Senate Study Bill 3117 - Introduced SENATE/HOUSE FILE _____ BY (PROPOSED DEPARTMENT OF REVENUE BILL) A BILL FOR An Act relating to the policy administration of the tax 1 and related laws of the department of revenue, including 2 administration of income taxes, sales and use taxes, and 3 an environmental protection charge, a financial account 4 matching and debt collection system, property taxes, and 5 study reports related to property taxes and the office 6 of the state debt coordinator, and including retroactive 7 applicability provisions. 8 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 9 TLSB 5309DP (4) 84 mm/sc

S.F. _____ H.F. _____ DIVISION I 1 INCOME TAXES 2 Section 1. Section 2.48, subsection 3, paragraph c, 3 subparagraph (4), Code 2011, is amended by striking the 4 subparagraph. 5 Sec. 2. Section 2.48, subsection 3, paragraph e, 6 subparagraph (5), Code 2011, is amended by striking the 7 subparagraph. 8 Sec. 3. Section 15.119, subsection 2, paragraph e, Code 9 Supplement 2011, is amended by striking the paragraph. 10 Sec. 4. Section 422.7, subsection 21, paragraph a, 11 subparagraph (1), unnumbered paragraph 1, Code Supplement 2011, 12 is amended to read as follows: 13 Net capital gain from the sale of real property used in 14 a business, excluding passive activity businesses as defined 15 in section 469(c) of the Internal Revenue Code, in which the 16 taxpayer materially participated for ten years, as defined in 17 section 469(h) of the Internal Revenue Code, and which has been 18 held for a minimum of ten years, or from the sale of a business, 19 as defined in section 423.1 , excluding passive activity 20 businesses as defined in section 469(c) of the Internal Revenue 21 Code, in which the taxpayer materially participated for ten 22 years, as defined in section 469(h) of the Internal Revenue 23 Code, and which has been held for a minimum of ten years. The 24 sale of a business means the sale of all or substantially all 25 of the tangible personal property or service of the business. 26 Sec. 5. Section 422.15, subsection 2, Code 2011, is amended 27 to read as follows: 28 2. Every partnership , including limited partnerships 29 organized under chapter 488 , having a place of business in 30 the state doing business in this state or deriving income 31 from sources within this state as defined in section 422.33, 32 subsection 1 , shall make a return, stating specifically the 33 net income and capital gains (or losses) or losses reported on 34 the federal partnership return, the names and addresses of the 35 -1- LSB 5309DP (4) 84 mm/sc 1/ 14

S.F. _____ H.F. _____ partners, and their respective shares in said amounts. 1 Sec. 6. Section 422.25, subsection 1, paragraph b, Code 2 2011, is amended to read as follows: 3 b. The period for examination and determination of the 4 correct amount of tax is unlimited in the case of a false or 5 fraudulent return made with the intent to evade tax or in the 6 case of a failure to file a return. In lieu of the period 7 of limitation for any prior year for which an overpayment of 8 tax or an elimination or reduction of an underpayment of tax 9 due for that prior year results from the carryback to that 10 prior year of a net operating loss or net capital loss, the 11 period is the period of limitation for the taxable year of the 12 net operating loss or net capital loss which results in the 13 carryback. If the tax found due is greater than the amount 14 paid, the department shall compute the amount due, together 15 with interest and penalties as provided in subsection 2 , and 16 shall mail a notice of assessment to the taxpayer and, if 17 applicable, to the taxpayer’s authorized representative of the 18 total, which shall be computed as a sum certain if paid on or 19 before , with interest computed to the last day of the month 20 in which the notice is dated , or on or before the last day of 21 the following month if the notice is dated after the twentieth 22 day of any month. The notice shall also inform the taxpayer 23 of the additional interest and penalty which will be added to 24 the total due if not paid on or before the last day of the 25 applicable month . 26 Sec. 7. Section 422.33, subsections 9 and 27, Code 27 Supplement 2011, are amended by striking the subsections. 28 Sec. 8. REPEAL. Sections 16.211, 16.212, and 422.11X, Code 29 2011, are repealed. 30 Sec. 9. RETROACTIVE APPLICABILITY. The following provision 31 or provisions of this division of this Act apply retroactively 32 to January 1, 2012, for tax years beginning on or after that 33 date: 34 1. The section of this Act amending section 422.7, 35 -2- LSB 5309DP (4) 84 mm/sc 2/ 14

