Senate File 2303 - Introduced SENATE FILE 2303 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO SSB 3171) (COMPANION TO LSB 6046HV BY COMMITTEE ON WAYS AND MEANS) A BILL FOR An Act relating to state taxation by temporarily updating the 1 Code references to the Internal Revenue Code, decoupling 2 from certain federal bonus depreciation provisions, 3 rescinding certain administrative rules and rule amendments 4 and modifying the sales tax exemptions related to the 5 purchase of items used in manufacturing and other 6 activities, and including effective date and retroactive 7 applicability provisions. 8 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 9 TLSB 6046SV (2) 86 mm/rj

S.F. 2303 DIVISION I 1 INTERNAL REVENUE CODE REFERENCES 2 Section 1. INTERNAL REVENUE CODE REFERENCES FOR 3 2015. Notwithstanding the definition of “Internal Revenue 4 Code” in section 15.335, subsection 7, section 422.3, 5 subsection 5, section 422.10, subsection 3, section 422.32, 6 subsection 1, and section 422.33, subsection 5, Code 2016, 7 the following shall apply for the period beginning January 1, 8 2015, and ending December 31, 2015, and for tax years beginning 9 during the 2015 calendar year: 10 1. The definition of “Internal Revenue Code” for purposes 11 of section 15.335, subsection 7, section 422.10, subsection 3, 12 and section 422.33, subsection 5, Code 2016, and for purposes 13 of references in the 2016 Iowa Code and 2016 Iowa Acts to the 14 definition of “Internal Revenue Code” in those sections, shall 15 mean the Internal Revenue Code in effect on January 1, 2016. 16 2. The definition of “Internal Revenue Code” for purposes 17 of sections 422.3 and 422.32, Code 2016, and for purposes of 18 references in the 2016 Iowa Code and 2016 Iowa Acts to the 19 definition of “Internal Revenue Code” in those sections, shall 20 mean the Internal Revenue Code of 1954, prior to the date of 21 its redesignation as the Internal Revenue Code of 1986 by the 22 Tax Reform Act of 1986, or means the Internal Revenue Code of 23 1986 as amended to and including January 1, 2016. 24 Sec. 2. DEDUCTION FOR STATE SALES AND USE TAX FOR 25 2015. Notwithstanding section 422.9, subsection 2, paragraph 26 “i”, Code 2016, the deduction for state sales and use taxes is 27 allowable under section 422.9 for tax years beginning during 28 the 2015 calendar year, but only if the taxpayer elected to 29 deduct the state sales and use taxes in lieu of state income 30 taxes under section 164 of the Internal Revenue Code. The 31 deduction for state sales and use taxes is not allowed if the 32 taxpayer has taken the deduction for state income taxes or 33 claimed the standard deduction under section 63 of the Internal 34 Revenue Code. 35 -1- LSB 6046SV (2) 86 mm/rj 1/ 9

S.F. 2303 Sec. 3. BONUS DEPRECIATION FOR 2015. 1 1. Notwithstanding section 1 of this Act, or any other 2 provision of law to the contrary, the additional first-year 3 depreciation allowance authorized in section 168(k) of the 4 Internal Revenue Code, as enacted by Pub. L. No. 114-113, §143, 5 does not apply in computing net income for state tax purposes 6 for tax years ending on or after January 1, 2015, but before 7 January 1, 2016. If the taxpayer has taken the additional 8 first-year depreciation allowance for purposes of computing 9 federal adjusted gross income or federal taxable income, as 10 the case may be, then the taxpayer, when computing net income 11 for purposes of the individual income tax under section 422.7 12 or the corporation income tax or franchise tax under section 13 422.35, shall make the adjustments described in section 422.7, 14 subsection 39A, paragraphs “a” through “c”, Code 2016, or 15 described in section 422.35, subsection 19A, paragraphs “a” 16 through “c”, Code 2016, as applicable. 17 2. In addition to the requirements of section 422.5, 18 subsection 2, paragraph “b”, subparagraph (1), Code 2016, 19 for purposes of the state alternative minimum taxable income 20 calculation in section 422.5, subsection 2, paragraph “b”, 21 subparagraph (1), to the extent that any preference or 22 adjustment is determined by an individual’s federal adjusted 23 gross income, the individual’s federal adjusted gross income is 24 computed in accordance with subsection 1 of this section for 25 tax years beginning during the 2015 calendar year. 26 3. In addition to the requirements of section 422.9, 27 subsection 2, paragraph “h”, Code 2016, for purposes of 28 calculating the deductions in section 422.9 that are authorized 29 under the Internal Revenue Code, and to the extent that 30 any such deduction is determined by an individual’s federal 31 adjusted gross income, the individual’s federal adjusted gross 32 income is computed in accordance with subsection 1 of this 33 section for tax years beginning during the 2015 calendar year. 34 Sec. 4. EFFECTIVE UPON ENACTMENT. This division of this 35 -2- LSB 6046SV (2) 86 mm/rj 2/ 9

