Lowe's Home Centers, LLC v. Iowa Dept of Revenue and Courtney M. Kay-Decker

IN THE SUPREME COURT OF IOWA
No. 18–0097
Filed December 14, 2018
LOWE’S HOME CENTERS, LLC,
Appellant,
vs.
IOWA DEPARTMENT OF REVENUE and COURTNEY M. KAY-DECKER,
Appellees.
Appeal from the Iowa District Court for Polk County, Lawrence P.
McLellan, Judge.
Taxpayer appeals district court judgment upholding department of
revenue’s assessment of sales tax on labor installing home
improvements. AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED WITH INSTRUCTIONS.
E. Kendrick Smith of Jones Day, Atlanta, Georgia, and Allison M.
Heffern and Desirée Kilburg of Shuttleworth & Ingersoll, Cedar Rapids,
for appellant.
Thomas J. Miller, Attorney General, and Hristo Chaprazov and
James D. Miller, Assistant Attorneys General, for appellee.
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WATERMAN, Justice.
In this appeal, we must determine whether the Iowa Department of
Revenue (the Department) erred by assessing sales tax on labor installing
building components sold by Lowe’s Home Centers, L.L.C. Iowa Code
section 423.2(6) (2007) imposes sales tax on many services including
“carpentry,” “electrical and electronic repair and installation,” and “pipe
fitting and plumbing,” terms defined in regulations promulgated by the
Department. But the statute exempts from sales tax services performed
in connection with “new construction, reconstruction, alteration,
expansion, remodeling, or the services of a general building contractor,
architect, or engineer.” Id. § 423.3(37). The regulations distinguish
between services performed for “repairs” and “installation” subject to
sales tax and “remodeling” services exempt from tax. The parties
disagree whether the sales tax applies to labor installing items sold by
Lowe’s to homeowners through installation contracts, specifically
windows, doors, dishwashers, garbage disposals, faucets, toilets, sinks,
vanities, and ceiling fans installed by subcontractors.
Lowe’s protested the Department’s sales tax assessment, and an
administrative law judge (ALJ) on summary judgment found the disputed
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. On intra-agency appeal, the director upheld the sales tax
assessment as taxable “installation” services. On judicial review, the
district court affirmed. We retained Lowe’s’ appeal. Lowe’s does not
challenge the validity of the regulations promulgated by the Department
but contends the agency erred in applying the Iowa Code and
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regulations. The parties disagree on the deference owed to the
Department’s rulings.
On our review, we conclude the Department’s application of law to
fact is entitled to deference and should be upheld unless it is “irrational,
illogical, or wholly unjustifiable.” Iowa Code § 17A.19(10)(m). For the
reasons elaborated below, we uphold the sales tax assessment except as
to carpentry services. The Department’s own regulations limit the
definition of carpentry services subject to sales tax to those performed for
repairs. The director’s final order disavowed the ALJ’s finding that the
installation services constituted repairs, which in our view means the
sales tax did not apply to carpentry for installations other than repairs.
By contrast, the regulations expressly define the electrical and plumbing
services to include installations. The director correctly determined these
installation services by electrical and plumbing subcontractors, which
involved no structural changes to the homes of customers, did not fall
within the statutory exemption for “new construction, reconstruction,
alteration, expansion, remodeling, or the services of a general building
contractor.” Id. § 423.3(37). We strictly construe exemptions to tax
statutes. We therefore affirm in part, reverse in part, and remand with
instructions for the district court to direct the Department to recalculate
the sales tax assessment consistent with this opinion.
I. Background Facts and Proceedings.
Lowe’s operates eleven big-box home improvement stores in Iowa.
It sells a variety of products, including lumber, siding, shingles, paint,
electrical and plumbing supplies, doors, windows, cabinets, sinks, ceiling
fans, and appliances. Lowe’s primarily engages in two types of customer
transactions: over-the-counter retail sales of merchandise and
installation sales contracts.
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To make an over-the-counter retail purchase, the customer selects
products in the store and takes them to a checkout counter. The cashier
scans the products’ bar codes, and the store’s computer system
calculates the sales tax based on the item’s retail price. The customer
pays the sales price and tax at checkout and departs with the
merchandise. These transactions are not at issue in this case.
The home improvements at issue here are installed custom storm
windows and doors, faucets, toilets, built-in dishwashers, ceiling fans,
patio doors, interior and exterior doors, sinks, vanities, and garbage
disposals. Based on the Department’s regulations, the retailer must pay
tax on the cost of materials used during installation. The fighting issue
is whether Lowe’s is required to collect taxes on the installation labor.
The Iowa Code imposes a sales tax on sixty-six categories of services. Id.
§ 423.2(6). At issue are “carpentry,” “electrical and electronic repair and
installation,” and “pipe fitting and plumbing.” Id. The Iowa
Administrative Code provides guidance on which types of activities fall
under each category of taxable services. These services are exempt from
taxation when performed in connection with “new construction,
reconstruction, alteration, expansion, remodeling, or the services of a
general building contractor, architect, or engineer.” Id. § 423.3(37).
To have Lowe’s arrange installation, the customer visits a service
station within the store. The customer describes the project and selects
the products to be installed. Lowe’s issues a printed estimate that states
in part,
Lowes is a supplier of materials only. Lowes does not engage
in the practice of engineering, architecture, or general
contracting. Lowes does not assume any responsibility for
design, engineering, or construction; for the selection or
choice of materials for a general or specific use; for
quantities or sizing of materials; for the use or installation of
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materials; or for compliance with any building code or
standard of workmanship.
(Capitalization modified.). Lowe’s subcontracts with third-party
“installers” who install the products in the customer’s home. The
installer may first visit the customer’s home to outline the scope of the
project, take measurements, and estimate the labor cost and quantity of
materials needed to complete the project. Lowe’s charges the customer a
detailing fee for this service.