S.F. _____ H.F. _____ subsection 21. 1 2. The section of this Act amending section 422.15, 2 subsection 2. 3 DIVISION II 4 SALES AND USE TAXES 5 Sec. 10. Section 423.3, subsection 47, paragraph a, 6 unnumbered paragraph 1, Code Supplement 2011, is amended to 7 read as follows: 8 The sales price from the sale or rental of computers, 9 machinery, and equipment, including replacement parts but 10 excluding computer software and prewritten computer software , 11 and materials used to construct or self-construct computers, 12 machinery, and equipment if such items are any of the 13 following: 14 Sec. 11. Section 423.3, subsection 47, paragraph a, 15 subparagraph (4), Code Supplement 2011, is amended to read as 16 follows: 17 (4) Computers directly and primarily used in processing 18 or storage of data or information by an insurance company, 19 financial institution, or commercial enterprise. 20 Sec. 12. Section 423.3, subsection 47, paragraph c, 21 subparagraph (2), Code Supplement 2011, is amended to read as 22 follows: 23 (2) Point-of-sale equipment and computers , electronic 24 equipment with embedded computerized components, and 25 stand-alone entertainment devices . 26 Sec. 13. Section 423.3, subsection 47, paragraph c, Code 27 Supplement 2011, is amended by adding the following new 28 subparagraph: 29 NEW SUBPARAGRAPH . (5) Computers, machinery, and equipment, 30 including replacement parts, and materials used to construct 31 or self-construct computers, machinery, and equipment that 32 otherwise meet the requirements of paragraph “a” , subparagraphs 33 (1), (2), or (6), but are used at a location where a 34 manufacturer makes retail sales. 35 -3- LSB 5309DP (4) 84 mm/sc 3/ 14

S.F. _____ H.F. _____ Sec. 14. Section 423.37, subsection 2, Code 2011, is amended 1 to read as follows: 2 2. If a return required by this subchapter is not filed, 3 or if a return when filed is incorrect or insufficient and 4 the maker fails to file a corrected or sufficient return 5 within twenty days after the same is required by notice from 6 the department , the department shall determine the amount of 7 tax due from information as the department may be able to 8 obtain and, if necessary, may estimate the tax on the basis of 9 external indices, such as number of employees of the person 10 concerned, rentals paid by the person, stock on hand, or other 11 factors. The determination may be made using any generally 12 recognized valid and reliable sampling technique, whether or 13 not the person being audited has complete records, as mutually 14 agreed upon by the department and the taxpayer. The department 15 shall give notice of the determination to the person liable 16 for the tax. The determination shall fix the tax unless the 17 person against whom it is assessed shall, within sixty days 18 after the giving of notice of the determination, apply to the 19 director for a hearing or unless the taxpayer contests the 20 determination by paying the tax, interest, and penalty and 21 timely filing a claim for refund. At the hearing, evidence may 22 be offered to support the determination or to prove that it is 23 incorrect. After the hearing the director shall give notice of 24 the decision to the person liable for the tax. 25 DIVISION III 26 ENVIRONMENTAL PROTECTION CHARGE 27 Sec. 15. Section 424.10, subsection 2, paragraph a, Code 28 Supplement 2011, is amended to read as follows: 29 a. If a return required by this chapter is not filed, or 30 if a return when filed is incorrect or insufficient and the 31 maker fails to file a corrected or sufficient return within 32 twenty days after the return is required by notice from the 33 department , the department shall determine the amount of charge 34 due from information as the department may be able to obtain 35 -4- LSB 5309DP (4) 84 mm/sc 4/ 14

