KUM AND GO, LC (2007) (DO) (ST)

Topic Code: R071Real Property vs. Tangible Personal Property           Document Reference: 07300024

BEFORE THE IOWA DEPARTMENT OF REVENUE

HOOVER STATE OFFICE BLDG

DES MOINES, IOWA

_____________________________________________________________________________

IN THE MATTER OF:                                        *

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KUM AND GO, LC                                        *          DECLARATORY ORDER

6400 WESTOWN PARKWAY                              *

WEST DES MOINES, IOWA 50266                    *

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SALES/USE TAX                                        *          DOCKET NO. 07-30-6-0011

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Pursuant to a Petition for Declaratory Order filed with the Iowa Department of Revenue (hereinafter referred to as "Department") by Kum and Go, LC, (hereinafter referred to as "Petitioner") on January 11, 2007, and in accordance with Iowa Code, section 17A.9 and Department rule 701-7.56(17A) "declaratory order" (in general) Iowa Administrative Code, the Department hereby issues its Declaratory Order.

The facts under consideration in this Declaratory Order are as follows:

          The Petitioner owns and operates convenience stores throughout Iowa and in 12 other states in the United States. The petitioner sells self-service gasoline and offers “pay at the pump” service for the convenience of the Petitioner’s customers. Fuel storage tanks and pumps are referred to in the gasoline industry as fuel storage and dispensing systems. The typical components of the fuel storage and dispensing system are as follows:

          1. Fuel storage tank installed below ground;

          2. Fuel storage tank foundation constructed below ground upon which the fuel storage tank rests;

          3. Fuel dispensers, which are permanently attached to a concrete foundation or island;

          4. Concrete foundations or islands (constructed on-site from concrete) which are the foundations in which the fuel dispensers are affixed;

          5. Submersible pumps which move the fuel from the underground storage tanks to the dispensers. The pumps are typically located underground either in the tank or next to the tank;

          6. Pump housing which encloses the submersible pump;

          7. Piping which connects the fuel dispensers to the fuel storage tanks. Piping is also used to vent the fuel storage tank and fill the fuel storage tanks;

          8. Spill container, which collects fuel that overflows from the fill pipe. The spill container is usually underground, connected to the fill pipe;

          9. Wiring which brings electricity from a power source directly to the submersible pump, fuel dispensers, lights, monitors, and other electrical equipment;

          10. Electronic monitor, which determines the amount of fuel in the tank. It may also detect leaks in the tank. The electronic monitor is located underground and is usually mounted on or inside of the fuel storage tank;

          11. Electronic monitor display unit, which displays information collected by the electronic monitor. Typically, the display unit is similar to a computer screen and is located in a building used to control the dispensing of the fuel;

          12. Canopy, which is a shelter structure over the fuel dispensers. The canopy is permanently attached to the concrete foundations; and

          13. Lights which are installed in the canopy or on or near the island to illuminate the entire filling area.

          To construct the underground fuel storage and fuel dispensing system, large construction equipment is used to dig a hole in the ground. Concrete foundations and slabs are constructed and walls are prepared. The tanks and fuel dispensing equipment, with the piping, wiring, monitors and pumps are installed. A concrete surface is then poured on top of the entire area and finished. Concrete islands are constructed and the overhead canopy is also constructed. Miscellaneous details are finalized to prepare the filling area for customer traffic.

ISSUE

The issue the Petitioner seeks to have determined is as follows:

1. Is a contract to provide materials and construct a fuel storage and dispensing system for a convenience store the sale of real property?

2. For sales/use tax purposes, when a construction contractor provides the materials (underground fuel storage tanks, fuel dispensers, piping, wiring, canopies, etc.) and uses these materials to construct a fuel storage and dispensing system, should the contractor pay sales/use tax on their acquisition costs of the materials used to fulfill the construction contract and not charge sales/use tax on the construction contract invoices?

