Iowa manufacturers now free of sales tax on production supplies
June 13, 2016
By Keith Habel, CPA
Partner, SALT Practice Leader
In a ruling that will have a substantial impact on Iowa manufacturers, the Iowa Department of Revenue has expanded the definition of supplies that qualify as taxable and non-taxable. Effective July 1, 2016, House File 2433 will expand the criteria for items qualifying for exemption from Iowa sales tax from only replacement parts to now include general supplies. Previously, a manufacturer’s general length of use on replacement parts or supplies determined its classification as taxable or non-taxable.
A replacement part, which was exempt, was defined as any machinery or equipment part substituted for another part that generally had a useful life of 12 months or longer. These parts typically added to the value of the industrial machinery and/or prolonged its life and usefulness.
Non-exempt supplies were parts or other materials that had a useful life of less than 12 months. These parts are changed out frequently and are essential pieces in the day-to-day operation of the equipment, but did not qualify due to their short-term use. Items such as drill bits, taps, lubricants and coolants, air filters, and sawblades were previously subject to sales tax. The new law changes these supplies from being taxable to now non-taxable.
Expanding the range of manufacturing supplies that are non-taxable will significantly impact the cost of production and doing business for many Iowa manufacturers. Additionally, it will help resolve questions on what is and is not taxable within the manufacturing process.