S.F. _____ H.F. _____ and, if necessary, may estimate the charge on the basis of 1 external indices or factors. The department shall give notice 2 of the determination to the person liable for the charge. The 3 determination shall fix the charge unless the person against 4 whom it is assessed shall, within sixty days after the date 5 of the notice of the determination, apply to the director for 6 a hearing or unless the person against whom it is assessed 7 contests the determination by paying the charge, interest, and 8 penalty and timely filing a claim for refund. At the hearing 9 evidence may be offered to support the determination or to 10 prove that it is incorrect. After the hearing the director 11 shall give notice of the decision to the person liable for the 12 charge. 13 DIVISION IV 14 FINANCIAL ACCOUNT MATCHING AND DEBT COLLECTION 15 Sec. 16. Section 421.17A, subsection 4, Code 2011, is 16 amended to read as follows: 17 4. Verification of accounts and immunity from liability. 18 a. The facility may contact a financial institution to 19 obtain verification of the account number, the names and 20 social security numbers listed for the account, and the 21 account balance of an account held by an obligor. Contact 22 with a financial institution may be by telephone or by written 23 communication. The financial institution may require positive 24 voice recognition and may require the telephone number of 25 the authorized person from the facility before releasing an 26 obligor’s account information by telephone. 27 b. The facility and financial institutions doing business 28 in Iowa shall enter into agreements to share information 29 through a data match system. The agreements shall require 30 that each financial institution shall provide to the facility 31 for each calendar quarter the name, record address, social 32 security number or other taxpayer identification number, and 33 other identifying information for each obligor who maintains 34 an account at the institution and who has delinquent accounts, 35 -5- LSB 5309DP (4) 84 mm/sc 5/ 14

S.F. _____ H.F. _____ charges, fees, loans, taxes, or other indebtedness owed 1 to or being collected by the state, as identified by the 2 facility by name and social security number or other taxpayer 3 identification number. 4 c. A financial institution shall provide the information 5 required in paragraph “b” through the same data match system 6 developed by the department of human services child support 7 recovery unit pursuant to section 252I.4. A financial 8 institution that provides information on an obligor to the 9 department of human services child support recovery unit data 10 match system in one calendar quarter shall not be required to 11 provide information to the facility on the same obligor in the 12 same calendar quarter. 13 d. The department of revenue and the department of human 14 services shall enter into a cooperative agreement to implement 15 paragraph “b” and to share information in the data match system 16 to the extent allowed by federal law, including Tit. IV, part D 17 of the federal Social Security Act. As part of the agreement, 18 the facility and the department of revenue shall reimburse the 19 department of human services and its child support recovery 20 unit for any additional cost incurred in implementing this 21 subsection. 22 e. The facility shall pay a reasonable fee to a financial 23 institution for conducting the data match required in 24 paragraphs “b” and “c” , not to exceed the lower of either one 25 hundred fifty dollars for each quarterly data match or the 26 actual costs incurred by the financial institution for each 27 quarterly data match. The facility may use the state share 28 of funds collected under this subsection to pay the fees to 29 financial institutions under this paragraph. The director may 30 adopt rules pursuant to chapter 17A to specify a time period 31 and deadline to submit a claim for a fee under this paragraph. 32 b. f. The financial institution is immune from any civil or 33 criminal liability which might otherwise be incurred or imposed 34 for information released by the financial institution to the 35 -6- LSB 5309DP (4) 84 mm/sc 6/ 14

S.F. _____ H.F. _____ facility pursuant to this section . 1 c. g. The financial institution or the facility is not 2 liable for the cost of any early withdrawal penalty of an 3 obligor’s certificate of deposit. 4 h. The information available to the facility pursuant 5 to this subsection is confidential and shall be used by the 6 facility only in administrative levy collection activities 7 conducted pursuant to this section. 8 i. The director shall adopt rules pursuant to chapter 17A 9 for the implementation and administration of this subsection. 10 The rules shall specify an implementation plan for the data 11 match system. 12 Sec. 17. Section 421.17A, subsection 7, Code 2011, is 13 amended by adding the following new paragraph: 14 NEW PARAGRAPH . d. A financial institution shall not be 15 liable for blocking access to or surrendering an obligor’s 16 assets in response to an administrative levy action under this 17 section, or for any other action taken in good faith to comply 18 with the requirements of this section. 19 Sec. 18. Section 421.17A, Code 2011, is amended by adding 20 the following new subsection: 21 NEW SUBSECTION . 9. This section shall not be construed 22 to preclude a financial institution from doing either of the 23 following: 24 a. Recouping a deposit made to an obligor’s account if the 25 financial institution is lawfully entitled to do so. 26 b. Collecting standard or contractual account activity fees 27 to the extent such fees are necessary to maintain an account 28 during any period in which access to the account is blocked or 29 encumbered pursuant to this section. 30 Sec. 19. Section 422.20, subsection 3, paragraph a, Code 31 Supplement 2011, is amended to read as follows: 32 a. Unless otherwise expressly permitted by section 8A.504 , 33 section 8G.4 , section 96.11, subsection 6 , section 421.17, 34 subsections 22 , 23 , and 26 , subsection 27 , paragraph “k” , and 35 -7- LSB 5309DP (4) 84 mm/sc 7/ 14

