Senate Study Bill 1189

                                       SENATE FILE       
                                       BY  (PROPOSED COMMITTEE ON WAYS
                                            AND MEANS BILL BY
                                            CHAIRPERSON McKIBBEN)


    Passed Senate, Date               Passed House,  Date             
    Vote:  Ayes        Nays           Vote:  Ayes        Nays         
                 Approved                            

                                      A BILL FOR

  1 An Act relating to state taxes by imposing a single rate tax,
  2    eliminating the deduction for federal income taxes paid, and
  3    eliminating the alternative minimum tax under the individual
  4    income tax; by increasing the sales and use tax rate; and by
  5    increasing the state cigarette and tobacco products tax rates;
  6    and including effective and applicability date provisions.
  7 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
  8 TLSB 3429SC 80
  9 mg/sh/8

PAG LIN

  1  1                           DIVISION I
  1  2                      INDIVIDUAL INCOME TAX
  1  3                         SINGLE TAX RATE
  1  4    Section 1.  Section 422.4, subsections 1 and 2, Code 2003,
  1  5 are amended by striking the subsections.
  1  6    Sec. 2.  Section 422.4, subsection 16, Code 2003, is
  1  7 amended to read as follows:
  1  8    16.  The words "taxable "Taxable income" mean means the net
  1  9 income as defined in section 422.7 minus the deductions
  1 10 allowed by section 422.9, in the case of individuals; in.  In
  1 11 the case of estates or trusts, the words "taxable income" mean
  1 12 means the taxable income, (without a deduction for personal
  1 13 exemption), as computed for federal income tax purposes under
  1 14 the Internal Revenue Code, but with the adjustments specified
  1 15 in section 422.7 plus the Iowa income tax deducted in
  1 16 computing the federal taxable income and minus federal income
  1 17 taxes as provided in section 422.9.
  1 18    Sec. 3.  Section 422.5, subsection 1, Code 2003, is amended
  1 19 by striking the subsection and inserting in lieu thereof the
  1 20 following:
  1 21    1.  a.  A tax is imposed upon every resident and
  1 22 nonresident of the state which tax shall be levied, collected,
  1 23 and paid annually upon and with respect to the entire taxable
  1 24 income at the rate of three and one=half percent.
  1 25    b.  (1)  The tax imposed upon the taxable income of a
  1 26 nonresident shall be computed by reducing the amount
  1 27 determined pursuant to paragraph "a" by the amounts of
  1 28 nonrefundable credits under this division and by multiplying
  1 29 this resulting amount by a fraction of which the nonresident's
  1 30 net income allocated to Iowa, as determined in section 422.8,
  1 31 subsection 2, paragraph "a", is the numerator and the
  1 32 nonresident's total net income computed under section 422.7 is
  1 33 the denominator.  This provision also applies to individuals
  1 34 who are residents of Iowa for less than the entire tax year.
  1 35    (2)  The tax imposed upon the taxable income of a resident
  2  1 shareholder in an S corporation which has in effect for the
  2  2 tax year an election under subchapter S of the Internal
  2  3 Revenue Code and carries on business within and without the
  2  4 state may be computed by reducing the amount determined
  2  5 pursuant to paragraph "a" by the amounts of nonrefundable
  2  6 credits under this division and by multiplying this resulting
  2  7 amount by a fraction of which the resident's net income
  2  8 allocated to Iowa, as determined in section 422.8, subsection
  2  9 2, paragraph "b", is the numerator and the resident's total
  2 10 net income computed under section 422.7 is the denominator.
  2 11 If a resident shareholder has elected to take advantage of
  2 12 this subparagraph, and for the next tax year elects not to
  2 13 take advantage of this subparagraph, the resident shareholder
  2 14 shall not reelect to take advantage of this subparagraph for
  2 15 the three tax years immediately following the first tax year
  2 16 for which the shareholder elected not to take advantage of
  2 17 this subparagraph, unless the director consents to the
  2 18 reelection.  This subparagraph also applies to individuals who
  2 19 are residents of Iowa for less than the entire tax year.
  2 20    c.  (1)  A bill containing among its provisions an increase
  2 21 in the tax rate under this section or the imposition upon
  2 22 individuals or estates or trusts of an income surtax or
  2 23 alternative minimum tax shall require the affirmative votes of
  2 24 at least three=fourths of the members elected to each house of
  2 25 the general assembly for passage.
  2 26    (2)  A lawsuit challenging the proper enactment of a bill
  2 27 pursuant to subparagraph (1) shall be filed no later than one
  2 28 year following the enactment.  Failure to file such a lawsuit
  2 29 within the one=year time limit shall negate the three=fourths
  2 30 majority requirement as it applies to the bill.
  2 31    (3)  Each bill to which subparagraph (1) applies shall
  2 32 include a separate provision describing the requirements for
  2 33 enactment prescribed by subparagraphs (1) and (2).
  2 34    Sec. 4.  Section 422.5, subsection 2, Code 2003, is amended
  2 35 by striking the subsection and inserting in lieu thereof the
  3  1 following:
  3  2    2.  a.  However, if the married persons' filing jointly,
  3  3 unmarried head of household's, or surviving spouse's net
  3  4 income exceeds fifteen thousand dollars or eleven thousand
  3  5 dollars in the case of all other persons, the regular tax
  3  6 imposed under this division shall be the lesser of the product
  3  7 of eight percent times the portion of the net income in excess
  3  8 of fifteen thousand dollars or eleven thousand dollars, as
  3  9 applicable, or the regular tax liability computed without
  3 10 regard to this paragraph.
  3 11    b.  Paragraph "a" does not apply to estates and trusts.
  3 12 Married taxpayers electing to file separately shall compute
  3 13 the alternate tax described in paragraph "a" using the total
  3 14 net income of the husband and wife.  The alternate tax
  3 15 described in paragraph "a" does not apply if one spouse elects
  3 16 to carry back or carry forward the loss as provided in section
  3 17 422.9, subsection 3.  A person who is claimed as a dependent
  3 18 by another person as defined in section 422.12 shall not
  3 19 receive the benefit of paragraph "a" if the person claiming
  3 20 the dependent has net income exceeding fifteen thousand
  3 21 dollars or eleven thousand dollars as applicable or the person
  3 22 claiming the dependent and the person's spouse have combined
  3 23 net income exceeding fifteen thousand dollars or eleven
  3 24 thousand dollars as applicable.
  3 25    Sec. 5.  Section 422.5, subsections 5 and 7, Code 2003, are
  3 26 amended by striking the subsections.
  3 27    Sec. 6.  Section 422.7, Code 2003, is amended by striking
  3 28 the section and inserting in lieu thereof the following:
  3 29    422.7  "NET INCOME" == HOW COMPUTED.
  3 30    The term "net income" means the adjusted gross income
  3 31 before the net operating loss deduction as properly computed
  3 32 for federal income tax purposes under the Internal Revenue
  3 33 Code, with the following adjustments:
  3 34    1.  The adjusted gross income is adjusted by adding the sum
  3 35 of the following:
  4  1    a.  Add the amount of federal income tax refunds received
  4  2 in a tax year beginning on or after January 1, 2004, but
  4  3 before January 1, 2007, to the extent that the federal income
  4  4 tax was deducted on an Iowa individual income tax return for a
  4  5 tax year beginning prior to January 1, 2004.