PURPOSE OF RULING

The function of a declaratory order is to provide "reliable advice from an agency as to the applicability of unclear law." Bonfield, The Iowa Administrative Procedure Act: Background, Construction, Applicability, Public Access to Agency Law, The Rulemaking Process, 60 Iowa Law Rev. 731, 805 (1975). Iowa Code § 17A.9 contemplates declaratory orders by administrative agencies on a disclosed set of facts. City of Des Moines v. P.E.R.B., 275 N.W.2d 753, 758 (Iowa 1979). A declaratory order enables the public to secure definitive binding advice as to the applicability of agency-enforced law to a particular set of facts. Bonfield, at 822-23.

          It is not the function of a declaratory order to resolve issues involving factual analysis "too complicated to handle outside of an actual adjudication." Bonfield, at 807. A declaratory order is not a "contested case" as defined in Iowa Code § 17A.2(5); namely, it is not an evidentiary hearing which is also an administrative remedy set forth in Iowa Code ch. 17A and in the Department's rules, see 701 IAC 7.41(17A). Consequently, for purposes of this declaratory order, the Director views the issues raised in the petition for declaratory order as questions of law applicable to the factual situation disclosed by the Petitioner in the petition. This view is consistent with Department rule 701 IAC 7.56 concerning the issuance of declaratory orders.

CONCLUSION

Iowa law imposes sales and use tax on the purchase or use of tangible personal property. Iowa Code section 423.2(1)(2007) in relevant part states:

1. There is imposed a tax of five percent upon the sales price of all sales of tangible personal property, consisting of goods, wares, or merchandise, sold at retail in the state to consumers or users except as otherwise provided in this subchapter…

b. Sales of building materials, supplies, and equipment to owners, contractors, subcontractors, or builders for the erection of buildings or the alteration, repair, or improvement of real property are retail sales of tangible personal property in whatever quantity sold. Where the owner, contractor, subcontractor, or builder is also a retailer holding a retail sales tax permit and transacting retail sales of building materials, supplies, and equipment, the person shall purchase such items of tangible personal property without liability for the tax if such property will be subject to the tax at the time of resale or at the time it is withdrawn from inventory for construction purposes. The sales tax shall be due in the reporting period when the materials, supplies, and equipment are withdrawn from inventory for construction purposes or when sold at retail. The tax shall not be due when materials are withdrawn from inventory for use in construction outside of Iowa and the tax shall not apply to tangible personal property purchased and consumed by the manufacturer as building materials in the performance by the manufacturer or its subcontractor of construction outside of Iowa…

(emphasis added)

Department rules have the force and effect of the law and are presumed valid. Hope Evangelical Lutheran Church v. Iowa Department of Revenue and Finance, 463 N.W.2d 76 (Iowa 1990); Richards v. Iowa Department of Revenue, 360 N.W.2d 830 (Iowa 1985). Department rule 701 IAC 219.2(423) provides the following:

701—219.2(423) Contractors—consumers of building materials, supplies, and equipment by statute. 2005 Iowa Code subsection 423.2(1)"b" provides that sales of building materials, supplies and equipment to owners, contractors, subcontractors or builders for the erection of buildings or the alteration, repair or improvement of real property are retail sales in whatever quantity sold. This means that a contractor, subcontractor, or builder cannot claim an exemption for resale when purchasing building materials or supplies even if the contractor, subcontractor, or builder later separately itemizes material and labor charges for construction contracts. Building materials and supplies would generally consist of items which are incorporated into real property, lose their identity as tangible personal property and cannot be removed without altering the realty, or which are consumed by the contractor during the performance of the construction contract. See subrules 219.3(1), 219.3(2) and 219.3(3). Building equipment would ordinarily consist of machinery and tools. See subrule 219.3(4). The fact that a contractor, subcontractor or builder holds an Iowa retail sales tax permit and has a tax number does not entitle that person to purchase building materials, supplies and equipment without paying sales tax to the vendor. See rules 219.3(423) and 219.4(423).