If the installation process is standard, or once an installer has
completed an estimate, a description of the materials and the labor cost
estimate is entered into the store’s computer system. The computer
tracks the cost of goods and materials and the installation labor charge.
Lowe’s then prepares an “installed sales contract,” which sets forth 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.
If the customer agrees to the price and terms, the customer and a
Lowe’s representative sign the contract. Lowe’s deducts any prior
detailing fee and the customer goes to the checkout counter to pay the
total project cost. The customer typically leaves the store without the
products and materials purchased through the contract, but with a
contractual right to their installation in his or her home. Lowe’s holds
any in-stock items for the installer to pick up. The customer does not
own the items purchased until they are installed at the customer’s home.
The installer returns surplus materials to the store when the project is
complete.
The terms of the installed sales contracts expressly “assume[]
sound existing substructures, superstructures and points of attachment”
at the purchaser’s home. The contracts typically also include disclaimers
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such as noting the installation services do not include “alterations to
existing structure[s],” “[c]hanging or moving venting,” “[c]hanging or
moving electrical lines,” “[c]hanging or moving plumbing/supply lines,”
or “[i]nstalling new electrical line, additional boxes or switches.” Craig
Price, Lowe’s’ Director of Sales and Use Tax, testified by affidavit and
described Lowe’s’ role in the installation contracts is to
(1) serve as the general building contractor to ensure the
installations are performed correctly;
(2) complete each home improvement for the specified fixed
price; and
(3) absorb any excess costs if the actual labor and/or
material costs exceed the amounts estimated.
If the installation does not meet the customer’s approval, Lowe’s arranges
for corrective measures. Lowe’s is responsible for obtaining licenses and
building permits if needed and warrants that the installation will be
completed in a workmanlike manner. Lowe’s is also responsible for
ensuring the installation work complies with safety rules and building
codes, zoning ordinances, and other laws.
Under the terms of the installed sales contracts, Lowe’s is required
to sell the goods, materials, and installation services at the prices set in
the contract. The contract price includes the cost of goods sold,
installation services, and taxes. 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. Nor do the installers or customers pay sales tax for
the installation services.
In 2007, the Department conducted a sales tax audit of Lowe’s for
the three-year period beginning January 1, 2004, and ending
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December 31, 2006. On January 17, 2008, the Department issued a
sales tax assessment of $1,794,450.40 plus interest on the labor
performed for the installation of various home-related products sold by
Lowe’s. The Department determined that homeowners who received the
installed home improvements should have been separately assessed
sales tax on the labor. Because Lowe’s did not collect this additional tax
from its customers, the Department assessed the tax plus interest
against Lowe’s. This sales tax on the labor was in addition to the sales
tax Lowe’s already paid on the items sold. The Department found this
incidental work was independently taxable as enumerated repair services
under Iowa Code section 423.2(6). The Department concluded that
Lowe’s’ installation contracts did not involve structural changes to real
property, which according to the Department, is a prerequisite to
exempting the labor from sales tax under Iowa Code section 423.3(37)
and its implementing regulations.
Lowe’s and the Department resolved most of the assessment
through informal procedures. Lowe’s filed a timely protest for the sum
remaining in dispute: $249,806.22 including interest through November
30, 2012. Interest continues to accrue monthly. The Department
rejected Lowe’s’ protest and the matter proceeded to an appeal before an
ALJ. The parties conducted discovery and submitted the matter to the
ALJ for summary adjudication.
After a hearing, the ALJ issued a proposed decision granting
summary judgment in favor of the Department. The ALJ found (1) the
installations were taxable as enumerated repair services under Iowa
Code section 423.2(6); (2) the home improvements were not sufficiently
large in scale to qualify as new construction, reconstruction, alteration,
expansion, or remodeling of a building or structure under section
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423.3(37); and (3) the services of a general building contractor are only
exempt if they are performed on or in connection with new construction,
reconstruction, alteration, expansion, or remodeling.
Lowe’s appealed the proposed order to the director of the
Department. The director issued a final order affirming the proposed
order from the ALJ. The director modified the order to conclude that
under the definitions promulgated by the Department, the home
improvement installations Lowe’s performed were not repair services but
were subject to sales tax as installation services.
Lowe’s petitioned the district court for judicial review of the final
order. The district court affirmed the final order, concluding that the
Department’s “application of the law to the facts . . . was not irrational,
illogical or wholly unjustifiable.” Lowe’s appealed the district court
decision, and we retained the appeal.
II. Standard of Review.
Our review is governed by the Iowa Administrative Procedure Act,
Iowa Code section 17A.19. Nance v. Iowa Dep’t of Revenue, 908 N.W.2d
261, 267 (Iowa 2018). The district court acts in an appellate capacity in
exercising judicial review of agency action. Id. We apply the standards
of Iowa Code section 17A.19(10) to determine if we reach the same result
as the district court. Id.Lowe’s does not challenge the validity of the rules promulgated by
the Department to implement chapter 423. 1 Rather, Lowe’s contends the
1TheDepartment’s rulemaking authority to administer chapter 423 is included
in the preceding chapter. Specifically, the Department is empowered to administer the
taxes imposed in section 423.2 “in the same manner and subject to all the provisions
of, and all of the powers, duties, authority, and restrictions contained in . . . sections
422.67 through 422.75.” Iowa Code § 423.42. Iowa Code section 422.68 provides, “The
director shall have the power and authority to prescribe all rules not inconsistent with
the provisions of this chapter, necessary and advisable for its detailed administration
and to effectuate its purposes.” Id. § 422.68(1). Lowe’s does not contest the
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Department has misinterpreted and misapplied the governing provisions.
“We defer to the agency’s interpretation of law when the legislature has
clearly vested that interpretation in the agency’s discretion.” Kay-Decker
v. Iowa State Bd. of Tax Review, 857 N.W.2d 216, 222 (Iowa 2014).