  4  6    b.  Add interest and dividends from foreign securities and
  4  7 from securities of state and other political subdivisions
  4  8 exempt from federal income tax under the Internal Revenue
  4  9 Code.
  4 10    c.  Add interest and dividends from regulated investment
  4 11 companies exempt from federal income tax under the Internal
  4 12 Revenue Code.
  4 13    d.  Add, to the extent not already included, income from
  4 14 the sale of obligations of the state and its political
  4 15 subdivisions.  Income from the sale of these obligations is
  4 16 exempt from the taxes imposed by this division only if the law
  4 17 authorizing these obligations specifically exempts the income
  4 18 from the sale from the state individual income tax.
  4 19    e.  Add the amount resulting from the cancellation of a
  4 20 participation agreement refunded to the taxpayer as a
  4 21 participant in the Iowa educational savings plan trust under
  4 22 chapter 12D to the extent previously deducted as a
  4 23 contribution to the trust.
  4 24    2.  The adjusted gross income is adjusted by subtracting
  4 25 the sum of the following:
  4 26    a.  Subtract the amount of federal income taxes paid or
  4 27 accrued, as the case may be, in a tax year beginning on or
  4 28 after January 1, 2004, but before January 1, 2007, to the
  4 29 extent the federal tax payment is for a tax year beginning
  4 30 prior to January 1, 2004.
  4 31    b.  Subtract interest and dividends from federal
  4 32 securities.
  4 33    c.  Subtract the loss on the sale or exchange of a share of
  4 34 a regulated investment company held for six months or less to
  4 35 the extent the loss was disallowed under section 852(b)(4)(B)
  5  1 of the Internal Revenue Code.
  5  2    d.  (1)  Subtract, to the extent included, the amount of
  5  3 additional social security benefits taxable under the Internal
  5  4 Revenue Code for tax years beginning on or after January 1,
  5  5 1994.  The amount of social security benefits taxable as
  5  6 provided in section 86 of the Internal Revenue Code, as
  5  7 amended up to and including January 1, 1993, continues to
  5  8 apply for state income tax purposes for tax years beginning on
  5  9 or after January 1, 1994.
  5 10    (2)  Married taxpayers, who file a joint federal income tax
  5 11 return and who elect to file separate returns for state income
  5 12 tax purposes, shall allocate between the spouses the amount of
  5 13 benefits subtracted under subparagraph (1) from net income in
  5 14 the ratio of the social security benefits received by each
  5 15 spouse to the total of these benefits received by both
  5 16 spouses.
  5 17    e.  (1)  For a person who is disabled, or is fifty=five
  5 18 years of age or older, or is the surviving spouse of an
  5 19 individual or a survivor having an insurable interest in an
  5 20 individual who would have qualified for the exemption under
  5 21 this paragraph for the tax year, subtract, to the extent
  5 22 included, the total amount of a governmental or other pension
  5 23 or retirement pay, including, but not limited to, defined
  5 24 benefit or defined contribution plans, annuities, individual
  5 25 retirement accounts, plans maintained or contributed to by an
  5 26 employer, or maintained or contributed to by a self=employed
  5 27 person as an employer, and deferred compensation plans or any
  5 28 earnings attributable to the deferred compensation plans, up
  5 29 to a maximum of six thousand dollars for a person, other than
  5 30 a husband or wife, who files a separate state income tax
  5 31 return and up to a maximum of twelve thousand dollars for a
  5 32 husband and wife who file a joint state income tax return.
  5 33    (2)  However, a surviving spouse who is not disabled or
  5 34 fifty=five years of age or older can only exclude the amount
  5 35 of pension or retirement pay received as a result of the death
  6  1 of the other spouse.  A husband and wife filing separate state
  6  2 income tax returns are allowed a combined maximum exclusion
  6  3 under this paragraph "e" of up to the amount allowed for a
  6  4 husband and wife who file a joint state income tax return.
  6  5 The exclusion shall be allocated to the husband or wife in the
  6  6 proportion that each spouse's respective pension and
  6  7 retirement pay received bears to total combined pension and
  6  8 retirement pay received.
  6  9    f.  Notwithstanding the method for computing income from an
  6 10 installment sale under section 453 of the Internal Revenue
  6 11 Code, as defined in section 422.3, the method to be used in
  6 12 computing income from an installment sale shall be the method
  6 13 under section 453 of the Internal Revenue Code, as amended up
  6 14 to and including January 1, 2000.  A taxpayer affected by this
  6 15 paragraph shall make adjustments in the adjusted gross income
  6 16 pursuant to rules adopted by the director.
  6 17    The adjustment to net income provided in this paragraph is
  6 18 repealed for tax years beginning on or after January 1, 2002.
  6 19 However, to the extent that a taxpayer using the accrual
  6 20 method of accounting reported the entire capital gain from the
  6 21 sale or exchange of property on the Iowa return for the tax
  6 22 year beginning in the 2001 calendar year and the capital gain
  6 23 was reported on the installment method on the federal income
  6 24 tax return, any additional installment from the capital gain
  6 25 reported for federal income tax purposes is not to be included
  6 26 in net income in tax years beginning on or after January 1,
  6 27 2002.
  6 28    g.  Subtract, if the taxpayer is the owner of an individual
  6 29 development account certified under chapter 541A at any time
  6 30 during the tax year, all of the following:
  6 31    (1)  Contributions made to the account by persons and
  6 32 entities, other than the taxpayer, as authorized in chapter
  6 33 541A.
  6 34    (2)  The amount of any savings refund authorized under
  6 35 section 541A.3, subsection 1.
  7  1    (3)  Earnings from the account.
  7  2    h.  (1)  Subtract the maximum contribution that may be
  7  3 deducted for income tax purposes as a participant in the Iowa
  7  4 educational savings plan trust pursuant to section 12D.3,
  7  5 subsection 1, paragraph "a".
  7  6    (2)  Subtract, to the extent included, income from interest
  7  7 and earnings received from the Iowa educational savings plan
  7  8 trust created in chapter 12D.
  7  9    (3)  Subtract, to the extent not deducted for federal
  7 10 income tax purposes, the amount of any gift, grant, or
  7 11 donation made to the Iowa educational savings plan trust for
  7 12 deposit in the endowment fund of that trust.
  7 13    i.  Subtract, to the extent included, active duty pay
  7 14 received by a person in the national guard or armed forces
  7 15 military reserve for services performed on or after August 2,
  7 16 1990, pursuant to military orders related to the Persian Gulf
  7 17 Conflict.
  7 18    j.  Subtract, to the extent included, active duty pay
  7 19 received by a person in the national guard or armed forces
  7 20 military reserve for service performed on or after November
  7 21 21, 1995, pursuant to military orders related to peacekeeping
  7 22 in Bosnia=Herzegovina.
  7 23    k.  Subtract, to the extent included, the following:
  7 24    (1)  Payments made to the taxpayer because of the
  7 25 taxpayer's status as a victim of persecution for racial,
  7 26 ethnic, or religious reasons by Nazi Germany or any other Axis
  7 27 regime or as an heir of such victim.