When bidding on a contract, a contractor (general, special or subcontractor) should anticipate that sales or use taxes will increase the cost of materials by the tax unless the sponsor is a designated exempt entity; reference 701-subrule 19.12(5). The necessary allowance should be made in figuring the bid inasmuch as the contractor will be held responsible for paying the tax on building supplies, materials and equipment. The tax should not be identified as a separate item in the formal bid since the contractor cannot charge sales tax.

(emphasis added)

The items at issue that are being constructed include a large underground area for storage of fuel, the concrete over-laying of the underground storage, with underground electrical and fuel piping system, the construction of the foundation for fuel pump islands and the canopy covering all of the islands at the facility of the Petitioner. The building materials such as the concrete, wiring, piping and like materials are used to build these structures and the foundation. In constructing the foundation and structure, the building materials become integrated into the structure and the realty on which the storage, canopy and distribution systems are being constructed. Accordingly, the building materials are subject to tax when sold to the contractor and the contractor should adjust the contract price to factor the tax in as a cost when preparing the contract for bid.

In the second issue set forth by the Petitioner, the Petitioner references tangible personal property and materials and wishes to know who should be subject to the tax. The piping and wiring that are referenced would be considered building materials that become an integral part of the realty as set forth above, and would be subject to tax when sold to the contractor.

In addition to building materials, it appears that the construction at issue also involves tangible personal property, such as the fuel tanks, pumps and fuel dispensing systems, which essentially are manufactured as tangible personal property. Department rules 701 IAC 219.11(423) and 219.12(423) state the following for determining whether this type of equipment remains tangible personal property or becomes real property upon installation. This classification then determines whether the purchases of these items by the contractor are taxable or not taxable as to the construction contractor. These rules state:

701—219.11(423) Distinguishing machinery and equipment from real property. A construction contract may include many activities, but it does not include a contract for the sale and installation of machinery or equipment. Machinery and equipment includes property that is tangible personal property when it is purchased and remains tangible personal property after installation. Generally, tangible personal property can be moved without causing damage or injury to itself or to the structure, it does not bear the weight of the structure, and it does not in any other manner constitute an integral part of a structure. Manufactured machinery and equipment which does not become permanently annexed to the realty remains tangible personal property after installation.

219.11(1) The following is a list of property which, under normal conditions, remains tangible personal property after installation. The list is nonexclusive and is offered for illustrative purposes only:

a. Furniture, radio and television sets and antennas, washers and dryers, portable lamps, home freezers, portable appliances and window air-conditioning units.

b. Portable items such as casework, tables, counters, cabinets, lockers, athletic and gymnasium equipment and other related easily movable property attached to the structure.

c. Machinery, equipment, tools, appliances, and materials used exclusively as such by manufacturers, industrial processors and others performing a processing function with the items.

d. Office, bank and savings and loan association furniture and equipment, including office machines.

e. Radio, television and cable television station equipment, but not broadcasting towers.

f. Certain equipment used by restaurants and in institutional kitchens; for instance, dishwashers, stainless steel wall cabinets, stainless steel natural gas stoves, stainless steel natural gas convection ovens, and combination ovens and steamers with stands. This paragraph is not applicable to similar items used in residential kitchens. See Petition of Taylor Industries Inc., (Dkt No. 94-30-6-0367, 3-14-95).

219.11(2) The following is a list of property which, under normal conditions, becomes a part of realty. The list is nonexclusive and is offered for illustrative purposes only:

a. Boilers and furnaces.

b. Built-in household items such as kitchen cabinets, dishwashers, sinks (including faucets), fans, garbage disposals and incinerators.

c. Buildings, and structural and other improvements to buildings, including awnings, canopies, foundations for machinery, floors (including computer room floors), walls, general wiring and lighting facilities, roofs, stairways, stair lifts, sprinkler systems, storm doors and windows, door controls, air curtains, loading platforms, central air-conditioning units, building elevators, sanitation and plumbing systems, decks, and heating, cooling and ventilation systems.

d. Fixed (year-round) wharves and docks.

