S.F. 228 Section 1. Section 2.48, subsection 3, Code 2017, is amended 1 by adding the following new paragraph: 2 NEW PARAGRAPH . 0h. In 2019, the economic development 3 program for certified suppliers of anchor manufacturers 4 available under sections 15.226 through 15.229 and the related 5 adjustments to net income provided in section 422.7, subsection 6 59, and section 422.35, subsection 26. 7 Sec. 2. NEW SECTION . 15.226 Definitions. 8 For purposes of this part: 9 1. “Anchor manufacturer” means a business that meets all of 10 the following: 11 a. Manufactures tangible personal property at a facility in 12 Iowa. 13 b. Exports at least fifty percent of the tangible personal 14 property manufactured at the facility to markets outside of the 15 state. 16 2. “Certified supplier” means a business certified pursuant 17 to section 15.227. 18 3. “Facility” means a building or buildings located in the 19 state at which tangible personal property is manufactured for 20 sale within or without the state of Iowa. 21 4. “Manufactured” or “Manufactures” means adding value to 22 personal property through a process of manufacturing, refining, 23 purifying, combining of different materials, the packaging of 24 meats, extracting and recovering natural resources, and all 25 processes of fabricating and curing, with a view to selling the 26 property for gain or profit. 27 5. “Tangible personal property” means the same as defined in 28 section 422.33, subsection 2, paragraph “b” , subparagraph (3). 29 Sec. 3. NEW SECTION . 15.227 Certification of suppliers. 30 1. A business meeting the requirements of subsection 2 may 31 apply to the authority, no later than ninety days after the 32 end of a tax year of the business, for certification under 33 this section. If a business applying to the authority meets 34 the requirements of subsection 2, the authority shall issue 35 -1- LSB 1701XS (5) 87 mm/sc 1/ 9

S.F. 228 a certificate to the business stating that the business is a 1 certified supplier. 2 2. To receive certification as a certified supplier, a 3 business must meet all of the following for the tax year 4 immediately preceding the tax year for which the requested 5 certificate will be valid: 6 a. The business manufactures tangible personal property at a 7 facility in Iowa. 8 b. The business derives more than ten percent of its gross 9 sales of tangible personal property manufactured at a facility 10 in Iowa from sales to anchor manufacturers. For purposes of 11 the requirement in this paragraph, a business may aggregate 12 gross sales to more than one anchor manufacturer. 13 c. All sales by the business to anchor manufacturers are 14 arm’s length transactions. 15 d. The business provides all of the following: 16 (1) A statement or statements from one or more 17 anchor manufacturers, signed by an officer or authorized 18 representative of the anchor manufacturer, attesting that the 19 anchor manufacturer meets the definition of anchor manufacturer 20 under section 15.226. The business shall provide statements 21 from as many anchor manufacturers to which the business makes 22 sales as collectively represents more than ten percent of 23 the business’s gross sales of tangible personal property 24 manufactured at a facility in Iowa. 25 (2) Supporting documentation in a form prescribed by the 26 authority. 27 e. The business meets one of the following criteria: 28 (1) At least ten percent of the total payroll of the 29 business is located in the state. 30 (2) The business employs at least fifty employees at a 31 facility in the state. 32 f. The business agrees to annually provide to the authority 33 information and data on jobs created and capital investments 34 made in the state by the business. The information and data 35 -2- LSB 1701XS (5) 87 mm/sc 2/ 9

S.F. 228 shall be in a form prescribed by the authority. 1 g. The business is not an anchor manufacturer. 2 3. A certificate is valid for one tax year and shall include 3 an expiration date. Reapplication may be made each year for 4 certification under this part. The department of revenue shall 5 accept a validly issued, unexpired certificate issued under 6 this section. 7 4. The authority shall not issue certificates pursuant to 8 this section for tax years beginning on or after January 1, 9 2020. 10 Sec. 4. NEW SECTION . 15.228 Eligibility for adjustment to 11 net income of certified suppliers. 12 1. A certified supplier shall be eligible to make the 13 adjustment to net income in section 422.35, subsection 26, for 14 a tax year if all the following apply: 15 a. The certified supplier’s net business income for the tax 16 year, allocated and apportioned to this state under section 17 422.33, subsection 2, paragraph “a” , subparagraph (2), computed 18 without regard to section 422.35, subsection 26, increased 19 by more than five percent over the certified supplier’s net 20 business income in the prior year, allocated and apportioned to 21 this state under section 422.33, subsection 2, paragraph “a” , 22 subparagraph (2). 23 b. The certified supplier includes a copy of a valid, 24 unexpired certificate issued under section 15.227 with the 25 certified supplier’s tax return required under chapter 422. 26 2. A taxpayer who is a shareholder in a subchapter S 27 corporation that is a certified supplier shall be eligible to 28 make the adjustment to net income in section 422.7, subsection 29 59, for a tax year if all the following apply: 30 a. The certified supplier’s net business income for the tax 31 year, allocated and apportioned to this state under section 32 422.33, subsection 2, paragraph “a” , subparagraph (2), computed 33 without regard to section 422.35, subsection 26, increased 34 by more than five percent over the certified supplier’s net 35 -3- LSB 1701XS (5) 87 mm/sc 3/ 9