S.F. _____ H.F. _____ subsection 31 , section 252B.9 , section 321.40, subsection 1 6 , sections 321.120 , 421.17A, 421.19 , 421.28 , 422.72 , and 2 452A.63 , and this section , a tax return, return information, 3 or investigative or audit information shall not be divulged to 4 any person or entity, other than the taxpayer, the department, 5 or internal revenue service for use in a matter unrelated to 6 tax administration. 7 Sec. 20. Section 422.72, subsection 3, paragraph a, Code 8 Supplement 2011, is amended to read as follows: 9 a. Unless otherwise expressly permitted by section 8A.504 , 10 section 8G.4 , section 96.11, subsection 6 , section 421.17, 11 subsections 22, 23, and 26 , subsection 27 , paragraph “k” , and 12 subsection 31 , section 252B.9 , section 321.40, subsection 13 6 , sections 321.120 , 421.17A, 421.19 , 421.28 , 422.20 , and 14 452A.63 , and this section , a tax return, return information, 15 or investigative or audit information shall not be divulged to 16 any person or entity, other than the taxpayer, the department, 17 or internal revenue service for use in a matter unrelated to 18 tax administration. 19 DIVISION V 20 PROPERTY TAXES 21 Sec. 21. Section 427B.4, Code 2011, is amended to read as 22 follows: 23 427B.4 Application for exemption by property owner. 24 1. a. An application shall be filed for each project 25 resulting in actual value added for which an exemption is 26 claimed. The first application for exemption shall be filed 27 by the owner of the property with the local assessor governing 28 board of the city or county in which the property is located by 29 February 1 of the assessment year in which the value added is 30 first assessed for taxation for which the exemption is first 31 claimed, but not later than the year in which all improvements 32 included in the project are first assessed for taxation, or the 33 following two assessment years . 34 b. Applications for exemption shall be made on forms 35 -8- LSB 5309DP (4) 84 mm/sc 8/ 14

S.F. _____ H.F. _____ prescribed by the director of revenue and shall contain 1 information pertaining to the nature of the improvement, its 2 cost, the estimated or actual date of completion, whether the 3 exemption schedules described in section 427B.3 or an alternate 4 schedule adopted pursuant to section 427B.1 will be elected, 5 and any other information deemed necessary by the director of 6 revenue. 7 2. a. A person may submit a proposal to the city council 8 of the city or the board of supervisors of a county to receive 9 prior approval for eligibility for a tax exemption on new 10 construction. The city council or the board of supervisors, by 11 ordinance, may give its prior approval of a tax exemption for 12 new construction if the new construction is in conformance with 13 the zoning plans for the city or county. The prior approval 14 shall also be subject to the hearing requirements of section 15 427B.1 . 16 b. Prior approval received under this subsection does not 17 entitle the owner to exemption from taxation until the new 18 construction has been completed and found to be qualified real 19 estate. However, if the tax exemption for new construction is 20 not approved, the person may submit an amended proposal to the 21 city council or board of supervisors to approve or reject. 22 Sec. 22. RETROACTIVE APPLICABILITY. This division of this 23 Act applies retroactively to January 1, 2012, for assessment 24 years beginning on or after that date. 25 DIVISION VI 26 STUDY REPORT 27 Sec. 23. PROPERTY TAXATION OF TELECOMMUNICATIONS COMPANIES 28 —— REPORT. The department of revenue, in consultation 29 with the department of management, representatives of the 30 telecommunications industry, and other interested stakeholders, 31 shall study the current system of assessing telecommunications 32 property and levying property tax against telecommunications 33 companies and make recommendations for changes. The 34 department of revenue shall prepare and file a report detailing 35 -9- LSB 5309DP (4) 84 mm/sc 9/ 14