  7 28    (2)  Items of income attributable to, derived from, or in
  7 29 any way related to assets stolen from, hidden from, or
  7 30 otherwise lost to a victim of persecution for racial, ethnic,
  7 31 or religious reasons by Nazi Germany or any other Axis regime
  7 32 immediately prior to, during, and immediately after World War
  7 33 II, including, but not limited to, interest on the proceeds
  7 34 receivable as insurance under policies issued to a victim of
  7 35 persecution for racial, ethnic, or religious reasons by Nazi
  8  1 Germany or any other Axis regime by European insurance
  8  2 companies immediately prior to and during World War II.
  8  3 However, income from assets acquired with such assets or with
  8  4 the proceeds from the sale of such assets shall not be
  8  5 subtracted.  This subparagraph shall only apply to a taxpayer
  8  6 who was the first recipient of such assets after recovery of
  8  7 the assets and who is a victim of persecution for racial,
  8  8 ethnic, or religious reasons by Nazi Germany or any other Axis
  8  9 regime or is an heir of such victim.
  8 10    3.  a.  In determining the amount of federal income tax
  8 11 refunds or taxes paid or accrued under subsection 1 or
  8 12 subsection 2, for tax years beginning in the 2001 calendar
  8 13 year, the amount shall not be adjusted by the amount received
  8 14 during the tax year of the advanced refund of the rate
  8 15 reduction tax credit provided pursuant to the federal Economic
  8 16 Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No.
  8 17 107=16, and the advanced refund of such credit shall not be
  8 18 subject to taxation under this division.
  8 19    b.  In determining the amount of federal income tax refunds
  8 20 or taxes paid or accrued under subsection 1 or subsection 2,
  8 21 for tax years beginning in the 2002 calendar year, the amount
  8 22 for the tax year shall not be adjusted by the amount of the
  8 23 rate reduction credit received in the tax year to the extent
  8 24 that the credit is attributable to the rate reduction credit
  8 25 provided pursuant to the federal Economic Growth and Tax
  8 26 Relief Reconciliation Act of 2001, Pub. L. No. 107=16, and the
  8 27 amount of such credit shall not be taxable under this
  8 28 division.
  8 29    Sec. 7.  Section 422.8, subsection 2, paragraph a, Code
  8 30 2003, is amended to read as follows:
  8 31    a.  Nonresident's net income allocated to Iowa is the net
  8 32 income, or portion of net income, which is derived from a
  8 33 business, trade, profession, or occupation carried on within
  8 34 this state or income from any property, trust, estate, or
  8 35 other source within Iowa.  However, income derived from a
  9  1 business, trade, profession, or occupation carried on within
  9  2 this state and income from any property, trust, estate, or
  9  3 other source within Iowa shall not include distributions from
  9  4 pensions, including defined benefit or defined contribution
  9  5 plans, annuities, individual retirement accounts, and deferred
  9  6 compensation plans or any earnings attributable thereto so
  9  7 long as the distribution is directly related to an
  9  8 individual's documented retirement and received while the
  9  9 individual is a nonresident of this state.  If a business,
  9 10 trade, profession, or occupation is carried on partly within
  9 11 and partly without the state, only the portion of the net
  9 12 income which is fairly and equitably attributable to that part
  9 13 of the business, trade, profession, or occupation carried on
  9 14 within the state is allocated to Iowa for purposes of section
  9 15 422.5, subsection 1, paragraph "j" "b", and section 422.13 and
  9 16 income from any property, trust, estate, or other source
  9 17 partly within and partly without the state is allocated to
  9 18 Iowa in the same manner, except that annuities, interest on
  9 19 bank deposits and interest=bearing obligations, and dividends
  9 20 are allocated to Iowa only to the extent to which they are
  9 21 derived from a business, trade, profession, or occupation
  9 22 carried on within the state.
  9 23    Sec. 8.  Section 422.8, subsection 4, Code 2003, is amended
  9 24 by striking the subsection.
  9 25    Sec. 9.  Section 422.9, unnumbered paragraph 1 and
  9 26 subsections 1 and 2, Code 2003, are amended by striking the
  9 27 unnumbered paragraph and the subsections and inserting in lieu
  9 28 thereof the following:
  9 29    In computing taxable income of individuals, there shall be
  9 30 deducted from net income the following:
  9 31    1.  A standard deduction equal to the following:
  9 32    a.  For a single individual, or a married person filing
  9 33 separately, two thousand dollars.
  9 34    b.  For a head of household, or a husband and wife filing a
  9 35 joint return, four thousand dollars.
 10  1    c.  For each dependent, an additional two thousand dollars.
 10  2 As used in this section, the term "dependent" has the same
 10  3 meaning as provided by the Internal Revenue Code.
 10  4    2.  In addition to the amount in subsection 1, the
 10  5 following:
 10  6    a.  For a single individual, husband, wife, or head of
 10  7 household, an additional exemption of one thousand dollars for
 10  8 each such individual who has attained the age of sixty=five
 10  9 years before the close of the tax year or on the first day
 10 10 following the end of the tax year.
 10 11    b.  For a single individual, husband, wife, or head of
 10 12 household, an additional exemption of one thousand dollars for
 10 13 each such individual who is blind at the close of the tax
 10 14 year.  For the purposes of this paragraph, an individual is
 10 15 blind only if the individual's central visual acuity does not
 10 16 exceed twenty=two hundredths in the better eye with correcting
 10 17 lenses, or if the individual's visual acuity is greater than
 10 18 twenty=two hundredths but is accompanied by a limitation in
 10 19 the fields of vision such that the widest diameter of the
 10 20 visual field subtends an angle no greater than twenty degrees.
 10 21    Sec. 10.  Section 422.9, subsections 4 through 7, Code
 10 22 2003, are amended by striking the subsections.
 10 23    Sec. 11.  Section 422.11B, subsection 1, Code 2003, is
 10 24 amended to read as follows:
 10 25    1.  There is allowed as a credit against the tax determined
 10 26 in section 422.5, subsection 1, paragraphs "a" through "j" for
 10 27 a tax year an amount equal to the minimum tax credit for that
 10 28 tax year.
 10 29    The minimum tax credit for a tax year is the excess, if
 10 30 any, of the adjusted net minimum tax imposed for all prior tax
 10 31 years beginning on or after January 1, 1987, but before
 10 32 January 1, 2004, over the amount allowable as a credit under
 10 33 this section for those prior tax years.
 10 34    If a minimum tax credit is available to a tax period
 10 35 beginning on or after January 1, 2004, the credit can be
 11  1 carried over to tax years beginning on or after January 1,
 11  2 2004, but before January 1, 2007.  The minimum tax credit is
 11  3 limited to the tax determined in section 422.5, subsection 1,
 11  4 paragraphs "a" and "b".
 11  5    Sec. 12.  Section 422.12, subsection 1, Code 2003, is
 11  6 amended by striking the subsection and inserting in lieu
 11  7 thereof the following:
 11  8    1.  A personal exemption credit in the following amounts:
 11  9    a.  If the net income of an estate or trust, a single
 11 10 individual, or a married person filing a separate return is no
 11 11 more than twenty=five thousand dollars, forty dollars.
 11 12    b.  If the net income of a head of household or a husband
 11 13 and wife filling a joint return is no more than fifty thousand
 11 14 dollars, eighty dollars.