S.F. 228 business income in the prior year, allocated and apportioned 1 to this state under section 422.33, subsection 2, paragraph 2 “a” , subparagraph (2), which prior year’s allocation and 3 apportionment shall be computed with regard to section 422.35, 4 subsection 26, if the subchapter S corporation was a certified 5 supplier in the previous tax year and met the eligibility 6 requirements in this paragraph “a” . 7 b. The shareholder includes a copy of a valid, unexpired 8 certificate issued under section 15.227 with the shareholder’s 9 tax return required under chapter 422. 10 3. For purposes of establishing eligibility under this 11 section, “net business income” shall not include any income of 12 a certified supplier that is attributable to an existing trade 13 or business or income-producing contract that was acquired by 14 the certified supplier through merger or acquisition during or 15 after the first year for which the certified supplier becomes 16 eligible pursuant to this section for the adjustments to net 17 income in section 422.7, subsection 59, or section 422.35, 18 subsection 26. 19 Sec. 5. NEW SECTION . 15.229 Rules. 20 The authority and the department of revenue may adopt rules 21 pursuant to chapter 17A to administer this part. 22 Sec. 6. Section 257.21, subsection 2, Code 2017, is amended 23 to read as follows: 24 2. The instructional support income surtax shall be imposed 25 on the state individual income tax for the calendar year during 26 which the school’s budget year begins, or for a taxpayer’s 27 fiscal year ending during the second half of that calendar year 28 and after the date the board adopts a resolution to participate 29 in the program or the first half of the succeeding calendar 30 year, and shall be imposed on all individuals residing in the 31 school district on the last day of the applicable tax year. 32 As used in this section , “state individual income tax” means 33 the taxes computed under section 422.5 , without regard to the 34 adjustment to net income in section 422.7, subsection 59, less 35 -4- LSB 1701XS (5) 87 mm/sc 4/ 9

S.F. 228 the amounts of nonrefundable credits allowed under chapter 1 422, division II , except for the Iowa taxpayers trust fund tax 2 credit allowed under section 422.11E . 3 Sec. 7. Section 422.7, Code 2017, is amended by adding the 4 following new subsection: 5 NEW SUBSECTION . 59. a. If the adjusted gross income 6 includes income from a subchapter S corporation for which the 7 taxpayer is a shareholder, which subchapter S corporation is 8 a certified supplier that meets the requirements in section 9 15.228, subsection 2, paragraph “a” , the taxpayer may subtract 10 an amount based on the taxpayer’s pro rata share of the 11 profits or losses from the subchapter S corporation equal to 12 the difference between the subchapter S corporation’s net 13 business income for the tax year, allocated and apportioned to 14 this state under section 422.33, subsection 2, paragraph “a” , 15 subparagraph (2), computed without regard to section 422.35, 16 subsection 26, and one hundred five percent of the subchapter 17 S corporation’s net business income for the prior tax year, 18 allocated and apportioned under section 422.33, subsection 2, 19 paragraph “a” , subparagraph (2), which prior year’s allocation 20 and apportionment shall be computed with regard to section 21 422.35, subsection 26, if the subchapter S corporation was 22 a certified supplier in the previous tax year and met the 23 requirements in section 15.228, subsection 2, paragraph “a” . 24 A taxpayer who is a resident shall not make the subtraction 25 provided in this subsection unless the taxpayer also makes an 26 election pursuant to section 422.5, subsection 1, paragraph 27 “j” , subparagraph (2). 28 b. For purposes of the adjustment provided in this 29 subsection, “net business income” shall not include any 30 income of a certified supplier that is attributable to an 31 existing trade or business or income-producing contract that 32 was acquired by the certified supplier through merger or 33 acquisition during or after the first year for which the 34 certified supplier becomes eligible for the adjustment in this 35 -5- LSB 1701XS (5) 87 mm/sc 5/ 9

