April 6, 2012
Re: Energy Audits and Related Product Installation
Dear
Recently, you submitted an inquiry requesting that the Department clarify the application of Iowa sales tax laws to your client’s business of providing energy audit services. You inquired about one particular aspect of your client’s services: the installation of energy efficient products during the audit process as an incentive for participation.
Facts
Your client (hereinafter “Company”), headquartered out of state but registered to do business in Iowa, is hired by local Iowa utility companies to perform energy audits for utility customers. The customers are typically small businesses and owners of tenant-occupied commercial and residential property. The goal of the program is to educate customers on ways to reduce energy consumption. The audit services involve the following tasks:
1. Performing on-site energy audits for both commercial and residential customers that may include installing eligible no-cost and low-cost direct install efficiency measures. The items that are installed include, but are not limited to: pipe insulation, low-flow showerheads, faucet aerators, compact fluorescent lamps, LED exit lights, and thermostats, vending machine controls, and pre-rinse sprayers.
2. Performing analysis of energy use at the facility and technical consultation with the customer about where energy efficiency opportunities exist.
3. Providing a written report to the small business or property owner within two to three weeks after the audit, estimating potential costs, utility rebates, energy savings, and utility bill savings for customers needing building equipment improvements, primarily targeting insulation and/or lighting upgrades.
4. Providing information on other energy-saving strategies that could benefit customers.
The cost of the audit and the cost of the products installed during the audit (which you refer to as “direct install measures”) are paid for by the utility company, not the utility’s customer. The products are provided to the customer free of charge as an incentive to encourage customers to participate. Company bills the utility company for the energy efficiency audits and the installation of the energy efficient products. These services represent two separate line-items on the utility’s bill identified as: “Audit fees-Iowa” and “Direct Install Measures-Iowa.” Audits and direct install measures are billed at rates pre-determined by the contract between Company and the utility. Pre-determined rates for direct install measures consist of the material costs and a markup to cover installation labor.
Issues
The issues you presented are as follows:
1. Whether tax is due on the energy efficient items that are installed and if so, which party is obligated to pay the tax.
2. Whether the installation of direct-install measures is a taxable service.
3. The tax base for self-assessing use tax or collecting sales tax.
In your inquiry you also asserted your belief that no tax should be due on the direct installation items because the “true-object” of the transaction is the services that Company provides and the tangible personal property is merely incidental.
Discussion
The Direct-Install Measures
There is a tax of six percent imposed on the sales price of “tangible personal property.” Iowa Code section 423.2(1). The sales price of tangible personal property purchased for resale is exempt from tax. Iowa Code section 423.3(2). Tangible personal property is for resale when sold to any person who is not the ultimate user or consumer of the property and who holds the property for the purpose of selling it to another. With a valid exemption certificate, the buyer can purchase the items for resale tax-free and collect tax from its customers when the items are resold. 701 IAC 15.3
Company purchases energy-efficient items from suppliers, sells them to utility companies, and then installs them for utility customers. Therefore, Company does not intend to be the ultimate consumer of those items and the items are purchased by Company for resale to the utility. Therefore, Company should purchase the items tax-free and collect tax when the items are resold to the utility.
The charge on the items to the utility includes a markup for the installation service. The Department rules treat the installation of tangible personal property as follows:
When the sale of tangible personal property includes a charge for installation of the personal property sold, the current rate of tax shall be measured on the entire sales price from the sale. The installation charges would not be taxable if the installation service is not an enumerated service, and where a sales agreement exists, the installation charges are separately contracted. If the written contract contains no provisions separately itemizing such charges, tax is due on the full contract price with no deduction for installation charges, whether or not such installation charges are itemized separately on the invoice.
If the installation services are enumerated services, the installation charges would not be taxable if (1) the services are exempt from tax (e.g., the services are performed on or connected with new construction, reconstruction, alteration, expansion or remodeling of a building or structure); or the services are rendered in connection with the installation of new industrial machinery or equipment, and (2) where a sales agreement exists, the installation charges are separately contracted. If the written contract contains no provisions separately itemizing such charges, tax is due on the full contract price with no deduction for installation charges, whether or not such installation charges are itemized separately on the invoice. If no written contract exists, the installation charges must be separately itemized on the invoice to be exempt from tax….