S.F. _____ H.F. _____ recommendations for changes to the current system of assessing 1 telecommunications property and levying property tax against 2 telecommunications companies. The report shall be filed by the 3 department of revenue with the chairpersons and ranking members 4 of the ways and means committees of the senate and the house 5 of representatives and with the legislative services agency by 6 January 11, 2013. 7 DIVISION VII 8 REPORT —— STATE DEBT COORDINATOR 9 Sec. 24. DEPARTMENT OF REVENUE AND OFFICE OF THE STATE 10 DEBT COORDINATOR —— REPORT. The director of the department 11 of revenue shall develop and recommend legislative proposals 12 deemed necessary for the continued efficiency of the functions 13 of the office of the state debt coordinator established in 14 section 421C.1, and shall prepare and file a report detailing 15 the recommendations. The report shall be filed by the director 16 of the department of revenue with the department of management, 17 the governor, and the general assembly no later than January 18 14, 2013. 19 EXPLANATION 20 This bill relates to the policy administration of the tax and 21 related laws by the department of revenue. 22 Division I relates to income taxes. 23 The division amends Code section 422.7, relating to the Iowa 24 capital gain exclusion, to provide that capital gains from 25 the sale of real property used in a business or from the sale 26 of a business which is defined as a passive activity business 27 under section 469(c) of the Internal Revenue Code does not 28 qualify for the exclusion. This provision of the bill applies 29 retroactively to January 1, 2012, for tax years beginning on 30 or after that date. 31 The division amends Code section 422.15 to provide that 32 partnerships doing business in Iowa or deriving income from 33 sources within Iowa are required to file Iowa partnership 34 returns. This new language is consistent with the filing 35 -10- LSB 5309DP (4) 84 mm/sc 10/ 14

S.F. _____ H.F. _____ requirement for corporations set forth in Code section 422.33. 1 This provision of the bill applies retroactively to January 1, 2 2012, for tax years beginning on or after that date. 3 The division strikes language in Code section 422.25 to 4 eliminate the requirement that notices of assessment issued 5 after the twentieth day of a month include an interest 6 calculation for the next month. 7 The division amends Code section 422.33 to repeal the 8 assistive device tax credit for corporate income tax. The 9 assistive device tax credit for individual income tax was 10 repealed by 2009 Iowa Acts, chapter 179, section 151, and no 11 assistive device tax credit has been issued to a taxpayer since 12 2001. The division makes conforming changes to Code sections 13 2.48 and 15.119 to remove the assistive device credit from 14 the list of tax credits to be reviewed by the legislative tax 15 expenditure committee, and the list of tax credit programs 16 among which the economic development authority allocates the 17 annual aggregate tax credit limit. 18 The division repeals the disaster recovery housing project 19 tax credit in Code sections 16.211 and 16.212. This credit, 20 which was to be implemented and administered by the Iowa 21 finance authority, was never implemented. The division makes 22 conforming changes to Code section 2.48 to remove the disaster 23 recovery housing project tax credit from the list of tax 24 credits to be reviewed by the legislative tax expenditure 25 committee, and to Code sections 422.11X and 422.33 to remove 26 references in the individual and corporate income tax. 27 Division II relates to sales and use taxes. 28 The division amends the sales tax exemption in Code section 29 423.3 for certain equipment used by manufacturers by providing 30 that the exemption shall not apply if the equipment is computer 31 software or prewritten computer software. 32 The division amends the sales tax exemption in Code section 33 423.3 for computers used in the processing or storage of data 34 or information by an insurance company, financial institution, 35 -11- LSB 5309DP (4) 84 mm/sc 11/ 14

