Iowa Admin. Code r. 701-219.13

Current through Register Vol. 47, No. 11, December 11, 2024

Rule 701-219.13 - Tax on enumerated services

The tax on the services enumerated in Iowa Code section 423.2 is a tax on labor. When such services are performed on or connected with new construction, reconstruction, alteration, expansion or remodeling of structures, the services are exempt from tax. Neither the repair nor the rental of machinery on the job site is exempt from tax under this rule. Rule 701-219.21 (423) provides an explanation of the exemption in favor of rented machinery used by a contractor on a job site.

The distinction between a repair and new construction, reconstruction, alteration, expansion, and remodeling activities can, oftentimes, be difficult to grasp. Therefore, the intent of the parties and the scope of the project are factors that determine whether certain enumerated services are exempt. An area of particular difficulty is the distinction between repair and remodeling. Remodeling a building or other structure means much more than making repairs or minor changes to it. Remodeling is a reforming or reshaping of a structure or some substantial portion of it to the extent that the remodeled structure or portion of the structure is in large part the equivalent of a new structure or part thereof.

(1)Repair. Since retailers, as defined in Iowa Code section 423.1(47), may purchase building materials, supplies, and equipment for resale, persons making taxable repairs are not considered to be owners, contractors, subcontractors, or builders and are not subject to the provisions of Iowa Code section 423.2(1)"b." Repairpersons and servicepersons will normally purchase building materials and supplies free of tax for subsequent resale to their customers; contractor-retailers will also do this. However, contractors, subcontractors, or builders who may make repairs are subject to Iowa Code section 423.2(1)"b" and must pay tax at the time building materials, supplies, and equipment are purchased from vendors even though the contractors, subcontractors, or builders hold a valid sales tax permit. In determining who is a contractor and who is a retailer of repair services, the department looks to the total business of the entity in question and not to any one portion of it. Thus, the fact that a business whose overall activity is contracting has a division engaged in taxable repair services does not transform that business into a retailer providing services rather than a contractor. When contractors do repair work, they may separately itemize labor and materials charges and collect sales tax on all charges; if the labor and materials charges are billed as one lump sum, the entire amount is subject to sales tax. A contractor's markup on a materials charge is part of any taxable sale. A contractor can take a credit for any tax paid on the purchase of materials that are sold as part of a service transaction.

When other persons making repairs sell tangible personal property at retail in connection with any taxable service enumerated in Iowa Code section 423.2, those persons shall collect and remit tax on the sales price. The person making repairs shall purchase tangible personal property for resale when the property is used in the repair job and is resold to a customer. Rule 701-225.3 (423) provides an explanation of when persons performing services sell the property that the persons use in performing those services to their customers. Nonexclusive examples of repair situations are as follows:

a. Repair of broken or defective glass.

b. Replacement of broken, defective, or rotten windows.

c. Replacing individual or damaged roof shingles.

d. Replacing or repairing a segment of worn-out or broken kitchen cabinets.

e. Repair or replacement of broken or damaged garage doors or garage door openers.

f. Replacing or repairing a part of a broken or worn tub, shower, or faucets.

g. Replacing or repairing a broken water heater, furnace, or central air conditioning compressor.

h. Restoration of original wiring in a house or building.

(2)New construction, reconstruction, alteration, expansion, and remodeling. The following are examples of new construction, reconstruction, alteration, expansion, and remodeling activities:

a. The building of a garage or adding a garage to an existing building is considered new construction.

b. Adding a wooden redwood deck to an existing structure is considered new construction.

c. Replacing the entire roof on an existing structure is considered reconstruction.

d. Adding a new room to an existing building is considered new construction.

e. Adding a new room by building interior walls is considered alteration.

f. Replacing kitchen cabinets with some structural modification to the kitchen layout is considered remodeling.

g. Laying a new floor over an existing floor is considered remodeling.

h. Building a new wing to an existing building is considered an expansion.

i. Rearranging the interior physical structure of a building is considered remodeling or alteration.

j. Installing manufactured housing or a modular or mobile home on a foundation is considered new construction. However, rule 701-282.8 (423) provides a description of the special treatment of taxable installation charges when the taxable sale of manufactured housing as real estate occurs.

k. Replacing an entire water heater, water softener, furnace, or central air-conditioning unit.