S.F. 228 subsection. 1 Sec. 8. Section 422.35, Code 2017, is amended by adding the 2 following new subsection: 3 NEW SUBSECTION . 26. a. If the taxpayer is a certified 4 supplier that meets the requirements in section 15.228, 5 subsection 1, subtract an amount equal to the difference 6 between the taxpayer’s net business income for the tax year, 7 allocated and apportioned under section 422.33, subsection 2, 8 paragraph “a” , subparagraph (2), computed without regard to 9 this subsection, and one hundred five percent of the taxpayer’s 10 net business income for the prior tax year, allocated and 11 apportioned under section 422.33, subsection 2, paragraph “a” , 12 subparagraph (2). 13 b. For purposes of the adjustment provided in this 14 subsection, “net business income” shall not include any 15 income of a certified supplier that is attributable to an 16 existing trade or business or income-producing contract 17 which was acquired by the certified supplier through merger 18 or acquisition during or after the first year for which the 19 certified supplier becomes eligible for the adjustment in this 20 subsection. 21 Sec. 9. Section 422D.2, Code 2017, is amended to read as 22 follows: 23 422D.2 Local income surtax. 24 A county may impose by ordinance a local income surtax as 25 provided in section 422D.1 at the rate set by the board of 26 supervisors, of up to one percent, on the state individual 27 income tax of each individual residing in the county at the 28 end of the individual’s applicable tax year. However, the 29 cumulative total of the percents of income surtax imposed on 30 any taxpayer in the county shall not exceed twenty percent. 31 The reason for imposing the surtax and the amount needed 32 shall be set out in the ordinance. The surtax rate shall be 33 set to raise only the amount needed. For purposes of this 34 section , “state individual income tax” means the tax computed 35 -6- LSB 1701XS (5) 87 mm/sc 6/ 9

S.F. 228 under section 422.5 , without regard to the adjustment to net 1 income in section 422.7, subsection 59, less the amounts of 2 nonrefundable credits allowed under chapter 422, division II , 3 except for the Iowa taxpayers trust fund tax credit allowed 4 under section 422.11E . 5 Sec. 10. RETROACTIVE APPLICABILITY. This Act applies 6 retroactively to January 1, 2017, for tax years beginning on 7 or after that date. 8 EXPLANATION 9 The inclusion of this explanation does not constitute agreement with 10 the explanation’s substance by the members of the general assembly. 11 This bill creates an economic development program that 12 allows a certified supplier to make an adjustment to net income 13 for state individual and corporate income tax purposes. The 14 adjustment is available for corporations and shareholders of 15 subchapter S corporations. 16 To qualify as a certified supplier under the bill, a business 17 must meet several requirements. The business must manufacture 18 tangible personal property in Iowa but cannot be an anchor 19 manufacturer. The business must derive more than 10 percent 20 of its gross sales from sales to anchor manufacturers, and all 21 such sales must be arm’s length transactions. The business 22 must supply the authority with signed statements from a certain 23 number of anchor manufacturers attesting to certain information 24 as prescribed in the bill and must agree to annually provide 25 to the authority information and data on jobs and capital 26 investments made in the state by the business. Finally, the 27 business must maintain at least 10 percent of its payroll in 28 Iowa or employ at least 50 employees in Iowa. 29 “Anchor manufacturer” is defined as a business that 30 manufactures tangible personal property in Iowa and exports at 31 least 50 percent of the tangible personal property manufactured 32 in Iowa outside of the state. 33 A business that meets all of the qualifications of a 34 certified supplier may annually apply to the authority to 35 -7- LSB 1701XS (5) 87 mm/sc 7/ 9

S.F. 228 receive a certificate labeling the business as a certified 1 supplier. A business must apply for a certificate no later 2 than 90 days after the end of its tax year. The certificate is 3 valid for one year and shall include an expiration date. 4 The certified supplier will be entitled to make an 5 adjustment to its net income if it includes the valid, 6 unexpired certificate with its tax return, and if its net 7 business income allocated and apportioned to this state, 8 computed without regard to the adjustment to net income 9 provided in the bill, increased by more than 5 percent over 10 its prior year net business income allocated and apportioned 11 to this state. 12 If both requirements are met, the certified supplier is 13 entitled to subtract from its net income an amount equal to 14 the difference between its current year net business income 15 allocated and apportioned to this state, computed without 16 regard to the adjustment to net income provided in the bill, 17 and 105 percent of its prior year net business income allocated 18 and apportioned to this state. This net income adjustment 19 does not take into account any income attributable to an 20 existing trade or business or income-producing contract 21 which was acquired by the certified supplier through merger 22 or acquisition during or after the first year for which 23 the certified supplier became eligible for the net income 24 adjustment. Finally, the bill excludes this net income 25 adjustment from the calculation of the school district income 26 surtaxes in Code sections 257.21 (instructional support 27 program), 257.29 (educational improvement program), and 298.2 28 (physical plant and equipment levy), and the emergency medical 29 services income surtax in Code chapter 422D, so that revenues 30 from those taxes will not be reduced as a result of the net 31 income adjustment. 32 The economic development authority shall not issue 33 certificates for tax years beginning on or after January 1, 34 2020. The bill includes the certification program and its 35 -8- LSB 1701XS (5) 87 mm/sc 8/ 9