The Supreme Court of Iowa has determined that the installation labor involved in certain home improvement projects, subcontracted by a big-box home improvements store, is subject to sales tax. The taxpayer, Lowe’s, appealed the district court judgment upholding the Department of Revenue’s assessment of sales tax on labor installing home improvements. The district court had affirmed an administrative law judge’s decision that the transactions were properly taxed as “repairs” and that the services of a general building contractor are only exempt when performed in connection with new construction, reconstruction, alteration, expansion, or remodeling. The Supreme Court of Iowa affirmed in part, reversed in part and remanded the case with instructions to recalculate the sales tax assessment.
Construction Sales Tax
Lowe’s subcontracts with third-party installers who install products in the customer’s home. Lowe’s then prepares an installed sales contract, which indicates the cost of materials, cost of labor, sales tax charges for materials and labor (if any), the total cost, and other terms of the sale. Lowe’s pays sales and use tax based on the cost of the goods and materials sold under installed sales contracts at the time Lowe’s withdraws the items from its inventory. But Lowe’s does not collect or pay sales tax on the price customers paid for installation services.
The parties in this case disagreed whether the sales tax applied to labor installing items sold by Lowe’s to homeowners through the installation contracts, specifically items such as:
– sinks; and
– ceiling fans.
The Iowa Code imposes sales tax on many services including “carpentry,”“electrical and electronic repair and installation,” and “pipe fitting and plumbing.” However there are exemptions from sales tax for services performed in connection with “new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer.” State regulations also distinguish between services performed for “repairs” and “installation” subject to sales tax and “remodeling” services which are exempt from tax.
Lowe’s argued that all of its installation services were exempt because they were performed on or connected with new construction, reconstruction, alteration, expansion, or remodeling. The Supreme Court of Iowa disagreed. Examples of new construction include building a deck, a garage or a new room. Installations of items such as sinks or ceiling fans, without more, do not involve the scale or structural changes required to result in the equivalent of a new room or structure. The installation contracts at issue did not involve structural changes to real property, which is a prerequisite to exempting the labor from sales tax under Iowa law.
The Supreme Court of Iowa did hold that the Department erred by assessing sales tax on carpentry services for installations not constituting repairs. However the court agreed with the Department and district court’s determined that a sales tax exemption did not apply to small-scale installations without structural changes to the customer’s home.
Lowe’s Home Centers, LLC v. Iowa Department of Revenue, Iowa Supreme Court, No. 18-0097, December 14, 2018, 201-403