 11 15    c.  For each dependent of a taxpayer described in paragraph
 11 16 "a" or "b", an additional forty dollars.  As used in this
 11 17 section, "dependent" means the same as provided in the
 11 18 Internal Revenue Code.
 11 19    Sec. 13.  Section 422.12B, subsection 2, Code 2003, is
 11 20 amended to read as follows:
 11 21    2.  Married taxpayers electing to file separate returns or
 11 22 filing separately on a combined return may avail themselves of
 11 23 the earned income credit by allocating the earned income
 11 24 credit to each spouse in the proportion that each spouse's
 11 25 respective earned income bears to the total combined earned
 11 26 income.  Taxpayers affected by the allocation provisions of
 11 27 section 422.8 shall be permitted a deduction for the credit
 11 28 only in the amount fairly and equitably allocable to Iowa
 11 29 under rules prescribed by the director.
 11 30    Sec. 14.  Section 422.12C, subsection 3, Code 2003, is
 11 31 amended to read as follows:
 11 32    3.  Married taxpayers who have filed joint federal returns
 11 33 electing to file separate returns or to file separately on a
 11 34 combined return form must determine the child and dependent
 11 35 care credit under subsection 1 based upon their combined net
 12  1 income and allocate the total credit amount to each spouse in
 12  2 the proportion that each spouse's respective net income bears
 12  3 to the total combined net income.  Nonresidents or part=year
 12  4 residents of Iowa must determine their Iowa child and
 12  5 dependent care credit in the ratio of their Iowa source net
 12  6 income to their all source net income.  Nonresidents or part=
 12  7 year residents who are married and elect to file separate
 12  8 returns or to file separately on a combined return form must
 12  9 allocate the Iowa child and dependent care credit between the
 12 10 spouses in the ratio of each spouse's Iowa source net income
 12 11 to the combined Iowa source net income of the taxpayers.
 12 12    Sec. 15.  Section 422.13, subsection 1, paragraph c, and
 12 13 subsection 1A, Code 2003, are amended to read as follows:
 12 14    c.  However, if that part of the net income of a
 12 15 nonresident which is allocated to Iowa pursuant to section
 12 16 422.8, subsection 2, is less than one thousand dollars the
 12 17 nonresident is not required to make and sign a return except
 12 18 when the nonresident is subject to the state alternative
 12 19 minimum tax imposed pursuant to section 422.5, subsection 1,
 12 20 paragraph "k".
 12 21    1A.  Notwithstanding any other provision in this section, a
 12 22 resident of this state is not required to make and file a
 12 23 return if the person's net income is equal to or less than the
 12 24 appropriate dollar amount listed in section 422.5, subsection
 12 25 2, upon which tax is not imposed fifteen thousand dollars in
 12 26 the case of married persons filing jointly, unmarried heads of
 12 27 households, and surviving spouses, or is equal to or less than
 12 28 eleven thousand dollars in the case of all other persons.  A
 12 29 nonresident of this state is not required to make and file a
 12 30 return if the person's total net income in section 422.5,
 12 31 subsection 1, paragraph "j", is equal to or less than the
 12 32 appropriate dollar amount provided in section 422.5,
 12 33 subsection 2, upon which tax is not imposed fifteen thousand
 12 34 dollars in the case of married persons filing jointly,
 12 35 unmarried heads of households, and surviving spouses, or is
 13  1 equal to or less than eleven thousand dollars in the case of
 13  2 all other persons.  For purposes of this subsection, the
 13  3 amount of a lump sum distribution subject to separate federal
 13  4 tax shall be included in net income for purposes of
 13  5 determining if a resident is required to file a return and the
 13  6 portion of the lump sum distribution that is allocable to Iowa
 13  7 is included in total net income for purposes of determining if
 13  8 a nonresident is required to make and file a return.
 13  9    Sec. 16.  Section 422.21, unnumbered paragraphs 1 and 2,
 13 10 Code 2003, are amended to read as follows:
 13 11    Returns shall be in the form the director prescribes, and
 13 12 shall be filed with the department on or before the last day
 13 13 of the fourth month after the expiration of the tax year.
 13 14 However, co=operative associations as defined in section
 13 15 6072(d) of the Internal Revenue Code shall file their returns
 13 16 on or before the fifteenth day of the ninth month following
 13 17 the close of the taxable year and nonprofit corporations
 13 18 subject to the unrelated business income tax imposed by
 13 19 section 422.33, subsection 1A, shall file their returns on or
 13 20 before the fifteenth day of the fifth month following the
 13 21 close of the taxable year.  If, under the Internal Revenue
 13 22 Code, a corporation is required to file a return covering a
 13 23 tax period of less than twelve months, the state return shall
 13 24 be for the same period and is due forty=five days after the
 13 25 due date of the federal tax return, excluding any extension of
 13 26 time to file.  In case of sickness, absence, or other
 13 27 disability, or if good cause exists, the director may allow
 13 28 further time for filing returns.  The director shall cause to
 13 29 be prepared blank forms for the returns and shall cause them
 13 30 to be distributed throughout the state and to be furnished
 13 31 upon application, but failure to receive or secure the form
 13 32 does not relieve the taxpayer from the obligation of making a
 13 33 return that is required.  The department may as far as
 13 34 consistent with the Code draft income tax forms to conform to
 13 35 the income tax forms of the internal revenue department of the
 14  1 United States government.  Each return by a taxpayer upon whom
 14  2 a tax is imposed by section 422.5 shall show the county of the
 14  3 residence of the taxpayer.  For tax years beginning on or
 14  4 after January 1, 2004, the director shall not prescribe and no
 14  5 longer accept income tax returns of married persons filing
 14  6 separately on the combined return form.
 14  7    An individual in the armed forces of the United States
 14  8 serving in an area designated by the president of the United
 14  9 States or the United States Congress as a combat zone or as a
 14 10 qualified hazardous duty area, or an individual serving in
 14 11 support of those forces, is allowed the same additional time
 14 12 period after leaving the combat zone or the qualified
 14 13 hazardous duty area, or after a period of continuous
 14 14 hospitalization, to file a state income tax return or perform
 14 15 other acts related to the department, as would constitute
 14 16 timely filing of the return or timely performance of other
 14 17 acts described in section 7508(a) of the Internal Revenue
 14 18 Code.  For the purposes of this paragraph, "other acts related
 14 19 to the department" includes filing claims for refund for any
 14 20 tax administered by the department, making tax payments other
 14 21 than withholding payments, filing appeals on the tax matters,
 14 22 filing other tax returns, and performing other acts described
 14 23 in the department's rules.  The additional time period allowed
 14 24 applies to the spouse of the individual described in this
 14 25 paragraph to the extent the spouse files jointly or separately
 14 26 on the combined return form with the individual or when the
 14 27 spouse is a party with the individual to any matter for which
 14 28 the additional time period is allowed.
 14 29    Sec. 17.  Section 422.21, unnumbered paragraph 5, Code
 14 30 2003, is amended by striking the unnumbered paragraph.
 14 31    Sec. 18.  Section 422.21, unnumbered paragraph 7, Code
 14 32 2003, is amended to read as follows:
 14 33    If married taxpayers file a joint return or file separately
 14 34 on a combined return in accordance with rules prescribed by
 14 35 the director, both spouses are jointly and severally liable
 15  1 for the total tax due on the return, except when one spouse is
 15  2 considered to be an innocent spouse under criteria established
 15  3 pursuant to section 6015 of the Internal Revenue Code.