S.F. _____ H.F. _____ or commercial enterprise to apply only to computers directly 1 and primarily used in processing or storage of data by an 2 insurance company, financial institution, or commercial 3 enterprise. 4 The division amends Code section 423.3 to provide that 5 the sale or rental of electronic equipment with embedded 6 computerized components or of stand-alone entertainment devices 7 is not exempt from the sales tax. 8 The division adds a new exception to the sales tax exemptions 9 in Code section 423.3, subsection 47, for certain computers, 10 machinery, and equipment used by manufacturers by providing 11 that the exemption shall not apply if the equipment is used at 12 a location where the manufacturer makes retail sales. 13 By operation of Code section 423.6, an item exempt from the 14 imposition of the sales tax is also exempt from the use tax 15 imposed in Code section 423.5. 16 The division strikes language in Code section 423.37 to 17 eliminate the requirement that the department send a notice 18 to filers of sales or use tax returns if the return is either 19 incorrect or insufficient. The department would be authorized 20 to determine the amount of tax due and send a notice of 21 assessment to the person liable for the tax. 22 Division III relates to the environmental protection charge 23 on petroleum diminution. 24 The division strikes language in Code section 424.10 to 25 eliminate the requirement that the department send a notice to 26 filers of environmental protection charge returns if the return 27 is either incorrect or insufficient. The department would be 28 authorized to determine the amount of tax due and send a notice 29 of assessment to the person liable for the tax. 30 Division IV relates to the establishment of an automated 31 data match process. 32 The division amends Code section 421.17A to allow for 33 the establishment of an automated data match process to 34 request and receive certain obligor account information from 35 -12- LSB 5309DP (4) 84 mm/sc 12/ 14

S.F. _____ H.F. _____ financial institutions. Financial institutions will provide 1 the requested information each calendar quarter through 2 the data match system already established and developed 3 by the department of human services child support recovery 4 unit. Financial institutions will be required to enter into 5 agreements to provide such information for persons who have 6 delinquent accounts, charges, fees, loans, taxes, or other 7 indebtedness owed to the state. If a financial institution 8 provides information on a person to the department of human 9 services through the data match system in any calendar quarter, 10 it will not be required to fulfill a request by the department 11 of revenue on that same person in the same calendar quarter. 12 The department of revenue and the department of human 13 services are directed to enter into an agreement to share 14 information and costs related to use of the data match system 15 by both departments. The financial institutions are also 16 entitled to a reasonable fee, paid by the department of 17 revenue, for fulfilling its data match requests. 18 If the department of revenue acquires information on a 19 person through the data match system, it may initiate an 20 administrative action in accordance with existing law in Code 21 section 421.17A to levy against the person’s account at the 22 financial institution. 23 The division further amends Code section 421.17A to add a 24 waiver of liability for a financial institution’s compliance 25 with a levy action and to establish a financial institution’s 26 right to recoup deposits and collect activity fees it is 27 lawfully entitled to during the administrative levy process. 28 Code sections 422.20 and 422.72, relating to the general 29 prohibition against disclosure of taxpayer information by 30 the department of revenue and other state officials, are 31 amended to permit the department of revenue to share data with 32 the department of human services and financial institutions 33 pursuant to Code section 421.17A. 34 Division V of the bill relates to property taxes. 35 -13- LSB 5309DP (4) 84 mm/sc 13/ 14

S.F. _____ H.F. _____ The division amends Code section 427B.4 to extend by two 1 years the time period for claiming the industrial real estate 2 or cattle facilities property tax exemptions. Currently, a 3 taxpayer cannot claim one of these exemptions unless it is 4 claimed in the first year the property is eligible for the 5 exemption. The division applies retroactively to January 1, 6 2012, for assessment years beginning on or after that date. 7 Division VI establishes a study to be facilitated by 8 the department of revenue, in consultation with applicable 9 stakeholders, regarding property tax on telecommunications 10 companies. The department of revenue will study the current 11 system of assessing property and levying property tax 12 for telecommunications companies. A report detailing any 13 recommended changes will be filed with the chairperson and 14 ranking members of the ways and means committees of the senate 15 and the house of representatives and with the legislative 16 services agency by January 11, 2013. 17 Division VII establishes a report to be prepared and filed by 18 the director of the department of revenue. The director will 19 develop and recommend legislative proposals deemed necessary 20 for the office of the state debt coordinator, which shall 21 be compiled in a report and filed with the department of 22 management, the governor, and the general assembly no later 23 than January 14, 2013. 24 -14- LSB 5309DP (4) 84 mm/sc 14/ 14