Policy letter; designated exempt entity; May24,2004
Topic Code: D098Designated Exempt Entity Document Reference: 04300065
May 24, 2004
Regional Utilities Service System
Re: Designated exempt entities, your inquiry, 04-29-04.
Your recent letter to the Policy Section of the Iowa Department of Revenue has been given to me for reply. Please allow me to introduce myself. My name is Darwin Clupper. I am a technical tax specialist with the Policy Section. My particular area of concentration is Iowa sales and use tax law. We have already talked by telephone, and I received your fax containing the Articles of Incorporation for RUSS. You inquire on behalf of the Regional Utility Service Systems Commission (RUSS). RUSS was formed by six Iowa counties, pursuant to the provisions of Chapter 28E of the Code, in 1999. RUSS was created “for the purpose of planning, designing, developing, financing, constructing, owning, operating, and maintaining wastewater treatment systems and water systems” for the counties which created it and the cities and unincorporated areas within those counties. RUSS is declared to be a “public body. . .exercising public and essential governmental functions”. Its operations are financed by charges to those using its services and by transfers of funds for the counties which created it to RUSS. RUSS is governed by a board of six members; the Board of Supervisors of each member county appoints one of the six. A member’s term lasts three years. RUSS is a not-for-profit organization; disputes concerning it which occur among the six counties which established it are to be settled by arbitration.Your letter asks if RUSS is a “designated exempt entity”, and the purchases of its construction contractors therefore exempted from tax by § 422.42(16) of the Code. Subsection 422.42(16) states that a “designated exempt entity” means “an entity which is designated in section 422.45, subsection 7.” Among the entities mentioned in subsection 7 are “all divisions, boards, commissions, agencies, or instrumentalities, of state, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder”. It is clear from the material you have provided that RUSS is an “agency” of the county governments which formed it. Black's Law Dictionary (6th ed. 1990) at p. 696 defines "Governmental Agency" as follows: "A subordinate creature of federal, state or local government created to carry out a governmental function or to implement a statute or statutes." RUSS was created by local county governments, is controlled by a Board selected by the governing bodies of those counties, and is, in part, funded by those county governments. These circumstances are enough to make RUSS the "subordinate creature" of those governments. Furthermore, RUSS was created pursuant to chapter 28E of the Code, and under that chapter can exercise only the powers possessed by its creating local governments; so RUSS was "created to carry out a governmental function". Therefore, it is “an entity which is designated in section 422.45, subsection 7” and therefore a “designated exempt entity” under § 422.42(16) of the Code. In closing, I must issue my usual warning. The opinions which I have expressed in this letter are informal only. Because of this, the Department could, in the future, take a position contrary to them.Sincerely,Darwin D. ClupperTax Specialist, Policy SectionCompliance Division515-281-3670