Otherwise, we review the interpretation for correction of errors at law. Id.We find no Iowa Code provision expressly granting the Department
authority to interpret the sales tax provisions in chapter 423. We need
not decide whether the Department has interpretive authority over
chapter 423 because even without any deference to the agency, we agree
with the Department’s interpretation of the governing statutes and rules.
See KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308, 312 (Iowa
2010) (declining to decide whether the Department had interpretive
authority because we agreed with the agency’s interpretation).
Factual determinations as to sales tax obligations are vested in the
Department. Iowa Ag Constr. Co. v. Iowa State Bd. of Tax Review, 723
N.W.2d 167, 173 (Iowa 2006). We are bound by the agency’s factual
findings that are supported by substantial evidence in the record when
the record is viewed as a whole. Iowa Code § 17A.19(10)(f)); Iowa Ag
Constr. Co., 723 N.W.2d at 173. “Because factual determinations are by
law clearly vested in the agency, it follows that application of the law to
the facts is likewise vested by a provision of law in the discretion of the
agency.” Iowa Ag Constr. Co., 723 N.W.2d at 174. “We can therefore
reverse the agency’s application of the law to the facts only if we
determine such application was ‘irrational, illogical, or wholly
unjustifiable.’ ” Id. (quoting Iowa Code § 17A.19(10)(m)).
_______________________
Department’s statutory authority to promulgate rules implementing the sales tax
provisions of chapter 423. Nor does Lowe’s contest the validity of those rules.
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Our review of constitutional questions is de novo. KFC Corp., 792
N.W.2d at 312.
III. Analysis.
This case turns on the application of law to undisputed facts. The
governing law includes the sales tax provisions and exemptions in Iowa
Code chapter 423 and the implementing regulations promulgated by the
Department. We begin our analysis with the applicable canons of
construction for tax statutes and exemptions. Next, we set forth the
operative provisions of the Code and regulations and apply our
deferential review to the Department’s application of that law to the facts.
A. Construction of Tax Statutes. “Statutes which impose taxes
are construed liberally in favor of the taxpayer and strictly against the
taxing body.” Iowa Auto Dealers Ass’n v. Iowa Dep’t of Revenue, 301
N.W.2d 760, 762 (Iowa 1981). But “taxation is the rule, exemption is the
exception.” Iowa Network Servs., Inc. v. Iowa Dep’t of Revenue, 784
N.W.2d 772, 776 (Iowa 2010). “Exemptions from taxation, therefore, are
‘construed strictly against the taxpayer and liberally in favor of the taxing
body.’ ” Id. (quoting Ranniger v. Iowa Dep’t of Revenue & Fin., 746
N.W.2d 267, 269 (Iowa 2008)). All doubts must be resolved in favor of
taxation. Dial Corp. v. Iowa Dep’t of Revenue & Fin., 634 N.W.2d 643,
646 (Iowa 2001). “A taxpayer seeking to come under a tax exemption
statute has the burden of proving an entitlement to the exemption.”
Ballstadt v. Iowa Dep’t of Revenue, 368 N.W.2d 147, 148 (Iowa 1985); see
also Sherwin-Williams Co. v. Iowa Dep’t of Revenue, 789 N.W.2d 417, 424
(Iowa 2010) (same).
B. Governing Iowa Code Provisions and Administrative Rules.
During the relevant time period, the Iowa Code imposed a five percent
sales tax on the furnishing of certain services, including “carpentry,”
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“electrical and electronic repair and installation,” and “pipe fitting and
plumbing” services. Iowa Code § 423.2(5)–(6). But the legislature
included an exemption from sales tax for “[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.” Id. § 423.3(37).
The Iowa Code also imposed a five percent sales tax on “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.” Id. § 423.2(1). Lowe’s does
not contest the imposition of sales tax on the merchandise it sold to
homeowners through the installed sales contracts. Instead, Lowe’s
contests the imposition of sales tax on the labor installing the
merchandise in the customer’s homes. We must determine whether the
installation services were taxable under the Iowa Code.
1. Whether the services were taxable under Iowa Code section
423.2(6). Lowe’s challenges the tax imposed on the labor performed in
the installation of custom storm windows and doors, faucets, toilets,
built-in dishwashers, ceiling fans, patio doors, interior and exterior
doors, sinks, vanities, and garbage disposals. The Department found
these installation services were taxable as carpentry, electrical and
electronic repair and installation, and plumbing and pipe fitting services.
Specifically, the Department found the installation of dishwashers and
garbage disposals involved electrical installation and plumbing; the
installation of ceiling fans involved carpentry and electrical installation;
the installation of vanity tops, windows, storm doors, patio doors, and
interior and exterior doors involved carpentry; and the installation of
faucets, toilets, and sinks involved plumbing.
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The legislature did not codify definitions of the services at issue,
but the Department promulgated regulations that define them. The
regulation defining “carpentry” provides, “Persons engaged in the
business of repairing, as a carpenter, as the trade is known in the usual
course of business, are rendering, furnishing, or performing a service,
the gross receipts from which are subject to tax.” Iowa Admin. Code
r. 701—26.12 (emphasis added). This regulatory definition expressly
limits the scope of taxable carpentry services to repairing and omits the
terms “installing” or “installation.”
“Electrical and electronic repair and installation services” are more
broadly defined to include services performed by “[p]ersons engaged in
the business of repairing or installing electrical wiring, fixtures, switches
in or on real property or repairing or installing any article of personal
property powered by electric current.” Id. r. 701—26.16 (emphasis
added). This regulation expressly encompasses both repairs and
installations.
“ ‘Pipe fitting and plumbing’ shall mean the 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.” Id. r. 701—26.36 (emphasis added). Again, the definition in
this regulation expressly encompasses both repairs and installations.