 15  4    Sec. 19.  Section 422.11B, Code 2003, is repealed.
 15  5                     COORDINATING AMENDMENTS
 15  6    Sec. 20.  Section 12D.9, subsection 2, Code 2003, is
 15  7 amended to read as follows:
 15  8    2.  State income tax treatment of the Iowa educational
 15  9 savings plan trust shall be as provided in section 422.7,
 15 10 subsections 32, 33, and 34 subsection 1, paragraph "e", and
 15 11 subsection 2, paragraph "h", and section 422.35, subsection
 15 12 14.
 15 13    Sec. 21.  Section 217.39, Code 2003, is amended to read as
 15 14 follows:
 15 15    217.39  PERSECUTED VICTIMS OF WORLD WAR II == REPARATIONS
 15 16 == HEIRS.
 15 17    Notwithstanding any other law of this state, payments paid
 15 18 to and income from lost property of a victim of persecution
 15 19 for racial, ethnic, or religious reasons by Nazi Germany or
 15 20 any other Axis regime or as an heir of such victim which is
 15 21 exempt from state income tax as provided in section 422.7,
 15 22 subsection 35 2, paragraph "k", shall not be considered as
 15 23 income or an asset for determining the eligibility for state
 15 24 or local government benefit or entitlement programs.  The
 15 25 proceeds are not subject to recoupment for the receipt of
 15 26 governmental benefits or entitlements, and liens, except liens
 15 27 for child support, are not enforceable against these sums for
 15 28 any reason.
 15 29    Sec. 22.  Section 422.120, subsection 1, paragraph b,
 15 30 subparagraph (3), Code 2003, is amended to read as follows:
 15 31    (3)  The annual index factor for the 1997 calendar year is
 15 32 one hundred percent.  For each subsequent the 1998 through
 15 33 2002 calendar year years, the annual index factor equals the
 15 34 annual inflation factor for that calendar year as computed in
 15 35 section 422.4 for purposes of the individual income tax.  For
 16  1 the 2003 calendar year and each subsequent calendar year the
 16  2 annual index factor shall be determined by the department by
 16  3 October 15 of the calendar year preceding the calendar year
 16  4 for which the factor is determined, which reflects the
 16  5 purchasing power of the dollar as a result of inflation during
 16  6 the fiscal year ending in the calendar year preceding the
 16  7 calendar year for which the factor is determined.  In
 16  8 determining the annual index factor, the department shall use
 16  9 the annual percent change, but not less than zero percent, in
 16 10 the gross domestic product price deflator computed for the
 16 11 second quarter of the calendar year by the bureau of economic
 16 12 analysis of the United States department of commerce and shall
 16 13 add all of that percent change to one hundred percent.  The
 16 14 annual index factor and the cumulative index factor shall each
 16 15 be expressed as a percentage rounded to the nearest one=tenth
 16 16 of one percent.  The annual index factor shall not be less
 16 17 than one hundred percent.
 16 18    Sec. 23.  Section 425.23, subsection 4, paragraph b, Code
 16 19 2003, is amended to read as follows:
 16 20    b.  The annual adjustment factor for the 1998 base year is
 16 21 one hundred percent.  For each subsequent the 1999 through
 16 22 2002 base year years, the annual adjustment factor equals the
 16 23 annual inflation factor for the calendar year, in which the
 16 24 base year begins, as computed in section 422.4 for purposes of
 16 25 the individual income tax.  For the 2003 base year and each
 16 26 subsequent base year, the annual adjustment factor equals the
 16 27 annual index factor, in which the base year begins, as
 16 28 computed in section 422.120, subsection 1, for purposes of the
 16 29 livestock production tax credit.
 16 30    Sec. 24.  Section 450.4, subsection 8, Code 2003, is
 16 31 amended to read as follows:
 16 32    8.  On the value of that portion of any lump sum or
 16 33 installment payments which are received by a beneficiary under
 16 34 an annuity which was purchased under an employee's pension or
 16 35 retirement plan which was excluded from net income as set
 17  1 forth in under section 422.7, subsection 31.
 17  2    Sec. 25.  Section 541A.2, subsection 7, unnumbered
 17  3 paragraph 1, Code 2003, is amended to read as follows:
 17  4    An individual development account closed in accordance with
 17  5 this subsection is not subject to the limitations and benefits
 17  6 provided by this chapter but is subject to state tax in
 17  7 accordance with the provisions of section 422.7, subsection 28
 17  8 2, paragraph "g", and section 450.4, subsection 6.  An
 17  9 individual development account may be closed for any of the
 17 10 following reasons:
 17 11    Sec. 26.  Section 541A.3, subsection 2, Code 2003, is
 17 12 amended to read as follows:
 17 13    2.  Income earned by an individual development account is
 17 14 not subject to state tax, in accordance with the provisions of
 17 15 section 422.7, subsection 28 2, paragraph "g".
 17 16           EFFECTIVE AND APPLICABILITY DATE PROVISION
 17 17    Sec. 27.
 17 18    1.  Except as provided in subsection 2, this division of
 17 19 this Act takes effect January 1, 2004, for tax years beginning
 17 20 on or after that date.
 17 21    2.  The section of this division of this Act repealing
 17 22 section 422.11B takes effect January 1, 2007, for tax years
 17 23 beginning on or after that date.
 17 24                           DIVISION II
 17 25                 SALES, USE, AND CIGARETTE TAXES
 17 26                       SALES AND USE TAXES
 17 27    Sec. 28.  Section 422.42, subsection 6, Code 2003, is
 17 28 amended by adding the following new paragraph:
 17 29    NEW PARAGRAPH.  c.  That in transactions in which tangible
 17 30 personal property or services are taxable when sold at retail,
 17 31 any charges by the retailer for handling, delivery, or freight
 17 32 are included in the gross receipts.
 17 33    Sec. 29.  Section 422.43, subsections 1, 2, 4, 5, 6, 7, 10,
 17 34 and 12, Code 2003, are amended to read as follows:
 17 35    1.  There is imposed a tax of five and one=half percent
 18  1 upon the gross receipts from all sales of tangible personal
 18  2 property, consisting of goods, wares, or merchandise, except
 18  3 as otherwise provided in this division, sold at retail in the
 18  4 state to consumers or users; a like rate of tax upon the gross
 18  5 receipts from the sales, furnishing, or service of gas,
 18  6 electricity, water, heat, pay television service, and
 18  7 communication service, including the gross receipts from such
 18  8 sales by any municipal corporation or joint water utility
 18  9 furnishing gas, electricity, water, heat, pay television
 18 10 service, and communication service to the public in its
 18 11 proprietary capacity, except as otherwise provided in this
 18 12 division, when sold at retail in the state to consumers or
 18 13 users; a like rate of tax upon the gross receipts from all
 18 14 sales of tickets or admissions to places of amusement, fairs,
 18 15 and athletic events except those of elementary and secondary
 18 16 educational institutions; a like rate of tax on the gross
 18 17 receipts from an entry fee or like charge imposed solely for
 18 18 the privilege of participating in an activity at a place of
 18 19 amusement, fair, or athletic event unless the gross receipts
 18 20 from the sales of tickets or admissions charges for observing
 18 21 the same activity are taxable under this division; and a like
 18 22 rate of tax upon that part of private club membership fees or
 18 23 charges paid for the privilege of participating in any
 18 24 athletic sports provided club members.