In all instances of new construction, reconstruction, alteration, expansion, or remodeling, the contractor is the final consumer of the materials, supplies, or equipment used in completing the job and is therefore responsible for paying sales tax to its supplier on the full sales price of the materials, supplies, or equipment used in the project. However, the contractor is not to charge the owner sales tax on any labor charges associated with completing the job.

(3)"On or connected with." The term "on or connected with" is broad and should be used to convey generally accepted meaning. Therefore, in a specific situation, the facts relating thereto are controlling in determining whether the exemption is applicable. "On or connected with" does not connote that those things connected have to be primary or subsidiary to the construction, reconstruction, alteration, expansion or remodeling of the real property. An incidental relationship can qualify the activity for exemption if the relationship forms an intimate connection with the construction activity. For example, the service of excavating and grading relating to the clearing of land to begin construction of a building would qualify for the exemption; however, excavating and grading land without motive toward construction would not qualify for exemption even though at some later date plans to construct a building were created and a structure was actually erected.

(4)Time and physical relationship.

a.Time. The presence of a time relationship can also be a factor in determining the applicability of exemption. For example, tax would not apply to separate labor charges relating to the installation of production machinery and equipment in a building while remodeling of the real property was in progress. However, if a year after all construction activity has ended, the owner decides to install a piece of production machinery in the building, any taxable enumerated services relating thereto would be subject to tax. Further, if, following construction, the land is graded for the purpose of seeding a new lawn, the exemption would be applicable. However, if the lawn does not grow and the land is regraded the following year, the exemption would not be applicable. Therefore, the motive behind the activity and the course of events that could reasonably be expected to occur would be a further consideration in determining if the exemption is applicable.

b.Physical. A physical relationship is also a factor that should be evaluated. If a building is constructed to house machinery, any enumerated services relating to the installation of that machinery would be exempt from tax. For example, piping joining two pieces of equipment housed in separate buildings would qualify for exemption if the equipment in either building was installed while such new construction, reconstruction, alteration, expansion or remodeling to the structure was also taking place to house the equipment.

c.Incidental relationship. On the other hand, an incidental relationship, a time relationship and close physical proximity may not be enough to support the conclusion that a taxable service is performed in connection with new construction or reconstruction. For example, a homeowner hires a contractor to add a new room to an existing home. The existing home is in need of a number of the repairs described in subrule 219.13(1); for example, it is in need of rewiring and replacement of a broken window. The contractor rewires the home and repairs the window in addition to building the new room. The taxable services that the general contractor performs while rewiring the home and repairing the window are not performed in connection with the construction of the new room simply because those services happen to be performed at the same time and on the same home as the new construction. If the addition of the new room were the cause of the need for the taxable service (e.g., the window was broken during construction of the new room) and not just a convenient occasion for performance of the service, that performance would be exempt from tax.

d.Determination of taxability. Facts and motives are important in the determination of the taxability of services relating to construction activities. It should also be noted that taxes on enumerated services are applicable to repair or installation work that is not on or connected with new construction, reconstruction, alteration, expansion, or remodeling.

(5)Various nontaxable services. Services associated with new construction or reconstruction, for example, that are not taxable include but are not limited to brick laying, concrete finishing, tiling, siding installation, laying of linoleum and other flooring and carpet installation. No tax can be collected on the performance of these services even when they are furnished in connection with the performance of repairs.

(6)Taxable construction-related services.

a.Carpentry repair or installation. Persons engaged in the business of carpentry, as the trade is known in the usual course of business, are selling a service subject to sales tax, regardless of whether they perform repair or installation. The carpentry services can be conducted on or within real or personal property.

b.Roof, shingle, and glass repair. Persons engaged in the business of repairing, restoring, or renovating roofs or shingles or restoring or replacing glass, whether the glass is personal property or affixed to real property, are selling a service subject to sales tax.

c.Electrical and electronic repair and installation.