These regulations are binding on the Department. The
Department acknowledges that the installation services Lowe’s provided
were not repairs. Lowe’s argues that because the definition of carpentry
is limited to repairs and omits installation services, the sales tax did not
apply. We agree. The Department included both installing and repairing
in its definitions for electrical and plumbing services but omitted
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installing from its definition of carpentry. We assume its omission was
intentional and give it effect. See Oyens Feed & Supply, Inc. v.
Primebank, 808 N.W.2d 186, 193 (Iowa 2011) (assuming legislature’s
placement of term in one provision but not another was intentional).
Regardless, “[w]hen an agency elects to be its own lexicographer, persons
are entitled to rely upon the established definitions.” AOL LLC v. Iowa
Dep’t of Revenue, 771 N.W.2d 404, 409 (Iowa 2009). Provisions imposing
taxes are construed strictly against the Department. Iowa Auto Dealers
Ass’n, 301 N.W.2d at 762. We hold that the Department erred by
assessing sales tax on carpentry services for installations not
constituting repairs.
By contrast, the definitions of “electrical and electronic repair and
installation” and “pipe fitting and plumbing” encompass both repairs and
installations. For that reason, the Department’s imposition of sales tax
on those installation services was lawful, subject to the exemption in
Iowa Code section 423.3(37).
According to the Department, the installation of vanity tops,
windows, storm doors, patio doors, and interior and exterior doors
involved carpentry alone without electrical or plumbing services. We
reverse the district court judgment upholding the sales tax on the
installation of those items. But if carpentry services were included on
installations also involving electrical or plumbing services, the
Department on remand must adjust the sales tax assessment subject to
the predominant service rule discussed below.
2. Whether the services fall under the exemption in Iowa Code
section 423.3(37). Lowe’s argues that even if the contracts involved
enumerated services, the services at issue are exempt from taxation
under section 423.3(37). Lowe’s’ argument is two-pronged. First, it
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contends that any installation of the products it sold that become a
permanent fixture of the real estate fall within the statutory exemption
for “new construction, reconstruction, alteration, expansion, [or]
remodeling”—even, for example, the installation of a new ceiling fan in an
existing room. Second, Lowe’s contends the installation services are
exempt as “the services of a general building contractor.” We address
each argument in turn.
i. “[S]ervices on or connected with new construction, reconstruction,
alteration, expansion, [or] remodeling.” We begin with the statutory text.
Section 423.3 exempts from sales tax
[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. The exemption in this subsection also
applies to the sales price on the lease or rental of all
machinery, equipment, and replacement parts directly and
primarily used by owners, contractors, subcontractors, and
builders for new construction, reconstruction, alteration,
expansion, or remodeling of real property or structures and
of all machinery, equipment, and replacement parts which
improve the performance, safety, operation, or efficiency of
the machinery, equipment, and replacement parts so used.
Iowa Code § 423.3(37). The Department promulgated this regulation
implementing section 423.3(37):
The distinction between a repair . . . and new construction,
reconstruction, alteration, expansion and remodeling
activities . . . can, oftentimes, be difficult to grasp.
Therefore, the intent of the parties and the scope of the
project may become the factors which determine whether
certain enumerated services are taxable. An area of
particular difficulty is the distinction between repair and
remodeling. Remodeling a building or other structure means
much more than making repairs or minor changes to it.
Remodeling is a reforming or reshaping of a structure or some
substantial portion of it to the extent that the remodeled
structure or portion of the structure is in large part the
equivalent of a new structure or part thereof.
Iowa Admin. Code r. 701—219.13 (emphasis added).
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Lowe’s does not challenge the validity of this regulation, which has
been in effect since 2005. The legislature has not amended section
423.3(37) in response to this administrative rule. “We consider the
legislature’s inaction as a tacit approval of the [agency’s] action.” City of
Sioux City v. Iowa Dep’t of Revenue & Fin., 666 N.W.2d 587, 592 (Iowa
2003) (noting that the administrative rule being in effect for eleven years
weighs against finding the rule invalid).
Significantly, this regulation explains the exemption applies to
home improvement projects of a size or scale “the equivalent of a new
structure or part thereof.” Iowa Admin. Code r. 701—219.13. The
Department and district court determined that section 423.3(37)’s
exemption does not apply to small-scale installations without structural
changes to the customer’s home. We agree.
The regulation gives examples of projects that constitute “new
construction, reconstruction, alteration, expansion, [and] remodeling”:
a. The building of a garage or adding a garage to an
existing building would be considered new construction.
b. Adding a redwood deck to an existing structure
would be considered new construction.
c. Replacing a complete roof on an existing structure
would be considered reconstruction or alteration.
d. Adding a new room to an existing building would be
considered new construction.
e. Adding a new room by building interior walls would
be considered alteration.
....
i. Rebuilding a structure damaged by flood, fire or
other uncontrollable disaster or casualty would be
considered reconstruction.
j. Building a new wing to an existing building would
be considered an expansion.
k. Rearranging the interior physical structure of a
building would be considered remodeling.
....
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m. Replacing an entire water heater, water softener,
furnace or central air conditioning unit.
Id. r. 701—219.13(2). The foregoing examples involve home improvement
projects of a larger scale than the installation of fixtures or other building
components at issue here—windows, doors, dishwashers, garbage
disposals, toilets, sinks, vanities, and ceiling fans.