 18 25    2.  There is imposed a tax of five and one=half percent
 18 26 upon the gross receipts derived from the operation of all
 18 27 forms of amusement devices and games of skill, games of
 18 28 chance, raffles, and bingo games as defined in chapter 99B,
 18 29 operated or conducted within the state, the tax to be
 18 30 collected from the operator in the same manner as for the
 18 31 collection of taxes upon the gross receipts of tickets or
 18 32 admission as provided in this section.  The tax shall also be
 18 33 imposed upon the gross receipts derived from the sale of
 18 34 lottery tickets or shares pursuant to chapter 99E.  The tax on
 18 35 the lottery tickets or shares shall be included in the sales
 19  1 price and distributed to the general fund as provided in
 19  2 section 99E.10.
 19  3    4.  There is imposed a tax of five and one=half percent
 19  4 upon the gross receipts from the sales of engraving,
 19  5 photography, retouching, printing, and binding services.  For
 19  6 the purpose of this division, the sales of engraving,
 19  7 photography, retouching, printing, and binding services are
 19  8 sales of tangible property.
 19  9    5.  There is imposed a tax of five and one=half percent
 19 10 upon the gross receipts from the sales of vulcanizing,
 19 11 recapping, and retreading services.  For the purpose of this
 19 12 division, the sales of vulcanizing, recapping, and retreading
 19 13 services are sales of tangible property.
 19 14    6.  There is imposed a tax of five and one=half percent
 19 15 upon the gross receipts from the sales of optional service or
 19 16 warranty contracts, except residential service contracts
 19 17 regulated under chapter 523C, which provide for the furnishing
 19 18 of labor and materials and require the furnishing of any
 19 19 taxable service enumerated under this section.  The gross
 19 20 receipts are subject to tax even if some of the services
 19 21 furnished are not enumerated under this section.  For the
 19 22 purpose of this division, the sale of an optional service or
 19 23 warranty contract, other than a residential service contract
 19 24 regulated under chapter 523C, is a sale of tangible personal
 19 25 property.  Additional sales, services, or use taxes shall not
 19 26 be levied on services, parts, or labor provided under optional
 19 27 service or warranty contracts which are subject to tax under
 19 28 this section.
 19 29    If the optional service or warranty contract is a computer
 19 30 software maintenance or support service contract and there is
 19 31 no separately stated fee for the taxable personal property or
 19 32 for the nontaxable service, the tax of five and one=half
 19 33 percent imposed by this subsection shall be imposed on fifty
 19 34 percent of the gross receipts from the sale of such contract.
 19 35 If the contract provides for technical support services only,
 20  1 no tax shall be imposed under this subsection.  The provisions
 20  2 of this subsection also apply to the tax imposed by chapter
 20  3 423.
 20  4    7.  There is imposed a tax of five and one=half percent
 20  5 upon the gross receipts from the renting of rooms, apartments,
 20  6 or sleeping quarters in a hotel, motel, inn, public lodging
 20  7 house, rooming house, manufactured or mobile home which is
 20  8 tangible personal property, or tourist court, or in any place
 20  9 where sleeping accommodations are furnished to transient
 20 10 guests for rent, whether with or without meals.  "Renting" and
 20 11 "rent" include any kind of direct or indirect charge for such
 20 12 rooms, apartments, or sleeping quarters, or their use.  For
 20 13 the purposes of this division, such renting is regarded as a
 20 14 sale of tangible personal property at retail.  However, this
 20 15 tax does not apply to the gross receipts from the renting of a
 20 16 room, apartment, or sleeping quarters while rented by the same
 20 17 person for a period of more than thirty=one consecutive days.
 20 18    10.  There is imposed a tax of five and one=half percent
 20 19 upon the gross receipts from the rendering, furnishing, or
 20 20 performing of services as defined in section 422.42.
 20 21    12.  A tax of five and one=half percent is imposed upon the
 20 22 gross receipts from the sales of prepaid telephone calling
 20 23 cards and prepaid authorization numbers.  For the purpose of
 20 24 this division, the sales of prepaid telephone calling cards
 20 25 and prepaid authorization numbers are sales of tangible
 20 26 personal property.
 20 27    Sec. 30.  Section 422.43, subsection 13, paragraph a,
 20 28 unnumbered paragraph 1, Code 2003, is amended to read as
 20 29 follows:
 20 30    A tax of five and one=half percent is imposed upon the
 20 31 gross receipts from the sales, furnishing, or service of solid
 20 32 waste collection and disposal service.
 20 33    Sec. 31.  Section 422.43, subsections 16 and 17, Code 2003,
 20 34 are amended to read as follows:
 20 35    16.  a.  A tax of five and one=half percent is imposed upon
 21  1 the gross receipts from sales of bundled services contracts.
 21  2 For purposes of this subsection, a "bundled services contract"
 21  3 means an agreement providing for a retailer's performance of
 21  4 services, one or more of which is a taxable service enumerated
 21  5 in this section and one or more of which is not, in return for
 21  6 a consumer's or user's single payment for the performance of
 21  7 the services, with no separate statement to the consumer or
 21  8 user of what portion of that payment is attributable to any
 21  9 one service which is a part of the contract.
 21 10    b.  For purposes of the administration of the tax on
 21 11 bundled services contracts, the director may enter into
 21 12 agreements of limited duration with individual retailers,
 21 13 groups of retailers, or organizations representing retailers
 21 14 of bundled services contracts.  Such an agreement shall impose
 21 15 the tax rate only upon that portion of the gross receipts from
 21 16 a bundled services contract which is attributable to taxable
 21 17 services provided under the contract.
 21 18    17.  A tax of five and one=half percent is imposed upon the
 21 19 gross receipts from any mobile telecommunication service which
 21 20 this state is allowed to tax by the provisions of the federal
 21 21 Mobile Telecommunications Sourcing Act, Pub. L. No. 106=252, 4
 21 22 U.S.C. } 116 et seq.  For purposes of this subsection, taxes
 21 23 on mobile telecommunications service, as defined under the
 21 24 federal Mobile Telecommunications Sourcing Act, that are
 21 25 deemed to be provided by the customer's home service provider
 21 26 shall be paid to the taxing jurisdiction whose territorial
 21 27 limits encompass the customer's place of primary use,
 21 28 regardless of where the mobile telecommunication service
 21 29 originates, terminates, or passes through and shall in all
 21 30 other respects be taxed in conformity with the federal Mobile
 21 31 Telecommunications Sourcing Act.  All other provisions of the
 21 32 federal Mobile Telecommunications Sourcing Act are adopted by
 21 33 the state of Iowa and incorporated into this subsection by
 21 34 reference.  With respect to mobile telecommunications service
 21 35 under the federal Mobile Telecommunications Sourcing Act the
 22  1 director shall, if requested, enter into agreements consistent
 22  2 with the provisions of the federal Act.