701 IAC 212.6. Because of the lump-sum billing, the utility company must pay tax on the entire charge for “Direct Install Measures-Iowa,” regardless of whether the labor portion is for a non-enumerated service. Id.
The Services Involved in Installing Direct-Install Measures
Even if the installation services and the materials were separately itemized, tax would likely be due on the charge for the installation services. The items that Company installs include pipe insulation, faucet aerators, low-flow showerheads, timers, compact fluorescent lamps, vending machine controls, LED exit lights, thermostats and pre-rinse sprayers. At issue is whether the installation of any of these items constitutes a taxable enumerated service under Iowa Code section 423.2(6) and whether any exemptions apply.
The services of “electrical and electronic repair and installation” and “pipe fitting and plumbing” are taxable (Iowa Code section 423.2(6)), unless “performed or connected with new construction, reconstruction, alteration, expansion or remodeling of a building or structure” (Iowa Code section 423.3(37); 701 IAC 219.1). Therefore, if Company’s services constitute “electrical and electronic repair and installation” or “pipe fitting and plumbing” the services will be taxable unless they are performed or connected with new construction, reconstruction, alteration, expansion or remodeling.
The department rules explain “electrical and electronic repair and installation” as:
[R]epairing or installing electrical wiring, fixtures, switches in or on real property or repairing or installing any article of personal property powered by electric current are rendering, furnishing or performing a service, the gross receipts from which are subject to tax. For purposes of this rule only, that electrical portion of the repair and installation of personal property powered by electric current is subject to tax. “Repair” is synonymous with mend, restore, maintain, replace, or service. A “repair” contemplates an existing structure or thing which has become imperfect and constitutes the restoration to the original existing structure that which has been lost or destroyed. A “repair” is not a capital improvement, that is, it does not materially add to the value or substantially prolong the useful life of the property. “Installation” shall include affixing electrical wiring, fixtures or switches to real property, affixing any article of personal property powered by electric current to any other article of personal property, or making any article of personal property powered by electric current operative with respect to its intended functional purpose. For purposes of 26.2(1), service tax shall not apply on electrical installation or repair when the service is on or connected with a structural change to a building or similar structure, whether the structural change be internal or external to the building or structure. The electrical repair or installation on or connected with new construction on buildings or structures would not be subject to service tax.
701 IAC 26.16. Company’s activities do not constitute repair because the items being replaced are not in need of mending or restoration. Instead, Company changes out existing items and installs more energy efficient items, even though the existing items are in working order. But, Company’s services likely do constitute installation within the meaning of the Department rules. As stated above, electronic and electrical installation includes “affixing electrical wiring, fixtures or switches to real property, affixing any article of personal property powered by electric current to any other article of personal property, or making any article of personal property powered by electric current operative with respect to its intended functional purpose.” 701 IAC 26.16. You stated that Company’s services include installing “compact fluorescent lamps, vending machine controls, LED exit lights, and thermostats.” These are all electrical devices and, presumably, installing them involves making articles of personal property operative. Installing these items also likely involves affixing electrical wiring and fixtures to real property. Assuming that is an accurate assessment of the procedures involved, Company’s activities do constitute electronic and electrical installation.
“Pipe fitting and plumbing” is also a taxable enumerated service. Iowa Code section 423.2(6). The Department’s rules define “pipe fitting and plumbing” as “[t]he trade of fitting, threading, installing and repairing of pipes, fixtures or apparatus used for heating, refrigerating, air conditioning or concerned with the introduction, distribution and disposal of a natural or artificial substance.” 701 IAC 26.36. “Fixture” is not defined in either the Code or the Department rules, but research of plumbing information available online suggests that low-flow showerheads and aerators are both considered plumbing fixtures. You stated that Company installs pipe insulation, faucet aerators, low-flow showerheads, timers, and pre-rinse sprayers. Some of these items are examples of fixtures; therefore, Company does appear to perform plumbing services.