Lowe’s nevertheless argues that all of its installation services are
exempt under section 423.3(37) because they were performed on or
connected with new construction, reconstruction, alteration, expansion,
or remodeling. Lowe’s argues for a bright-line distinction to determine
whether a service is subject to sales tax. According to Lowe’s, there are
only two categories of services: repairs, which are taxable, 2 and capital
improvements, which are not taxable under the exemption. Lowe’s
argues there is no “third category” of installation services that are neither
repairs nor exempt under section 423.3(37). We disagree. The
regulation, after providing a list of examples within the exemption,
acknowledges the third category of projects not falling within section
423.3(37)’s exemption that are subject to sales tax on the installation
labor. Iowa Admin. Code r. 701—219.13(3) (“The department would like
to emphasize that facts and motives are important in the determination
of the taxability of services relating to construction activities. However, it
should also be noted that taxes on enumerated services are applicable to
2The regulations define “repair” as,
synonymous with mend, restore, maintain, replace and service. A repair
contemplates an existing structure or tangible personal property which
has become imperfect and constitutes the restoration to a good and
sound condition. 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.
Iowa Admin. Code r. 701—219.13(1).
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repair or installation work that is not a construction activity.” (Emphasis
added.)).
The director of the Department determined that the installation of
the items at issue here did not fall within the exemption in section
423.3(37). The director explained that although “Iowa Administrative
Code 701—219.13 discusses at length the distinction between ‘repair’
and ‘remodeling[,]’ [t]his discussion does not preclude an alternate
context in which enumerated services can be performed by a contractor-
retailer.” The district court affirmed, stating,
The ALJ’s and director’s conclusions that the Construction
Exemption requires activity that is significantly larger in size
and scope than the Lowe’s installation contracts are not
irrational, illogical or wholly unjustifiable. Rule 701—219.13
demonstrates that the Department since at least 2005 has
construed new construction, reconstruction, alteration,
expansion, or remodeling to be more than “minor changes.”
To be subject to the Construction Exemption the activity
must constitute “a reforming or reshaping of a structure or
some substantial portion of it to the extent that the
remodeled structure or portion of the structure is in large
part the equivalent of a new structure or part thereof.” A
review of the cases cited in the rule confirms this concept.
The conclusion reached by the director on this issue is not
irrational, illogical or wholly unjustifiable.
(Footnotes omitted.) We agree with the Department and district court.
Exemptions are construed strictly against the taxpayer. Iowa Network
Servs., Inc., 784 N.W.2d at 776. We must read chapter 423 as a whole,
and harmonize its provisions. Lowe’s’ interpretation would broaden the
exemption in 423.3(37) to any service that is not a repair, in conflict with
section 423.2(6) imposing a sales tax on electrical and plumbing
installation services. We decline to construe the statutory exemption to
encompass the installation of any item that becomes a fixture.
Installations of items such as sinks or ceiling fans, without more, do not
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involve the scale or structural changes required to result in the
equivalent of a new room or structure.
To the contrary, the terms of the Lowe’s installed sales contracts
take the transactions at issue outside the scope of section 423.3(37).
The contracts expressly “assume[] sound existing substructures,
superstructure and points of attachment” at the purchaser’s home.
Lowe’s has also included in the installed sales contracts disclaimers such
as the installation services do not include “[a]ny alterations to [the]
existing structure,” “[c]hanging or moving or electrical lines,” “[c]hanging
or moving plumbing/supply lines,” “[c]hanging or moving venting,”
“[m]odifying existing cabinet(s) or countertop,” or “[r]eframing or
alterations to existing structure or carpentry work resulting from old or
damaged structure.” The installations at issue did not involve structural
changes of the type that would fall within section 423.3(37)’s exemption
for new construction, reconstruction, alteration, expansion, or
remodeling. The Department’s determination that the exemption does
not apply to the installation services was not irrational, illogical, or
wholly unjustifiable. We therefore affirm that determination.
ii. “[T]he services of a general building contractor, architect, or
engineer.” Lowe’s also argues that it was performing “the services of a
general building contractor” within the meaning of section 423.3(37).
Craig Price testified that Lowe’s “served as the general building
contractor to ensure that the installation was performed correctly.” The
Department responds that the installation services subject to the sales
tax were actually performed by subcontractors, not by Lowe’s. We must
interpret the words in context. The exemption includes “general building
contractors,” with “architects, and engineers.” Under the canon of
statutory construction noscitur a sociis, “the meanings of particular
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words may be indicated or controlled by associated words.” Des Moines
Flying Serv., Inc. v. Aerial Servs., Inc., 880 N.W.2d 212, 221 (Iowa 2016)
(quoting Peak v. Adams, 799 N.W.2d 535, 547 (Iowa 2011)). Reading
those terms together supports the Department’s plain language
interpretation that the work of a general building contractor on a project,
like that of the architect or engineer, differs from the physical installation
work actually performed in this case by subcontractors. Rather, the
services of “a general building contractor, architect, or engineer” typically
involve the design and planning for the project, and work overseeing and
coordinating the subcontractors performing the physical installations.
Indeed, the Lowe’s printed estimates in the agency record include the
disclaimer stating, “Lowes is a supplier of materials only. Lowes does not
engage in the practice of engineering, architecture, or general
contracting.” (Capitalization modified.) As noted, the terms of Lowe’s
installed sales contracts provide for straightforward physical installations
without the type of structural changes to the home that require the
services of a general building contractor, architect, or engineer. In any
event, the sales tax was imposed on the installation labor performed by
subcontractors, not Lowe’s.
Moreover, the Department’s regulations limit the exemption to
services the general building contractor performs on or connected with
new construction, reconstruction, alteration, expansion, or remodeling.
See, e.g., Iowa Admin. Code r. 701—219.1 (“Contractors may also be
retailers of tangible personal property and taxable enumerated services.
It should be noted that these services are exempt from taxation when
performed on or in connection with new construction, reconstruction,
alteration, expansion, or remodeling of a building or structure.”). Lowe’s
does not challenge the validity of this regulation, which has been in effect
20
since 2005. See City of Sioux City, 666 N.W.2d at 592 (considering
legislature’s inaction as tacit approval). We reiterate that we strictly
construe exemptions against the taxpayer. Sherwin-Williams Co., 789
N.W.2d at 424. For those reasons, we affirm the Department’s rejection
of Lowe’s general building contractor argument.