(1) In general. Persons engaged in the business of repairing or installing electrical wiring, fixtures, or switches in or on real property, or repairing or installing any article of tangible personal property powered by electric current, are selling a service subject to sales tax. This includes installation of semiconductors, such as vacuum tubes, transistors, or integrated circuits, or installation or repair of machinery or equipment that functions mainly through the use of semiconductors.

(2) New machinery or equipment. The sales price of the electrical or electronic installation is exempt from tax if the sales price is charged for the installation of new machinery or equipment.

(3) Definition. For purposes of this subrule:

"Installation" includes affixing electrical wiring, fixtures or switches to real property; affixing any article of personal property powered by electric current to any other article of personal property; or making any article of personal property powered by electric current operative with respect to its intended function or purpose.

d.Excavating and grading.

(1) In general. Persons engaged in the business of excavating and grading are selling services subject to sales tax.

(2) Definitions. For purposes of this subrule:

"Excavation" means the digging, hauling, hollowing out, scooping out or making of a cut or hole in the earth. "Excavation" ordinarily includes not only the digging down into the earth but also the removal of whatever material or substance is found beneath the surface.

"Grading" means a physical change of the earth's structure by scraping and filling in the surface to reduce it to a common level. "Grading" includes the reducing of the surface of the earth to a given line fixed as the grade, involving excavating, filling, or both.

e.Painting, papering and interior decorating.

(1) In general. Persons engaged in the business of painting, papering, and interior decorating are selling a service subject to sales tax.

(2) Definitions. For purposes of this subrule:

"Interior decoration" means the designing or decoration of the interior of houses or buildings, counseling with respect to such design or decoration, or the procurement of furniture fixtures or home or building decorations.

"Painting" means the covering of both interior and exterior surfaces of tangible personal or real property with a coloring matter and mixture of a pigment or sealant, with some suitable liquid to form a solid adherent when spread on the surface in thin coats for decoration, protection, or preservation purposes. This includes all necessary preparations, including surface preparation. "Painting" does not include automobile undercoating, the coating of railroad cars, storage tanks, or the plating of tangible personal property with metal such as but not limited to chromium, bronze, tin, galvanized metal, or platinum.

"Papering" means the application of wallpaper or wall fabric to the interior of a house or building and any necessary preparations, including surface preparation.

(3) Incidental service. When a person provides interior decorating services without charge, incidental to the sale of real or tangible personal property, no sales tax shall be charged in addition to the tax paid on the sales price or any part thereof of the real or tangible personal property.

f.Pipe fitting and plumbing.

(1) In general. Persons engaged in the business of pipe fitting and plumbing are selling a service subject to sales tax.

(2) Definition. For purposes of this rule:

"Pipe fitting and plumbing" means the trade of fitting, threading, installing, and repairing pipes, fixtures, or apparatus used for heating, refrigeration, or air conditioning, or concerned with the introduction, distribution, and disposal of a natural or artificial substance.

g.Wood preparation.

(1) In general. Persons engaged in the business of wood preparation or treatment for others are selling a service subject to sales tax.

(2) Definition. For purposes of this rule:

"Wood preparation" includes all processes whereby wood is sawed from logs in measured dimensions, planed, sanded, oiled, or treated in any manner before being used to repair an existing structure or create or become a part of a new structure. If such preparation is engaged solely for the purpose of processing lumber or wood products for ultimate sale at retail, such preparation may not be deemed as selling a service subject to sales tax.

h.Well drilling. Persons engaged in the business of well drilling are selling a service subject to sales tax.

i.Landscaping. Landscaping services performed on or in connection to new construction, reconstruction, alteration, expansion, or the remodeling of a building or structure are not subject to sales tax. Rule 701-211.24 (423) provides more information about landscaping services.

j.House and building moving. Persons engaged in the business of moving houses or buildings from one location to another, for any reason, are selling a service subject to sales tax. The sales price from this service is not considered a transportation charge.

This rule is intended to implement Iowa Code section 423.2(6).

Iowa Admin. Code r. 701-219.13

ARC 8161C, IAB 7/24/24, effective 8/28/24