Based on the examples above, Company is performing taxable enumerated services and those services will be subject to tax unless they fall within an exemption. The exemption that may be applicable is Iowa Code section 423.3(37). This section exempts “[t]he sales price of services on or connected with new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer.” Iowa Code section 423.3(37).
The Department rules provide some guidance on what constitutes repair or installation and what constitutes new construction or remodeling. 701 IAC 219. The rules explain that remodeling is much more than making repairs or minor changes to a building or structure. 701 IAC 219.13. Tax is due on any repair or installation that does not rise to the level of construction or remodeling. See 701 IAC 219.13(3). To distinguish between installation or repair and remodeling or new construction, the Department examines the intent of the parties and the scope of the project. Id.
According to your facts, it is the intent of Company to provide installation of energy efficient measures primarily to encourage participation in the audit program, not to perform a major overhaul to the customer’s building—at least not during the time of the audit. The fact that the majority of the items offered are installed during the audit visit suggests that Company’s installation activities do not rise to the level of new construction or remodeling. Keep in mind that the exemption is fact-dependant and the more improvements being made, or the more extensive the improvement, the more likely it is that remodeling is occurring. For example, installation of major appliances such as a “water heater, water softener, furnace, or central air conditioning unit” would constitute an exempt activity. 701 IAC 219.13(2). To the extent that Company engages in installing these major appliances, such services would be exempt. In those instances, Company would pay sales or use tax on the purchase price of those major appliances and would not collect tax on those appliances from the utility. For more guidance on what does and does not rise to the level of new construction or remodeling, please refer to the Department rules found in 701 IAC 219.
Therefore, it is likely that Company’s activities are taxable enumerated services and are not exempt as new construction or remodeling. As a result, Company would be required to collect sales tax from the utility on the services even if they were separately itemized from the charge for the direct-install measures.
True-Object Test
You believe that, based on the true-object test, the Department should conclude that the utility is not obligated to pay tax on the materials transferred. You assert that the audit services are the true object of Company’s transaction with the utility company and the items installed are merely incidental. Based on this logic you argue that even if the tangible personal property is taxable generally, it should not be in this instance because it is not the true object of the transaction.
Your assertion is incorrect, because Company separately itemizes the fee for the energy audit and the fee for the direct installation measures. As you explained, the charge for direct installation measures includes the price of the materials and the labor provided. The materials are not incidental to the installation of those materials. The true-object test is not applicable because the nontaxable audit service is separately itemized from the amount charged for the direct installation measures.
Conclusion
In conclusion, Company should purchase direct-install measures tax-free as items for resale and must collect sales tax from the utilities on the entire amount charged for the direct installation measures.
Additionally, while you did not inquire as to the taxability of the energy audit component of the service, it may be beneficial to refer to Iowa Department of Revenue Policy Letter No. 10300021 (June 22, 2010) to determine if any aspect of the energy audit service makes it taxable. The letter is available on the Department’s website at http://itrl.idr.iowa.gov/. Also, if you would like more information about the distinction between repair/installation and new construction/remodeling, you may consult the Department’s publication on contracting that is available at http://www.iowa.gov/tax/educate/78527.html.
I hope this information is of assistance to you. Please be advised that this letter is an informal opinion and is only applicable to the factual situation referenced and to the statutes in existence at the time of issuance. The Department could, in the future, take a position contrary to that stated in the letter. Any written advice or opinion rendered to members of the public by Department personnel that is not pursuant to a Petition for Declaratory Order under 701 IAC 7.56 is not binding upon the Department. If you have any additional questions regarding this matter, please do not hesitate to contact me.
Sincerely,
Alana Stamas
Attorney
Tax Policy and Communications Division
Iowa Department of Revenue
(515) 725-2265
alana.stamas@iowa.gov