 22  3    Sec. 32.  Section 422.45, subsection 61, Code 2003, is
 22  4 amended by striking the subsection and inserting in lieu
 22  5 thereof the following:
 22  6    61.  a.  The gross receipts from the sale, furnishing, or
 22  7 service of metered gas, electricity, and fuel, including
 22  8 propane and heating oil to residential customers which is used
 22  9 to provide energy for residential dwellings and units of
 22 10 apartment and condominium complexes used for human occupancy
 22 11 shall be partially exempt as provided in paragraph "b".
 22 12    b.  If the date of the utility billing or meter reading
 22 13 cycle of the residential customer for the sale, furnishing, or
 22 14 service of metered gas and electricity is on or after January
 22 15 1, 2003, or if the sale, furnishing, or service of fuel for
 22 16 purposes of residential energy and the delivery of the fuel
 22 17 occurs on or after January 1, 2003, the rate of tax is three
 22 18 percent of the gross receipts.
 22 19    c.  The partial exemption in this subsection does not apply
 22 20 to local option sales and services taxes imposed pursuant to
 22 21 chapters 422B and 422E.
 22 22    Sec. 33.  Section 422.47, Code 2003, is amended by adding
 22 23 the following new subsection:
 22 24    NEW SUBSECTION.  2.  Construction contractors may make
 22 25 application to the department for a refund of the additional
 22 26 one=half of one percent tax paid under this division by reason
 22 27 of the increase in the tax from five to five and one=half
 22 28 percent for taxes paid on goods, wares, or merchandise under
 22 29 the following conditions:
 22 30    a.  The goods, wares, or merchandise are incorporated into
 22 31 an improvement to real estate in fulfillment of a written
 22 32 contract fully executed prior to July 1, 2003.  The refund
 22 33 shall not apply to equipment transferred in fulfillment of a
 22 34 mixed construction contract.
 22 35    b.  The contractor has paid to the department or to a
 23  1 retailer the full five and one=half percent tax.
 23  2    c.  The claim is filed on forms provided by the department
 23  3 and is filed within one year of the date the tax is paid.
 23  4    A contractor who makes an erroneous application for refund
 23  5 shall be liable for payment of the excess refund paid plus
 23  6 interest at the rate in effect under section 421.7.  In
 23  7 addition, a contractor who willfully makes a false application
 23  8 for refund is guilty of a simple misdemeanor and is liable for
 23  9 a penalty equal to fifty percent of the excess refund claimed.
 23 10 Excess refunds, penalties, and interest due under this
 23 11 subsection may be enforced and collected in the same manner as
 23 12 the tax imposed by this division.
 23 13    Sec. 34.  Section 422C.3, subsection 1, Code 2003, is
 23 14 amended to read as follows:
 23 15    1.  A tax of five and one=half percent is imposed upon the
 23 16 rental price of an automobile if the rental transaction is
 23 17 subject to the sales and services tax under chapter 422,
 23 18 division IV, or the use tax under chapter 423.  The tax shall
 23 19 not be imposed on any rental transaction not taxable under the
 23 20 state sales and services tax, as provided in section 422.45,
 23 21 or the state use tax, as provided in section 423.4, on
 23 22 automobile rental receipts.
 23 23    Sec. 35.  Section 423.2, Code 2003, is amended to read as
 23 24 follows:
 23 25    423.2  IMPOSITION OF TAX.
 23 26    An excise tax is imposed on the use in this state of
 23 27 tangible personal property, including aircraft subject to
 23 28 registration under section 328.20, purchased for use in this
 23 29 state, at the rate of five and one=half percent of the
 23 30 purchase price of the property.  An excise tax is imposed on
 23 31 the use of manufactured housing in this state at the rate of
 23 32 five and one=half percent of the purchase price if the
 23 33 manufactured housing is sold in the form of tangible personal
 23 34 property and at the rate of five and one=half percent of the
 23 35 installed purchase price if the manufactured housing is sold
 24  1 in the form of realty.  An excise tax is imposed on the use of
 24  2 leased vehicles at the rate of five and one=half percent of
 24  3 the amount otherwise subject to tax as calculated pursuant to
 24  4 section 423.7A.  The excise tax is imposed upon every person
 24  5 using the property within this state until the tax has been
 24  6 paid directly to the county treasurer or the state department
 24  7 of transportation, to a retailer, or to the department.  An
 24  8 excise tax is imposed on the use in this state of services
 24  9 enumerated in section 422.43 at the rate of five and one=half
 24 10 percent.  This tax is applicable where services are rendered,
 24 11 furnished, or performed in this state or where the product or
 24 12 result of the service is used in this state.  This tax is
 24 13 imposed on every person using the services or the product of
 24 14 the services in this state until the user has paid the tax
 24 15 either to an Iowa use tax permit holder or to the department.
 24 16    Sec. 36.  APPLICABILITY.  This section applies in regard to
 24 17 the increase in the state sales tax from five to five and one=
 24 18 half percent.  The five and one=half percent rate applies to
 24 19 all sales of taxable personal property, consisting of goods,
 24 20 wares, or merchandise if delivery occurs on or after July 1,
 24 21 2003.  The five and one=half percent rate applies to the gross
 24 22 receipts from the sale, furnishing, or service of gas,
 24 23 electricity, water, heat, pay television service, and
 24 24 communication service if the date of billing the customer is
 24 25 on or after July 1, 2003.  In the case of a service contract
 24 26 entered into prior to July 1, 2003, which contract calls for
 24 27 periodic payments, the five and one=half percent rate applies
 24 28 to those payments made or due on or after July 1, 2003.  This
 24 29 periodic payment applies, but is not limited to, tickets or
 24 30 admissions, private club membership fees, sources of
 24 31 amusement, equipment rental, dry cleaning, reducing salons,
 24 32 dance schools, and all other services subject to tax, except
 24 33 the aforementioned utility services which are subject to a
 24 34 special transitional rule.  Unlike periodic payments under
 24 35 service contracts, installment sales of goods, wares, and
 25  1 merchandise are subject to the full amount of sales or use tax
 25  2 when the sales contract is entered into.
 25  3                   CIGARETTE AND TOBACCO TAXES
 25  4    Sec. 37.  Section 453A.6, subsection 1, Code 2003, is
 25  5 amended to read as follows:
 25  6    1.  There is imposed, and shall be collected and paid to
 25  7 the department, the following taxes on all cigarettes used or
 25  8 otherwise disposed of in this state for any purpose
 25  9 whatsoever:
 25 10    CLASS A.  On cigarettes weighing not more than three pounds
 25 11 per thousand, eighteen mills three and five hundredths cents
 25 12 on each such cigarette.
 25 13    CLASS B.  On cigarettes weighing more than three pounds per
 25 14 thousand, eighteen mills three and five hundredths cents on
 25 15 each such cigarette.