e. Improvements to land including patios, retaining walls, roads, walks, bridges, fencing, railway switch tracks, ponds, dams, ditches, wells, underground irrigation systems, drainage, storm and sanitary sewers, and water supply lines for drinking water, sanitary purposes and fire protection. Reference rule 701—18.35(422,423) relating to drainage tile.

f. Mobile and modular homes installed on foundations.

g. Planted nursery stock.

h. Residential water heaters, water softeners, intercoms, garage door opening equipment, pneumatic tube systems and music and sound equipment (except portable equipment).

i. Safe deposit boxes, drive-up and walk-up windows, night depository equipment, remote TV auto teller systems, vault doors, and camera security equipment (except portable equipment).

j. Seating in auditoriums and theaters and theater stage lights (except portable seating and lighting).

k. Silos and grain storage bins.

l. Storage tanks constructed on the site.

m. Swimming pools (wholly or partially underground (except portable pools)).

n. Truck platform scale foundations.

o. Walk-in cold storage units that become a component part of a building.

701—219.12(423) Tangible personal property which becomes structures. Items which are manufactured as tangible personal property can, by their nature, become structures. However, the determination is factual and must be made on an item-by-item basis. The following is a listing of criteria which courts have used in making such a determination:

1. The degree of architectural and engineering skills necessary to design and construct the structure.

2. The overall scope of the business and the contractual obligations of the person designing and building the structure.

3. The amount and variety of materials needed to complete the structure, including the identity of materials prior to assembly and the complexity of assembly.

4. The size and weight of the structure.

5. The permanency or degree of annexation of the structure to other real property which would affect its mobility.

6. The cost of building, moving or dismantling the structure.

(emphasis added)

The canopies that cover the pumping islands at the Petitioner’s facility are specifically listed as real property in 701 IAC 219.11 set forth above. The lighting fixtures, although a component of the canopy is considered to be a building material. As a result, this would be treated as a being taxable when sold to the contractor. However, the light bulbs or tubes used in the lighting fixtures are considered to be a supply and would not qualify as part of the realty nor are they considered to be machinery or equipment and are subject to tax at the time of purchase by the contractor upon initial purchase and by the Petitioner upon replacement. See 701 IAC 219.3(3).

The installation of the tangible personal property such as the fuel storage tank, submersible pumps, piping, pump housing, fuel ventilation piping, spill container, electrical monitoring system, and distribution systems are encased in concrete. Although the items can be removed, the size of the removal and cost would be great and would result in damage to the underlying realty by leaving a large hole that once held the storage and distribution system. These items are intended to become integral to the concrete structures to the extent that these items have become a part of the realty as well.

The underground storage and the systems required for the fuel distribution to the islands, the dispensing system are very similar to the underground irrigation systems, drainage, storm and sanitary sewers, and water supply lines for drinking water, sanitary purposes and fire protection also specified as real property in 701 IAC 219.11. Thus, these items would become part of the real property.

Based on the items listed and the manner in which they are to be installed in the construction project, the tangible personal property at issue become part of the realty and lose their identity as tangible personal property. As a result, Iowa sales or use tax is due on the purchase of these items by the contractor.

THEREFORE, based on the facts presented by the Petitioner, the foregoing reasoning, and applicable provisions of law, it is the Director’s Order that the listed building materials used to construct the Petitioner’s fuel storage and distribution systems are building materials and supplies and are subject to Iowa sales tax at the time the items are sold to the contractor, pursuant to Iowa Code section 423.2(1)(2007). In addition, the purchases and installation of the various components of the fuel storage and distribution systems are purchases of tangible personal property that become part of the realty. As such, these items of tangible personal property that become realty are subject to Iowa sales or use tax at the time the contractor purchases or withdraws the items from inventory for installation.

Done at Des Moines, Iowa, this 22nd day of March, 2007.

                                                  IOWA DEPARTMENT OF REVENUE AND FINANCE

                                                  ______________________________________

                                                  Mark Schuling, Director