Iowa state sales tax problem surfaces

Obsolete tax renders $18 million surprise for lawmakers

Rod Boshart
Published: February 7 2014 | 4:24 pm - Updated: 29 March 2014 | 3:20 am in

DES MOINES -- Tucked away in the Iowa Department of Revenue’s yearly technical bill filed with the Legislature is a potential $18 million surprise lawmakers did not expect to confront in an election-year session.

State lawmakers are being asked to address an unintended consequence of legislative action taken in 2008 related to sales tax issues that had the effect of repealing the state sales tax on heavy equipment purchases, said Victoria Daniels, revenue agency spokeswoman.

If the Legislature and Gov. Terry Branstad fail to act this session, she said, the result would be the state having to refund at estimated $18 million plus interest to customers who paid the sales tax to about 185 retailers of construction equipment at the time of purchase that was collected and remitted to the state not knowing the requirement had unwittingly been struck via a bureaucratic and legislative snafu.

“I think you call that a mess,” said Rep. Tom Sands, R-Wapello, chairman of the House Ways and Means Committee.

The inadvertent change – which slipped by the department, the legislative code editors, and lawmakers and their staffs in the vetting process -- didn’t come to light until last summer when an attorney contacted the department about the Iowa Code section and it was determined by legal staff at the department and the Iowa Attorney General’s office that the 2008 action had “rendered that tax obsolete,” Daniels said.

“It was not the department’s intention nor do we believe that it was the Legislature’s intention to remove that tax or repeal that tax,” said Daniels, whose agency has asked lawmakers in Senate Study Bill 3117 to restore the sales tax on heavy equipment retroactive to July 1, 2008. A Senate Ways and Means subcommittee is slated to consider the measure Tuesday.

Senate President Pam Jochum, D-Dubuque, who is chair of the subcommittee, said she believed the split-control Legislature would have to comply with the department’s request, noting that it would cause an additional $18 million problem or more for budget-makers as they try to settle on an overall fiscal 2015 state funding level.

“It’s simply a mistake that needs to be corrected,” said Jochum.

Sands said the outcome “is yet to be determined” as the full Legislature gets up to speed on the issue.

Lawmakers who are sensitive to tax-related issues during an election year note that the action could be construed by an opponent in the 2014 campaign as having imposed a tax, even though it’s restoring a tax that was not meant to be repealed.

“I suppose somebody could argue that, but it would be a stretch, quite frankly,” said Jochum.

“I am about as anti-tax an individual that you’ll find up here and I’m always looking for ways to reduce people’s taxes, but this isn’t something that was intentionally done,” Sands said.

Scott Newhard of the Associated General Contractors of Iowa said he had not discussed the issue with his members to know how they wish to proceed. He said the changes that were made in 2008 were designed to ensure that leasing and rental of construction equipment remained exempt from the Iowa sales tax under provisions of the streamlined sales tax initiative.

“The department actually was trying to assist in making sure that exemption continued,” Newhard added.

Branstad’s office did not immediately respond to a request for comment.

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