SSB 3171 - Tax coupling for 2015/sales tax exemption for supplies used in
manufacturing
Legislation has been introduced in the House and the Senate that would couple
Iowa’s tax code with the federal tax changes for 2015, bringing tax relief to Iowa
farmers, small, business owners, teachers, and others.


The largest portion of this update to the tax code is the expanded Section
179 expensing that is used by farmers and small business owners.



SSB 3171 also exempts consumable supplies used in the manufacturing
process from sales taxes. There is an existing sales tax exemption for
computers, machinery, and equipment used by manufacturers and those
engaged in processing, including replacement parts. Supplies would now
qualify under that exemption. Examples of supplies include such items as drill
bits, grinding wheels, punches, taps, reamers, saw blades, lubricants,
coolants, sanding discs, sanding belts, and air filters.



This issue has been debated in the legislature over the last three years, but a
bill has never become law. Last fall, Governor Branstad and the Department
of Revenue issued new administrative rules that would have enacted this
sales tax exemption for consumable supplies without legislative approval.
These rules included another sales tax exemption related real property used
by manufacturers.

SSB 3371 rescinds the administrative rules so the sales tax exemption only relates
to consumable supplies.
More information:
The legislation updates the Iowa Internal Revenue Code to “couple” with federal tax
law changes. Some of these changes to state tax law for tax year 2015 include
extending:
• Deduction of up to $250 for out-of-pocket expenses by teachers.
• Up to $4,000 tuition and fees deduction for higher education expenses.
• Choice to deduct state sales and use taxes in lieu of the standard deduction.
• Some tax-free IRA contributions to eligible charities.
• Allowing small businesses to expense, rather than depreciate, the first
$500,000 of equipment costs (Section 179 expensing).
• Premiums for mortgage insurance deductible as qualified residence interest.
• Enhanced charitable deduction for contributions of food inventory.
• Basis adjustment to stock of S corporations making charitable contributions.
The bill applies these changes for tax year 2015 only. These are taxes that
are due this year. Farm taxes were scheduled to be filed by March 1, but the
Department of Revenue has delayed the filing deadline for those taxpayers to April
30, which is the filing deadline for all other taxpayers.
One change to federal legislation that is not included is the provision to provide a
first-year depreciation allowance, known as 50 percent bonus depreciation. Iowa has
not coupled its tax code to match this provision since it was included in the federal
tax code in 2008. Businesses instead use standard depreciation schedules for these
qualified expenses.
Consumable supplies have previously not been eligible for the sales tax exemption,
which has been in place since 1998. These items were specifically listed as not

 SSB 3171 - Tax coupling for 2015/sales tax exemption for supplies used in
manufacturing
qualifying for the exemption under administrative rules that had been in place since
the exemption was created. It is estimated to save Iowa manufacturers and
processors nearly $22 million in sales taxes in FY 17.
The legislation defines consumable supplies as tangible personal property, other
than computers, machinery, equipment, or replacement parts, that meets one of
the following conditions:
 The tangible personal property is to be connected to a computer, machinery, or
equipment and requires regular replacement because the property is consumed
or deteriorates during use, including but not limited to saw blades, drill bits,
filters, and other similar items with a short useful life.
 The tangible personal property is used in conjunction with a computer,
machinery, or equipment and is specially designed for use in manufacturing
specific products and may be used interchangeably and intermittently on a
particular computer, machine, or piece of equipment, including but not limited to
jigs, dies, tools, and other similar items.
 The tangible personal property comes into physical contact with other tangible
personal property used in processing and is used to assist with or maintain
conditions necessary for processing, including but not limited to cutting fluids,
oils, coolants, lubricants, and other similar items with a short useful life.
 The tangible personal property is directly and primarily used in an activity that
currently qualifies under the existing machinery and equipment sales tax
exemption including but not limited to prototype materials and testing materials.
The administrative rules on real property that are being rescinded were projected to
save businesses nearly $13 million. The rule change impacted how the department
would determine when tangible personal property used to construct machinery and
equipment would become real property. If the tangible personal property is used to
construct real property, sales tax must be paid. Material used to construct real
property are subject to the sales tax. If the tangible personal property is not
classified as real property after it is constructed, it would be eligible for the
machinery and equipment sales tax exemption.
The major impact of the new administrative rule is the presumption that specific
structures are not considered real property and thus the materials used to construct
them are eligible for the sales tax exemption. These structures include:
 Storage tanks that rest upon a foundation and are secured with bolts
 Industrial piping systems directly and primarily used in processing
 Cooling towers directly used in processing
 Structural steel, if exposed and used to support other computers, machinery,
or equipment