Definition of “Manufacturing Equipment” Construed For Tax Purposes

November 15, 2010 | Erin Herbold

In Iowa, challenges to property tax assessments are first made at the county level. If the county board of review rejects the taxpayer’s arguments, the taxpayer may appeal to the county district court (trial court). If the taxpayer does not find relief at this level, they may appeal to the state’s appellate courts. In this case involving a property tax assessment challenge, the definition of “manufacturing equipment” was at issue.  “Manufacturing equipment” is exempt from tax. 

In this case, a manufacturing company (foundry) claimed that a cupola, a vertical annealing furnace, and a smokestack qualified as “manufacturing equipment.” The cupola was used to melt metals during the casting process while the furnace was used to alter the hardness and add strength to metal. The smokestack vents hot gases and fine particulate matter generated during the smelting process. The county assessor included the value of both items in the value of the taxpayer’s property that was subject to taxation.  The manufacturer appealed to the county board of review, but the board ruled against the manufacturer, so the manufacturer appealed to the trial court.  But, during the pendency of the appeal, the Iowa Supreme Court granted an interlocutory review to consider whether the items were manufacturing equipment. 

Iowa law (Iowa Code §427A.1(1)(c), (d), and (e)) provides that “buildings, structures, or improvements, any of which are constructed on or in the land, attached to the land, or placed upon a foundation whether or not attached to the foundation” are subject to property taxation. This includes machinery or improvements. The code further provides that “machinery used in manufacturing establishments shall, for the purpose of taxation, be regarded as real estate.” Originally, “machinery used in manufacturing establishments” was subject to property tax. However, the Iowa legislature reversed court when they enacted Iowa Code § 427B.17. That code section provides that “machinery used in manufacturing establishments” became exempt if it was assessed for the first time on or after Jan. 1, 1995.” 

The foundry argued that because they were a manufacturing establishment and because the listed equipment was manufacturing equipment, it was entitled to property tax exemption for those items.  The board of review believed that the three pieces of equipment were common law fixtures to the real estate and subject to property tax. 

The sole issue before the court was whether the phrase “machinery used in manufacturing establishments” under Iowa Code §427A.1(1)(e) includes within its scope common law fixtures. The court noted that the legislature enacted §427B.17 which phased out property tax on machinery that was first assessed after Jan. 1, 1995.  There have been only a few cases interpreting the meaning of machinery used in manufacturing, and none of those cases directly addressed the issue at bar.  In addition, there are no IDOR regulations that address whether fixtures used in manufacturing are subject to tax.  However, the Iowa Administrative Code states that under Iowa Code §427A.1(1)(e) all machinery used in manufacturing establishments shall be assessed as real estate .  The Iowa Supreme Court also looked at authority from other jurisdictions and found that, in some states, a “machinery” exemption has generally been given a narrow interpretation to exclude fixtures. Thus, favorable tax treatment is limited in these states. But, in some states, the term “machinery” has been interpreted to include common law fixtures. Manufacturers in these states enjoy more favorable tax treatment. 

The court first noted that Iowa cases and cases from other states have held fixtures to be within the scope of exemptions for manufacturing machinery. The Court further reasoned that the Iowa legislature must have been aware that, without limiting words, machinery would be susceptible to a broad interpretation including fixtures. Thus, the Court concluded that where two provisions of a statute conflict, as was the case here, the more specific statute prevails over the general statute.  The Court reached the conclusion that §427A.1(1)(e) includes all “machinery used in manufacturing establishment” regardless of whether the machinery is a common law fixture. The case was remanded with instructions for the trial court to grant summary judgment in favor of the foundry.  Griffin Pipe Products Co., Inc. v. Board of Review of County of Pottawattamie,789 N.W.2d 769 (Iowa Sup. Ct. 2010).