3. The contractor-retailer rule. Lowe’s also relies on Iowa Code
section 423.2(1)(b), known as the “contractor-retailer rule,” which
governs the timing and payee for the sales tax on building materials and
provides,
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.
Under this provision, Lowe’s as a contractor-retailer pays sales tax
when the property “is withdrawn from inventory for construction
purposes.” Lowe’s argues that the Iowa Contractors Guide (ICG),3
published by the Department, provides that any installation labor
provided pursuant to a construction contract must be excluded from
sales tax because the contractor-retailer “does not collect sales tax from
the final customer.” Lowe’s reliance on the ICG and the contractor-
retailer rule is misplaced. Section 423.2(1)(b) addresses only the sales
tax on items of personal property, not on the labor to install them. The
Department has not imposed sales tax on services in a manner
3Iowa Dep’t of Revenue, Iowa Contractor’s Guide (2004).
21
inconsistent with its ICG. To the contrary, the ICG applies to
“construction contracts” expressly defined as “an agreement that
provides labor and materials to erect a structure for a second party.”
ICG at 1. As noted above, labor involved in new construction or other
structural changes to buildings falls within the exemption for “new
construction, reconstruction, alteration, expansion, [or] remodeling.”
Iowa Code § 423.3(37).
C. Lowe’s Remaining Arguments. Lowe’s raises a number of
additional arguments. We will address each argument in turn.
1. Predominant service rule. Lowe’s argues that it is exempt from
taxation because the primary service provided under these contracts was
the installation of nontaxable capital improvements. Under the
predominant service rule,
When taxable and nontaxable services are performed as part
of one transaction and the charge for the transaction is a
lump-sum fee that is not itemized or separately contracted,
the taxation of the fee for the entire transaction is
determined by the predominant service being performed.
Iowa Movers and Warehousemen’s Association v. Briggs, 237
N.W.2d 759 (Iowa 1976). If the predominant service being
provided in the transaction is a taxable enumerated service,
then the entire fee for the transaction is subject to Iowa tax.
However, if the predominant service being performed is a
nontaxable service, then the entire fee charged for the
transaction is not subject to Iowa tax.
Iowa Admin. Code r. 701—26.1(2).
The Iowa Tax Review Committee explained this rule with regard to
installing an air conditioning system:
Some enumerated services may be involved with the
installation of the air conditioning equipment such as
electrical installation and pipe fitting and plumbing services.
However, these enumerated services were incidental to
the overall installation of the air conditioning equipment. It
has been the Department’s position that, where a name[d]
service is incidental to a service not specifically enumerated,
22
the entire service is not subject to tax. Therefore it is the
position of the Committee that the installation of air
conditioning systems, whether a new installation or a
replacement, is exempt from the sales tax.
J. Elliott Hibbs, Iowa Tax Review Comm., Findings of the Tax Review
Committee in Regard to Tax Question by Field Personnel (May 11, 1976).
Lowe’s argues the homeowners were purchasing new, installed
home improvements and that all of the services at issue in this case were
“on or connected with new construction, reconstruction, alteration,
expansion, [or] remodeling” of real property. Lowe’s argues that because
the predominant service was installing permanent capital improvements,
pursuant to the predominant service rule, the incidental labor portions of
installation contracts that fall under enumerated tax sections are exempt
from taxation.
We have already determined that Lowe’s was performing
installation services subject to sales tax rather than services exempt
under Iowa Code section 423.3(37). Accordingly, Lowe’s reliance on the
predominant service rule is without merit on installation labor not
involving carpentry.
The predominant service rule does come into play for installations
involving carpentry and plumbing or electrical services. For example, the
Department found that the installation of ceiling fans involved both
carpentry and electrical services. Whether sales tax applies for the
installation of ceiling fans should be determined under the predominant
service rule. Neither the Department nor the district court made that
determination. We will not decide that issue on appeal. See Plowman v.
Fort Madison Cmty. Hosp., 896 N.W.2d 393, 413 (Iowa 2017) (“A supreme
court is ‘a court of review, not of first view.’ ” (quoting Cutter v. Wilkinson,
544 U.S. 709, 718 n.7, 125 S. Ct. 2113, 2120 n.7 (2005)); see also
23
Felderman v. City of Maquoketa, 731 N.W.2d 676, 679 (Iowa 2007)
(“Ordinarily we do not decide an issue on appeal that was not raised by a
party or decided by the district court.”). Rather, that determination must
be made by the Department on remand as to ceiling fan installations and
any other transactions involving carpentry and electrical or plumbing
services. Sales tax shall not be assessed on labor in transactions in
which the predominant service was carpentry installation.
2. Bifurcation. Lowe’s argues that because the installation
contracts charged a lump sum, the Department erred by splitting the
transaction into separate sales tax events for the goods and labor to be
paid by separate taxpayers. Lowe’s argues that neither the Iowa Code
nor the Department’s regulations authorize the bifurcation of sales tax
charges.
Lowe’s argues that there are only three types of transactions that a
contractor-retailer can perform: (1) an over-the-counter retail sale of
products, for which the customer owes sales tax for the entire
transaction; (2) the installation of products pursuant to a construction
contract, for which the contractor-retailer would owe use tax on the cost
of installed product; and (3) repair of a product for which the customer
would owe sales tax on the entire transaction. Iowa Admin. Code r.
701—219.4. Lowe’s argues that in each scenario, one taxpayer owes
only one tax. Lowe’s argues that no regulations allow bifurcating a
transaction into separately taxable events.
