The Iowa Supreme Court recently addressed whether a home improvement retailer owed sales taxes on installation services performed by subcontractors in connection with customer purchases of windows and doors, sinks, faucets and various other items. The taxpayer collected sales tax from customers on its sales of products, but did not collect or pay sales tax on the price customers paid for installation services performed by the subcontractors. Following an audit, the Department assessed sales tax on the labor charges, and the taxpayer appealed, with the case ultimately ending up at the state’s highest court.
Under Iowa law for the audit period, sales tax was imposed on a number of services, including “carpentry,” “electrical and electronic repair and installation,” and “pipe fitting and plumbing.” However, an exemption applied to services on or connected with new construction and remodeling, or the services of a general building contractor. The court first determined that many of the installations were taxable as “electrical and electronic repair and installation,” and “pipe fitting and plumbing” services. Although there were no statutory definitions of these services, the Department’s regulations specified that these services included both installations and repairs. In contrast, the regulation defining carpentry services addressed only repairs. As such, the court concluded that any labor charges associated with pure carpentry services that did not also involve electric or plumbing (e.g., installation of doors and windows) were not subject to tax. The court upheld the assessment as it applied to any installations that could be considered “electrical and electronic repair and installation,” and “pipe fitting and plumbing” services.
The court next rejected the taxpayer’s argument that the services were exempt under the exemption for construction or remodeling, noting that the taxpayer’s position would essentially extend the exemption to the installation of any item that becomes a fixture. In the court’s view, installations of items such as sinks or ceiling fans, without more, do not involve the scale or structural changes required under the regulations interpreting the construction and remodeling exemption. Finally, the court rejected several other arguments set forth by the taxpayer, including that the taxpayer acted as a general building contractor with respect to the installations. Please contact Jill Nielsen at 312- 665-2794 with questions on Lowe’s Home Centers, LLC. v. Iowa Department of Revenue.