S.F. 2303 Act, being deemed of immediate importance, takes effect upon 1 enactment. 2 Sec. 5. RETROACTIVE APPLICABILITY. This division of this 3 Act applies retroactively to January 1, 2015. 4 DIVISION II 5 SALES AND USE TAXES 6 Sec. 6. RESCISSION OF AMENDMENTS TO ADMINISTRATIVE RULES. 7 1. The amendments to 701 Iowa administrative code, rule 8 15.3, subrule 3; rule 18.29, subrule 7; rules 18.58, 219.11, 9 and 219.12; rule 219.13, subrule 3; and rule 230.5, as 10 appearing in ARC 2349C, as published in the Iowa administrative 11 bulletin, volume XXXVIII, number 14, dated January 6, 2016, pp. 12 1359-1364, are rescinded. 13 2. As soon as practicable, the Iowa administrative code 14 editor shall restore the language of the Iowa administrative 15 code rules and subrules referenced in subsection 1 of this 16 section to the language that existed on January 5, 2016. 17 Sec. 7. RESCISSION OF ADMINISTRATIVE RULES. 18 1. 701 Iowa administrative code, rules 230.14 through 19 230.22, are rescinded. 20 2. As soon as practicable, the Iowa administrative code 21 editor shall remove the language of the Iowa administrative 22 code rules referenced in subsection 1 of this section from the 23 Iowa administrative code. 24 Sec. 8. Section 423.3, subsection 47, paragraph a, 25 unnumbered paragraph 1, Code 2016, is amended to read as 26 follows: 27 The sales price from the sale or rental of computers, 28 machinery, and equipment, including replacement parts , 29 supplies , and materials used to construct or self-construct 30 computers, machinery, and equipment , replacement parts, and 31 supplies, if such items are any of the following: 32 Sec. 9. Section 423.3, subsection 47, paragraph d, Code 33 2016, is amended by adding the following new subparagraphs: 34 NEW SUBPARAGRAPH . (7) “Replacement part” means tangible 35 -3- LSB 6046SV (2) 86 mm/rj 3/ 9

S.F. 2303 personal property other than computers, machinery, equipment, 1 or supplies, regardless of the cost or useful life of the 2 tangible personal property, that meets all of the following 3 conditions: 4 (a) The tangible personal property replaces a component of 5 a computer, machinery, or equipment, which component is capable 6 of being separated from the computer, machinery, or equipment. 7 (b) The tangible personal property performs the same or 8 similar function as the component it replaced. 9 (c) The tangible personal property restores the computer, 10 machinery, or equipment to an operational condition, or 11 upgrades or improves the efficiency of the computer, machinery, 12 or equipment. 13 NEW SUBPARAGRAPH . (8) “Supplies” means tangible personal 14 property, other than computers, machinery, equipment, or 15 replacement parts, that meets one of the following conditions: 16 (a) The tangible personal property is to be connected 17 to a computer, machinery, or equipment and requires regular 18 replacement because the property is consumed or deteriorates 19 during use, including but not limited to saw blades, drill 20 bits, filters, and other similar items with a short useful 21 life. 22 (b) The tangible personal property is used in conjunction 23 with a computer, machinery, or equipment and is specially 24 designed for use in manufacturing specific products and may 25 be used interchangeably and intermittently on a particular 26 computer, machine, or piece of equipment, including but not 27 limited to jigs, dies, tools, and other similar items. 28 (c) The tangible personal property comes into physical 29 contact with other tangible personal property used in 30 processing and is used to assist with or maintain conditions 31 necessary for processing, including but not limited to cutting 32 fluids, oils, coolants, lubricants, and other similar items 33 with a short useful life. 34 (d) The tangible personal property is directly and 35 -4- LSB 6046SV (2) 86 mm/rj 4/ 9