The administrative code explains that
[chapter 423] details the obligation of contractors,
contractor-retailers, retailers, and repairpersons to pay or
collect sales tax on the sales price from sales of building
materials, supplies, equipment, and other tangible personal
property and the obligation of these parties to collect tax or
claim exemption for their performances of taxable services.
24
Iowa Admin. Code r. 701—219.1. The director of the Department found
that Lowe’s bifurcation argument was without merit:
The statutes at issue are separate and distinct. One
imposes tax on the owner, contractor, subcontractor or
builder for materials purchased to erect buildings or alter,
repair or improve real property. Iowa Code § 423.2(1)(b)
(emphasis added). The other statute exempts the sales price
of enumerated services when they are performed in
connection with new construction, reconstruction, alteration,
expansion or remodeling. Id. § 423.3(37). There is nothing
in the exemption statute that exempts the sales price of
services when performed in the context of a repair or
improvement of real property that occurs outside the scope
of a larger construction project.
We agree with the Department and reject Lowe’s bifurcation argument.
3. Other states. Lowe’s argues that Department’s interpretation of
the relevant statutes conflicts with the interpretations of other state
courts and taxing authorities and violates Iowa’s commitment to
uniformity under the Streamlined Sales and Use Tax Agreement (SSUTA).
See Iowa Code § 423.11. Relying on decisions from other jurisdictions,
Lowe’s contends that the Department’s position makes Iowa an outlier.
The Department responds that the SSUTA focuses on sales tax
administration and not on the substance of the law, and while it strives
for uniformity in the definitions of items subject to sales tax, it does not
require members to have the same taxable transactions and exemptions.
The Department notes that the cases from other states are
distinguishable because the text of their respective statutes differs
materially from Iowa’s. We agree with the Department.
The purpose of the SSUTA is “to simplify and modernize sales and
use tax administration in order to substantially reduce the burden of tax
compliance for all sellers and for all types of commerce.” Id. § 423.8.
But section 103 of the SSUTA states, “This Agreement shall not be
25
construed as intending to influence a member state to impose a tax on or
provide an exemption from tax for any item or service.” Streamlined
Sales and Use Tax Agreement § 103 (2002) (Streamlined Sales Tax
Governing Bd., Inc., amended 2018); see also Iowa Code § 423.11 (noting
that the agreement requires uniform rates, standards, and definitions,
but states are able to make policy choices consistent with the rates,
standards, and definitions).
Lowe’s relies on decisions from Indiana, Kansas, and Oklahoma to
support its argument that the installation services here are not subject to
tax. The Indiana and Oklahoma cases addressed the issue of taxing the
products, not the installation labor. See, e.g., Lowe’s Home Ctrs., LLC v.
Ind. Dep’t of State Revenue, 23 N.E.3d 52 (Ind. T.C. 2014); In re Sales Tax
& Use Tax Protest of Lowe’s Home Ctrs., LLC, No. P-09-195-H (Okla. Tax
Comm’n July 7, 2014), aff’d, 2015 WL 1530422 (Okla. Tax Comm’n
Feb. 26, 2015).
The Kansas case addressed installation services, but the Kansas
statute differs from Iowa’s by providing a much broader exemption. The
Kansas statute stated,
No tax shall be imposed upon the service of installing or
applying tangible personal property in connection with the
original construction of a building, or facility, the original
construction, reconstruction, restoration, remodeling,
renovation, repair, or replacement of a residence or the
construction, reconstruction, restoration, replacement or
repair of a bridge or highway.
In re Lowe’s Home Ctrs., L.L.C., No. 2014-34-DT, at 8–9 (Kan. B.T.A. Jan.
21, 2016) (quoting Kan. Stat. Ann. § 79–3603(p) (Supp. 2012)). The
Kansas Board of Tax Appeals found,
Lowe’s has satisfied its burdens by presenting substantial
credible, mostly uncontroverted evidence that the built-in
transactions at issue all involved improvements to
26
residential properties and, further, that Lowe’s, in
undertaking these installations, was acting as a contractor.
Moreover, the Board finds these installations of real property
improvements were performed in connection with the
reconstruction, restoration, remodeling, renovation, repair
and/or replacement of a residence and are, therefore,
exempt from the retailers’ sale tax pursuant to [the relevant
tax statute].
Id. at 14. The Kansas Court of Appeals, in an unpublished decision,
affirmed the Board of Tax Appeals. In re Lowe’s Home Ctrs., L.L.C.,
No. 115,254, 2017 WL 1369944, at *26 (Kan. Ct. App. Apr. 14, 2017)
(per curiam). The court declined to rely on decisions cited by Lowe’s from
other jurisdictions, noting “the statutes in those states differ from the
statutes in Kansas.” Id. at *23.
For the same reason, we decline to rely on cases from other states
interpreting statutes that differ from Iowa Code chapter 423. We must
apply Iowa’s tax statute as written. As explained above, the Department
correctly assessed sales tax on the electrical and plumbing installation
services.
4. Constitutional claims. Lowe’s argues that the Department
violated its federal and state constitutional rights to due process and
equal protection. The district court found that Lowe’s had failed to
preserve the due process issue for review because Lowe’s failed to raise
the issue before the agency. Lowe’s argues that it raised a due process
challenge in paragraphs thirty-nine through forty-five of its amended
protest. These paragraphs discuss Lowe’s’ claim that the Department’s
attempt to apply the electrical services rule to contractors and other
nonelectrical construction services violates the Iowa Administrative
Procedure Act.
On appeal, Lowe’s argues that the provisions at issue are
unconstitutionally vague. The void-for-vagueness doctrine has three
27
principles: (1) the “statute cannot be so vague that it does not give
persons of ordinary understanding fair notice that certain conduct is
prohibited[,]” (2) the statute “provide[s] those clothed with authority
sufficient guidance to prevent the exercise of power in an arbitrary or
discriminatory fashion[,]” and (3) the “statute cannot sweep so broadly as
to prohibit substantial amounts of constitutionally-protected activities.”
