Court Construes “Manufacturer” Exemption From Sales and Use Tax-Iowa

October 16, 2008 | Roger McEowen & Erin Herbold

For purposes of Iowa sales and use tax, Iowa Code §428.20 defines a “manufacturer” as a person who purchases, receives, or holds personal property of any description for the purpose of adding to its value by a process of manufacturing. In Iowa, a “manufacturer” is exempt from sales and use tax on purchases of equipment if the equipment is “directly and primarily used in processing.” The application of the exemption to a paint company was at issue in this case.

The plaintiff, an Ohio-based paint company, with 38 retail stores located in Iowa, uses a “decentralized” system to produce paint by combining the base and colorant and performing color-matching at each retail store. The company sought a refund of sales and use tax, based on the statutory exemption for equipment used in processing by a manufacturer. The Iowa Department of Revenue (IDOR) denied the request. On appeal, the trial court determined that the director’s interpretation was “clearly illogical” and “wholly unjustifiable.” 

On appeal, IDOR argued that the statutory language in Iowa Code §428.20 was unclear and claimed that the court was, therefore, bound by past IDOR rulings to ascertain the test for “primary use of business property.” Those rulings state that businesses classifying property as commercial real estate for property tax assessments cannot be classified as manufacturers. The plaintiff claimed that the purchases of machinery and equipment for the mixing and color-matching of paint in its retail stores were exempt from Iowa sales and use tax because the equipment was “directly and primarily” used in processing and that the plaintiff qualifies as a manufacturer of paint in Iowa. Further, the plaintiff asserted, the use of color-matching equipment is essential to the quality of the paint and the manufacturing process. 

The court determined the statute was clear, and expressed its puzzlement with IDOR’s argument citing prior IDOR rulings involving the “manufacturer” exemption in the context of commercial real estate. The plaintiff met the definition of a manufacturer under Iowa law. In addition, since the combination of the base and colorant and color-matching is the final step in the manufacturing process and adds to the value of the product for profit or gain, the purchase of the equipment used at the company’s retail stores is exempt from sales and use tax. According to the court, Iowa law is not so strict as to require the equipment be used at a manufacturing plant. In other words, the court reasoned that locality of the equipment does not matter, and IDOR’s “primary business purpose test” did not apply. The Sherwin-Williams Company v. Iowa Dept. of Rev., No. 8-254/07-1534 (Iowa Ct. App., Oct. 15, 2008).