The greatest (tax policy) evolution story ever told

Cody Edwards, Iowa table SALT law, Iowa taxation law, dickinson law firm, des moines iowa

Posted on 06/06/2017 at 11:13 AM by Cody Edwards

Stories of evolution are fascinating. In this evolution story, we explore the Iowa Department of Revenue’s evolution of its tax policy related to Iowa’s computer exemption, which has adapted in a manner to become consistent with the plain language of the statute and case law.  This evolution is beneficial to the IDOR, but is also beneficial for business throughout Iowa; it may also signal a faster rate of evolution of Iowa’s tax policy generally. 

To understand the evolution, we first explore the history of Iowa’s computer exemption. We then examine the new adaptation and, finally, why the adaptation matters.   

History. Iowa has historically allowed a sales tax exemption for computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise.  Commercial enterprise includes business conducted for profit, but excludes professional corporations such as law and accounting firms. See Iowa Code § 423.3(47)(a)(4).  Computers includes “stored program processing equipment and all devices fastened to it by means of signal cables or any communication medium that serves the function of a signal cable.”  Iowa Admin. Code rule 701—18.58(1).  Examples of computers include “terminals, printers, display units, card readers, tape readers, document sorters, optical readers, and card or tape punchers.” Id.

Prior to July 1, 1997 computers were only exempt if they were used “directly and primarily” in processing or storage of data or information.  For periods on and after July 1, 1997, the “direct and primarily” requirement was removed so that computers are exempt if they are merely used in processing or storage of data or information.  In The Connelly Group d/b/a President’s Casino (2011), the issue was whether slot machines were exempt computers. The Administrative Law Judge revisited the legislative history of the computer exemption before ruling that slot machines are, in fact, computers (although excluded from the computer exemption due to an exception for point-of-sale equipment).  The ALJ stated that even though the primary use of slot machines is a gaming machine, “as rewritten by the legislature in 1997 [the computer exemption] is no longer limited to computers used primarily for processing or storage of data.”  The ALJ also recognized that, based on the statutory definition of computer, the computer exemption should not be limited to “something commonly thought of as a computer or something that meets the dictionary definition of a computer.”

Subsequent to the ALJ’s ruling in The Connelly Group, the IDOR continued to take the position that (1) computers, including items attached to them, must be used directly and primarily in processing data to qualify for the exemption and (2) certain items do not qualify for the exemption because they are not ordinarily thought of as a computer.

For example, subsequent to The Connelly Group, the IDOR continued to require proof that multi-function printers were primarily used as printers and scanners (copying and faxing is not processing of data), a requirement that many companies are unable to satisfy. See Iowa Tax Research Library, Document Reference Nos: 15300028, 09300092. Not only are multi-function printers connected to computers, but they store and process data.  With respect to the dictionary definition of computer, the IDOR continued to tax items such as tablets, cell phones, and GPS units, reasoning that those items are do not fit the dictionary definition of computer or were not contemplated by the legislature to fall within the computer exemption; this position flies directly in the face of The Connelly Group and IDOR’s recent statement in its Declaratory Order  regarding Amazon Prime where it stated that “a statute can encompass technologies not in existence at the time of its promulgation.”  

Adaptation. Now, almost ten years after the Iowa Legislature removed the direct and primary use requirement in Iowa Code section 423.3(47)(a)(4) and six years after The Connelly Group, the IDOR appears to, at least to a limited degree, have evolved to recognize the effect of those changes. The IDOR recently provided—in an unpublished letter—that it “recently determined that multi-function devices are exempt as computer peripheral devices attached to computers,” without requiring proof of direct and primary use as a computer.  It is unclear whether the IDOR has evolved to extend the computer exemption to tablets, cell phones, GPS systems and other devices that store or process data.  After all, evolution is a slow process. 

Why This Matters. Although this evolution story focused on a narrow issue, it matters in the broader spectrum of Iowa tax issues. First, and most obviously, this evolution benefits Iowa businesses who have historically overpaid millions dollars of tax on this sole issue.  Second, the IDOR’s method of “announcing” its evolution, via a single informal and unpublished letter, raises questions about the IDOR’s transparency and makes it difficult for taxpayers “to understand and comply with tax obligations.” Third, and most importantly, hopefully this tax policy evolution signals that the IDOR is beginning to review and evolve in other areas of Iowa’s tax law, including what is and is not considered a computer or who is or is not considered a manufacturer.   

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- Cody Edwards 


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