S.F. 2303 primarily used in an activity described in paragraph “a” , 1 subparagraphs (1) through (6), including but not limited to 2 prototype materials and testing materials. 3 Sec. 10. EFFECTIVE UPON ENACTMENT. The sections of this 4 division of this Act rescinding Iowa administrative code rules 5 and amendments to Iowa administrative code rules, being deemed 6 of immediate importance, take effect upon enactment. 7 EXPLANATION 8 The inclusion of this explanation does not constitute agreement with 9 the explanation’s substance by the members of the general assembly. 10 This bill relates to state taxation. 11 DIVISION I —— INTERNAL REVENUE CODE REFERENCES. The bill 12 provides that notwithstanding several Code provisions as 13 specified in the bill, the definitions of “Internal Revenue 14 Code” in those Code provisions and, by internal reference, 15 in other sections of the Iowa Code and Iowa Acts shall mean 16 the Internal Revenue Code in effect on, or as amended to and 17 including, January 1, 2016. This definition change applies 18 only to the period beginning January 1, 2015, and ending 19 December 31, 2015, and for tax years beginning during the 2015 20 calendar year. 21 The affected Code provisions include Code sections 422.3 22 and 422.32, general definition sections in the chapter of the 23 Code that governs corporate and individual income tax and the 24 franchise tax, and Code sections 15.335, 422.10, and 422.33, 25 which contain references to the Internal Revenue Code for the 26 state research activities credit for individuals, corporations, 27 and corporations in economic development areas. 28 Code section 422.9 provides individuals a deduction from 29 net income for state sales and use taxes if the individual 30 chose to deduct sales and use tax in lieu of state income taxes 31 or the standard deduction for federal income tax purposes. 32 This deduction was set to expire under both federal and Iowa 33 law for tax years beginning on or after January 1, 2015. The 34 federal Protecting Americans from Tax Hikes Act of 2015 made 35 -5- LSB 6046SV (2) 86 mm/rj 5/ 9

S.F. 2303 the federal deduction permanent. The bill allows the Iowa 1 deduction for tax years beginning during the 2015 calendar 2 year. 3 The bill decouples, for Iowa income tax purposes for tax 4 years ending on or after January 1, 2015, but before January 5 1, 2016, from the federal additional first-year depreciation 6 allowance in section 168(k) of the Internal Revenue Code 7 (bonus depreciation) which was modified and extended through 8 2019 by the federal Protecting Americans from Tax Hikes Act 9 of 2015. Taxpayers who claim bonus depreciation for federal 10 tax purposes are, for the applicable tax year, required to add 11 such depreciation amounts back to Iowa net income, but are 12 then allowed under existing state law to deduct the amount of 13 depreciation that would otherwise be allowable under federal 14 law, without regard to the bonus depreciation allowance. 15 Under current law, taxpayers are in some instances required, 16 when calculating alternative minimum tax under Code section 17 422.5(2) and itemized deductions under Code section 422.9(2), 18 to recompute their federal adjusted gross income to take 19 into account the fact that Iowa has decoupled from bonus 20 depreciation. The bill provides that taxpayers must make those 21 same adjustments to federal adjusted gross income for tax year 22 2015 to account for the fact that Iowa has decoupled from bonus 23 depreciation as described above. 24 The division takes effect upon enactment and applies 25 retroactively to January 1, 2015. 26 DIVISION II —— SALES AND USE TAXES. The bill rescinds 27 several administrative rules and amendments to administrative 28 rules of the department of revenue relating to the 29 manufacturing sales and use tax exemptions under Code sections 30 423.3(47) and 423.3(48) for the purchase of certain items used 31 in manufacturing, research and development, data processing 32 or storage, or recycling activities, and for the purchase of 33 certain design and installation services related to machinery 34 and equipment, and to the definitions of several applicable 35 -6- LSB 6046SV (2) 86 mm/rj 6/ 9

