with exempt equipment. Examples of supplies include, but are not limited to the following:
- Saw blades, drill bits, filters, and other similar items with a short useful life
- Jigs, dies, tools, and other similar items
- Cutting fluids, oils, coolants, lubricants, and other similar items with a short useful life
- Prototype and testing materials used directly and primarily processing by manufacturers and research and development of new products or processes of processing
For the purposes of the existing manufacturing replacement parts exemption, HF2433 modifies the definition of the term replacement parts to make clear that replacement parts can be exempt regardless of their cost or useful life. An item may be considered an exempt replacement part if it meets all of the three following criteria:
- The item replaces a component that is capable of being separated from the exempt computer, machinery or equipment (exempt equipment)
- The item performs the same or similar function as the component it replaced
- The item restores the exempt equipment to an operational condition or upgrades or improves the efficiency of the exempt equipment
The provisions of HF2433 will become effective on July 1, 2016, and should ease the compliance burden on taxpayers who were previously required to distinguish between a taxable supply and exempt replacement part, which, based on prior law, was very difficult. Taxpayers engaged in manufacturing or research and development should review the changes provided under HF2433, and consider their impact when making sales and use tax exemption decisions.