State v. Nail, 743 N.W.2d 535, 539 (Iowa 2007).
Lowe’s argues that the statutes at issue here are
unconstitutionally vague because, when reading the statutes together
with the applicable regulations and the SSUTA, there was no authority
for the Department to have assessed sales tax against Lowe’s related to
incidental installation labor, thereby violating Lowe’s right to due
process.
We agree with the district court that Lowe’s failed to raise a due
process challenge before the agency. Regardless, Lowe’s’ due process
challenge is without merit. When reading the statutes and regulations,
we conclude that a person of ordinary understanding would have fair
notice of what activities are taxable. The Department is not permitted to
exercise its authority arbitrarily or discriminatorily under the statute and
regulations, and Lowe’s has failed to show that the sweep of the statute
is unconstitutionally overinclusive.
With regard to equal protection, Lowe’s argues that the structural
change requirement directly conflicts with the Department’s published
regulations and subjects Lowe’s to a higher tax burden than other
contractors. For that reason, Lowe’s argues Department has violated its
right to equal protection. Lowe’s raises this claim under the Equal
Protection Clause of the Fourteenth Amendment of the United States
28
Constitution and article I, section 6 of the Iowa Constitution. 4 “[O]n a
basic level, both constitutions establish the general rule that similarly
situated citizens should be treated alike.” LSCP, LLLP v. Kay-Decker, 861
N.W.2d 846, 856 (Iowa 2015).
“The equal protection clause . . . protects the individual from state
action which selects him out for discriminatory treatment by subjecting
him to taxes not imposed on others of the same class.” Allegheny
Pittsburgh Coal Co. v. Cty. Comm’n, 488 U.S. 336, 345–46, 109 S. Ct.
633, 639 (1989) (quoting Hillsborough Township v. Cromwell, 326 U.S.
620, 623, 66 S. Ct. 445, 448 (1946)). “[T]he legislature acts with broad
authority in the realm of taxation.” LSCP, LLLP, 861 N.W.2d at 859. “We
recognize a presumption favoring the constitutionality of taxing statutes.”
Sperfslage v. Ames City Bd. of Review, 480 N.W.2d 47, 49 (Iowa 1992).
We review the challenged tax statutes under the rational basis test.
LSCP, LLLP, 861 N.W.2d at 860. “The rational basis standard is easily
met in challenges to tax statutes.” Qwest Corp. v. Iowa State Bd. of Tax
Review, 829 N.W.2d 550, 558 (Iowa 2013) (quoting Hearst Corp. v. Iowa
Dep’t of Revenue & Fin., 461 N.W.2d 295, 306 (Iowa 1990)).
While both the state and federal constitutional provisions on a
basic level establish the general rule that similarly situated citizens
should be treated alike, “[w]e may conclude [article I, section 6] is more
protective” than the [Equal Protection Clause of the Fourteenth
Amendment]. Tyler v. Iowa Dep’t of Revenue, 904 N.W.2d 162, 166 (Iowa
2017) (alterations in original) (quoting LSCP, LLP, 861 N.W.2d at 856);
Racing Ass’n of Cent. Iowa v. Fitzgerald (RACI II), 675 N.W.2d 1, 5–7
4Article I, section 6 provides, “All laws of a general nature shall have a uniform
operation; the general assembly shall not grant to any citizen, or class of citizens,
privileges or immunities, which, upon the same terms shall not equally belong to all
citizens.” Iowa Const. art. I, § 6.
29
(Iowa 2004). In RACI II, we applied the rational basis test more
stringently than the United States Supreme Court in a taxation context.
Id. We have applied the RACI II test in other tax cases. See Tyler, 904
N.W.2d at 165–72; LSCP, LLP, 861 N.W.2d at 856–58; Qwest Corp., 829
N.W.2d at 558–66. Here, however, even under the approach of RACI II
and prevailing federal law, Lowe’s has failed to mount a successful equal
protection attack.
“The first step of [analyzing] an equal protection claim is to identify
the classes of similarly situated persons singled out for differential
treatment.” LSCP, LLLP, 861 N.W.2d at 859 (alteration in original)
(quoting Grovijohn v. Virjon, Inc., 643 N.W.2d 200, 204 (Iowa 2002)). “If a
plaintiff fails to articulate, and the court is unable to identify, a class of
similarly situated individuals who are allegedly treated differently under
the challenged statute,’ our analysis ends.” Id. (quoting Timberland
Partners XXI, LLP v. Iowa Dep’t of Revenue, 757 N.W.2d 172, 175 (Iowa
2008)). The district court determined that
[s]ection 423.2(6)(a) provides that all enumerated services
are subject to taxation. The statute provides that the
enumerated services may be exempt from taxation if the
taxpayer can establish that the services provided meet the
Construction Exemption. Thus every contractor including
Lowe’s is being treated the same. If Lowe’s could have
established that its installation contracts were performed on
or in connection with new construction, reconstruction,
expansion, alteration or remodeling they would have been
exempt. In this case they could not but Lowe’s inability to
establish the necessary facts to demonstrate the applicability
of the exemption does not create an equal protection
violation.
We agree with the district court that every contractor installing home
improvements faces the same sales tax consequences subject to the
same regulations and exemptions, without disparate treatment. This
30
legal conclusion is fatal to Lowe’s equal protection claim under the Iowa
and Federal Constitutions. See LSCP, LLLP, 861 N.W.2d at 859.
IV. DISPOSITION.
For these reasons, we affirm in part and reverse in part the
judgment of the district court. The Department’s assessment is upheld
except as to those transactions in which the predominant service or only
service provided was carpentry installation work. We remand the case
with instructions for the district court to direct the Department to
recalculate the sales tax assessment consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
WITH INSTRUCTIONS.