S.F. 2303 terms, including but not limited to definitions for tax-exempt 1 “computers”, “machinery”, “equipment”, “replacement parts”, 2 and “materials used to construct or self-construct computers, 3 machinery, and equipment”. These administrative rules and 4 amendments to administrative rules also concern the treatment 5 of these tax-exempt items as they relate to the taxation of 6 construction activities under Code sections 423.2(1)(b) and 7 423.2(1)(c) by amending the method for determining whether 8 the items are considered real property and taxed as building 9 materials when purchased in furtherance of a construction 10 contract, or considered tangible personal property eligible for 11 the manufacturing sales and use tax exemptions. 12 The effect of rescinding the amendments to these 13 administrative rules is to restore the language of the 14 affected rules to that as it existed prior to the date 15 the adopted amendments to the rules were published in the 16 Iowa administrative bulletin. The bill directs the Iowa 17 administrative code editor to restore the text of the affected 18 rules to the language that existed on January 5, 2016, which 19 was the day before the amendments were published in the 20 Iowa administrative bulletin. The bill also directs the 21 Iowa administrative code editor to remove language of the 22 rescinded rules from the Iowa administrative code. The Iowa 23 administrative code editor is required to complete these 24 actions as soon as practicable. The provisions rescinding 25 these administrative rules and amendments to administrative 26 rules and requiring certain administrative code editor actions 27 take effect upon enactment. 28 The bill amends the sales tax exemption in Code section 29 423.3(47) for the purchase or rental of certain items used in 30 manufacturing, research and development, data processing or 31 storage, or recycling activities. 32 Under current law, the exemption includes replacement 33 parts. The bill amends the exemption to include materials 34 used to construct or self-construct replacement parts. The 35 -7- LSB 6046SV (2) 86 mm/rj 7/ 9

S.F. 2303 bill defines “replacement part” for purposes of the exemption 1 to mean tangible personal property other than computers, 2 machinery, equipment, or supplies, regardless of the cost or 3 useful life of the property, that replaces a component of a 4 computer, machinery, or equipment, performs the same or similar 5 function as that component, and restores or improves the 6 computer, machinery, or equipment. 7 The bill also amends the exemption to include supplies 8 and materials used to construct or self-construct supplies. 9 “Supplies” is defined in the bill as tangible personal property 10 that is not a computer, machinery, equipment, or replacement 11 part and that meets one of the following four conditions: 12 1. The tangible personal property is to be connected to 13 a computer, machinery, or equipment and requires regular 14 replacement because it is consumed or deteriorates during use. 15 The bill lists saw blades, drill bits, filters, and other 16 similar items with a short useful life as examples. 17 2. The tangible personal property is used in conjunction 18 with a computer, machinery, or equipment and is specially 19 designed for use in manufacturing specific products and may 20 be used interchangeably and intermittently on a particular 21 computer, machine, or piece of equipment. The bill lists jigs, 22 dies, tools, and other similar items as examples. 23 3. The tangible personal property comes into physical 24 contact with other tangible personal property used in 25 processing and is used to assist with or maintain conditions 26 necessary for processing. The bill lists cutting fluids, oils, 27 coolants, lubricants, and other similar items with a short 28 useful life as examples. 29 4. The tangible property is directly and primarily used 30 in an activity described in Code section 423.3(47)(a)(1)-(6). 31 The bill lists prototype materials and testing materials as 32 examples. 33 By operation of Code section 423.6, an item exempt from the 34 imposition of the sales tax is also exempt from the use tax 35 -8- LSB 6046SV (2) 86 mm/rj 8/ 9