 25 16    Sec. 38.  Section 453A.43, subsection 1, unnumbered
 25 17 paragraph 1, Code 2003, is amended to read as follows:
 25 18    A tax is imposed upon all tobacco products in this state
 25 19 and upon any person engaged in business as a distributor of
 25 20 tobacco products, at the rate of twenty=two thirty=seven
 25 21 percent of the wholesale sales price of the tobacco products,
 25 22 except little cigars as defined in section 453A.42.  Little
 25 23 cigars shall be subject to the same rate of tax imposed upon
 25 24 cigarettes in section 453A.6, payable at the time and in the
 25 25 manner provided in section 453A.6; and stamps shall be affixed
 25 26 as provided in division I of this chapter.  The tax on tobacco
 25 27 products, excluding little cigars, shall be imposed at the
 25 28 time the distributor does any of the following:
 25 29    Sec. 39.  Section 453A.43, subsection 2, unnumbered
 25 30 paragraph 1, Code 2003, is amended to read as follows:
 25 31    A tax is imposed upon the use or storage by consumers of
 25 32 tobacco products in this state, and upon the consumers, at the
 25 33 rate of twenty=two thirty=seven percent of the cost of the
 25 34 tobacco products.
 25 35                        STUDY COMMITTEES
 26  1    Sec. 40.  INDUSTRIAL PROCESSING EXEMPTION STUDY COMMITTEE.
 26  2 On or before July 1, 2003, the department of revenue and
 26  3 finance shall initiate and coordinate the establishment of an
 26  4 industrial processing exemption study committee and provide
 26  5 staffing assistance to the committee.  It is the intent of the
 26  6 general assembly that the committee shall include
 26  7 representatives of the department of revenue and finance,
 26  8 department of management, industrial producers including
 26  9 manufacturers, fabricators, printers and publishers, and an
 26 10 association that specifically represents business tax issues,
 26 11 and other stakeholders.
 26 12    The industrial processing exemption under the sales and use
 26 13 tax is a significant exemption for business.  The committee
 26 14 shall study and make legislative and administrative
 26 15 recommendations relating to Iowa's processing exemption to
 26 16 ensure maximum utilization by Iowa's industries.
 26 17    The committee shall study and make recommendations
 26 18 regarding all of the following:
 26 19    1.  The current sales and use tax industrial processing
 26 20 exemption.
 26 21    2.  The corresponding administrative rules, including a
 26 22 review and recommendation of an administrative rules process
 26 23 relating to the industrial processing exemption prior to
 26 24 filing with the administrative rules review committee.
 26 25    3.  Other states' industrial processing exemptions.
 26 26    4.  Recommendations for change for issues including
 26 27 effectiveness and competitiveness.
 26 28    5.  Development of additional publications to improve
 26 29 compliance.
 26 30    The committee shall annually report to the general assembly
 26 31 by January 1 of each year through January 1, 2013.
 26 32    Sec. 41.  IOWA SALES, SERVICES, AND USE TAX STUDY
 26 33 COMMITTEE.  On or before July 1, 2003, the department of
 26 34 revenue and finance shall initiate and coordinate the
 26 35 establishment of a state sales, services, and use tax study
 27  1 committee and provide staffing assistance to the committee.
 27  2 It is the intent of the general assembly that the committee
 27  3 shall include representatives of the department of revenue and
 27  4 finance, department of management, an association of Iowa
 27  5 farmers and other agricultural interests, retail associations,
 27  6 contractors, taxpayers, an association that specifically
 27  7 represents business tax issues and other stakeholders, two
 27  8 members of the general assembly, and a representative of the
 27  9 governor's office.
 27 10    The committee shall study the current sales, services, and
 27 11 use tax law.  Programs funded through special features of the
 27 12 tax code often escape regular review.  It is intended that the
 27 13 study committee shall review the current sales, services, and
 27 14 use tax exemptions to improve government accountability.
 27 15    The committee shall study and make recommendations
 27 16 regarding all of the following:
 27 17    1.  Retaining or eliminating current sales, services, and
 27 18 use tax exemptions or providing new exemptions.  The decision
 27 19 shall be based at least partially on the issues of
 27 20 effectiveness and competitiveness and their impact on economic
 27 21 behavior.
 27 22    2.  Tax simplification and consistency issues in applying
 27 23 the tax, including recordkeeping burdens on retailers and
 27 24 application by the department of revenue and finance.
 27 25    3.  Streamline sales tax implementation in Iowa.
 27 26    4.  The tax rate.
 27 27    5.  Comparison of Iowa sales, services, and use tax
 27 28 structure with other states.
 27 29    The committee shall report to the general assembly by
 27 30 January 1, 2004.  The report shall provide rationale for each
 27 31 decision made by the study committee.
 27 32                           EXPLANATION
 27 33    DIVISION I == Division I of this bill rewrites the state
 27 34 individual income tax by setting a flat rate of 3.5 percent of
 27 35 the taxable income.  Most adjustments to federal adjusted
 28  1 gross income are eliminated.  However, deductions for a
 28  2 portion of social security benefits and pensions received are
 28  3 maintained.  In arriving at the taxable income, all of the
 28  4 itemized deductions allowed for federal tax purposes are
 28  5 eliminated.  A standard deduction is provided which is equal
 28  6 to $2,000 for each personal exemption the taxpayer is allowed
 28  7 under the federal tax code.  An additional $1,000 deduction is
 28  8 allowed if the individual or the individual's spouse is 65 or
 28  9 older or blind.  The present personal credit is made
 28 10 contingent on the amount of net income.  This amounts to a
 28 11 maximum income of $25,000 for single filers and $50,000 for
 28 12 joint filers and heads of households.  The deduction for
 28 13 federal income taxes paid is eliminated.  The alternative
 28 14 minimum tax is eliminated.  The division also retains the
 28 15 present credits that are allowed except for the minimum tax
 28 16 credit which is eliminated beginning with the 2007 tax year.
 28 17 The ability of married persons to file separately on combined
 28 18 returns is eliminated.  The division requires a three=fourths
 28 19 vote of members elected to each house to pass legislation that
 28 20 would increase the income tax rate or would impose an
 28 21 alternative minimum tax or individual income surtax.  A person
 28 22 is not required to file a return if the person's net income is
 28 23 no more than $15,000 for joint filers, heads of households,
 28 24 and surviving spouses, or no more than $11,000 for single
 28 25 filers.
 28 26    Division I of the bill takes effect January 1, 2004, for
 28 27 tax years beginning on or after that date.
 28 28    DIVISION II == Division II of this bill increases the sales
 28 29 and use tax rates from 5 percent to 5.5 percent, sets the rate
 28 30 for providing gas, electricity, and fuel for residential
 28 31 dwellings at 3 percent (total exemption was to occur beginning
 28 32 January 1, 2006), and imposes the tax on the charges by
 28 33 retailers for delivery or transportation of taxable tangible
 28 34 personal property and services.
 28 35    The division also increases the cigarette tax rate from 1.8
 29  1 cents per cigarette, 36 cents a pack, to 3.05 cents per
 29  2 cigarette, 61 cents a pack, and increases the tobacco products
 29  3 tax from 22 percent of the wholesale price to 37 percent of
 29  4 the wholesale price.
 29  5    The division requires the department of revenue and finance
 29  6 to establish two study committees.  The first is to study the
 29  7 industrial processing exemption under the sales and use tax
 29  8 and report to the legislature annually through January 2013.
 29  9 The second is to study the entire sales and use tax law and
 29 10 report to the legislature with its recommendations by January
 29 11 1, 2004.  Both study committees would consist of
 29 12 representatives of organizations or businesses with interests
 29 13 in the issues.
 29 14 LSB 3429SC 80
 29 15 mg/sh/8