HOUSE FILE 2049

BY  BALTIMORE

A BILL FOR

An Act providing an exemption from the computation of the individual and corporate state income tax of net income from the sale or exchange by an eligible manufacturer of tangible personal property that was manufactured within this state by the eligible manufacturer and including retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 422.7, Code Supplement 2011, is amended by adding the following new subsection:
   NEW SUBSECTION.  57.
  a.  Subtract, to the extent included, net income from the sale or exchange by an eligible manufacturer of tangible personal property that was manufactured within this state by the eligible manufacturer.
   b.  The adjustment in paragraph “a” for an item of tangible personal property manufactured both within and without this state shall not exceed an amount equal to the same proportion of net income as the allocable costs paid in this state by the taxpayer for the item of tangible personal property bears to the total allocable costs paid by the taxpayer for the item of tangible personal property. 
   c.  For purposes of this subsection: 
   (1)  “Allocable costs” means the same as defined in section 263A(a)(2) of the Internal Revenue Code. 
   (2)  “Eligible manufacturer” means a taxpayer who meets all the following requirements:
   (a)  The taxpayer’s principal business activity is manufacturing. A taxpayer primarily engaged in selling tangible personal property or services in order to earn a profit and only incidentally engaged in manufacturing tangible personal property is not a manufacturer for purposes of this subsection. 
   (b)  The taxpayer does not claim or receive any tax credits listed or allowed in division II or III of this chapter for the tax year in which an adjustment is made pursuant to this subsection.
   (3)  “Manufactured” or “manufacturing” means adding value to personal property through a process of manufacturing, refining, purifying, combining of different materials, the packaging of meats, extracting and recovering natural resources, and all processes of fabricating and curing, with a view to selling the property for gain or profit. 
   (4)  “Paid” means paid or accrued or paid or incurred, and the terms “paid or accrued” and “paid or incurred” shall be construed according to the method of accounting upon the basis of which the net income is computed under this division.
   (5)  “Tangible personal property” means corporeal personal property, such as machinery, tools, implements, goods, wares, computer software, and merchandise, and shall not be taken to mean money deposits in banks, shares of stock, bonds, notes, credits, or evidence of an interest in property and evidences of debt. 
   d.  The director shall adopt rules for the administration of this subsection. 
    Sec. 2.  Section 422.33, subsection 4, paragraph a, Code Supplement 2011, is amended to read as follows:
   a.  Add items of tax preference included in federal alternative minimum taxable income under section 57, except subsections (a)(1) and (a)(5), of the Internal Revenue Code, make the adjustments included in federal alternative minimum taxable income under section 56, except subsections (a)(4) and (d), of the Internal Revenue Code, and add losses as required by section 58 of the Internal Revenue Code. In making the adjustment under section 56(c)(1) of the Internal Revenue Code,
 
the net income excluded in section 422.35, subsection 26, shall be subtracted, and interest and dividends from federal securities and interest and dividends from state and other political subdivisions and from regulated investment companies exempt from federal income tax under the Internal Revenue Code, net of amortization of any discount or premium, shall be subtracted.
    Sec. 3.  Section 422.35, Code Supplement 2011, is amended by adding the following new subsection:
   NEW SUBSECTION.  26.
  a.  Subtract, to the extent included, net income from the sale or exchange by an eligible manufacturer of tangible personal property that was manufactured within this state by the eligible manufacturer.
   b.  The adjustment in paragraph “a” for an item of tangible personal property manufactured both within and without this state shall not exceed an amount equal to the same proportion of net income as the allocable costs paid by the taxpayer in this state for the item of tangible personal property bears to the total allocable costs paid by the taxpayer for the item of tangible personal property.
   c.  For purposes of this subsection: 
   (1)  “Allocable costs” means the same as defined in section 263A(a)(2) of the Internal Revenue Code. 
   (2)  “Eligible manufacturer” means a taxpayer who meets all the following requirements:
   (a)  The taxpayer’s principal business activity is manufacturing. A taxpayer primarily engaged in selling tangible personal property or services in order to earn a profit and only incidentally engaged in manufacturing tangible personal property is not a manufacturer for purposes of this subsection. 
   (b)  The taxpayer does not claim or receive any tax credits listed or allowed in division II or III of this chapter for the tax year in which an adjustment is made pursuant to this subsection.
   (3)  “Manufactured” or “manufacturing” means adding value to personal property through a process of manufacturing, refining, purifying, combining of different materials, the packaging of meats, extracting and recovering natural resources, and all processes of fabricating and curing, with a view to selling the property for gain or profit.
   (4)  “Paid” means paid or accrued or paid or incurred, and the terms “paid or accrued” and “paid or incurred” shall be construed according to the method of accounting upon the basis of which the net income is computed under this division.
   (5)  “Tangible personal property” means corporeal personal property, such as machinery, tools, implements, goods, wares, computer software, and merchandise, and shall not be taken to mean money deposits in banks, shares of stock, bonds, notes, credits, or evidence of an interest in property and evidences of debt. 
   d.  The director shall adopt rules for the administration of this subsection.
    Sec. 4.  RETROACTIVE APPLICABILITY.  This Act applies retroactively to January 1, 2012, for tax years beginning on or after that date.
EXPLANATION
   This bill relates to the state taxation of net income from the sale or exchange of tangible personal property manufactured within the state. 
   The bill exempts from the computation of net income and state alternative minimum tax for the individual and corporate income tax all net income from the sale or exchange of tangible personal property manufactured within the state by an eligible manufacturer and sold by the eligible manufacturer. To be considered an eligible manufacturer, a taxpayer’s principal business activity must be manufacturing and the taxpayer must not claim or receive any tax credits listed or allowed under the individual or corporate income tax.
   “Manufactured” and “manufacturing” are defined as adding value to personal property through a process of manufacturing, refining, purifying, combining of different materials, the packaging of meats, extracting and recovering natural resources, and all processes of fabricating and curing, with a view to selling the property for gain or profit.
   “Tangible personal property” is defined as corporeal personal property, such as machinery, tools, implements, goods, wares, computer software, and merchandise, and shall not be taken to mean money deposits in banks, shares of stock, bonds, notes, credits, or evidence of an interest in property and evidences of debt. 
   The exemption applies to tangible personal property manufactured both within and without this state, but is limited to the same proportion of net income as the allocable costs paid in this state by the taxpayer for the item of tangible personal property bears to the total allocable costs paid for the item of tangible personal property. Allocable costs, as defined in section 263A(a)(2) of the Internal Revenue Code, generally include those costs that are directly and indirectly related to the production of property which the Internal Revenue Service requires a taxpayer to either include in inventory costs or capitalize. “Paid” is defined to mean paid or accrued or paid or incurred, depending on the method of accounting used by the taxpayer to compute net income for purposes of the individual or corporate income tax. 
   The bill applies retroactively to January 1, 2012, for tax years beginning on or after that date.