Machinery Defined
As defined in rule 701—215.14(2), machinery is any mechanical, electrical, or electronic device designed and used to perform some function and to produce a certain effect or result.
Machinery includes:
- The basic unit of the machinery
- Any attachment necessary for the basic unit to function
- All devices used or required to control, regulate, or operate a piece of machinery when such devices are both:
- Directly connected with or are an integral piece of the machinery, and
- Used primarily for control, regulation, or operation of machinery
- Devices necessary to the operation of or used in conjunction with what is ordinarily thought of as machinery
Machinery does NOT include:
- Buildings designed specifically to house or support machinery
Equipment Defined
As defined in rule 701—215.14(2), “equipment” refers to devices or tools used to produce a final product or achieve a given result. This includes tables on which property is assembled on an assembly line, if those tables are directly and primarily used in processing by a manufacturer.
Equipment includes, but is not limited to:
- Tables on which property is assembled on an assembly line
- Chairs used by assembly line workers
- Coolers that do not change the nature of materials stored in them
- Equipment that eliminates bacteria
- Palletizers
- Storage bins
- Property used to transport raw, semifinished, or finished goods within a manufacturing plant
- Vehicle-mounted cement mixers if used by a manufacturer, not a contractor (May be subject to a 5% one-time registration fee as part of a vehicle subject to registration)
- Packaging and bagging equipment, including conveyor systems
- Quality control equipment
- Core and mold-making equipment and sand-handling equipment directly and primarily used in the mold-making process by a foundry
- Containers, pallets, packing cases, shipping cases, wrapping materials and similar items used for packaging or facilitating the transportation of tangible personal property to be sold at retail or for resale.
Replacement Parts and Supplies Defined
Iowa Code section 423.3(47)(d)(7) defines “replacement part” as tangible personal property other than computers, computer peripherals, machinery, equipment, or supplies, regardless of the cost or useful life of the tangible personal property, that meets all of the following conditions:
- The tangible personal property replaces a component of a computer, computer peripheral, machinery, or equipment, which component is capable of being separated from the computer, computer peripheral, machinery, or equipment.
- The tangible personal property performs the same or similar function as the component it replaced.
- The tangible personal property restores the computer, computer peripheral, machinery, or equipment to an operational condition, or upgrades or improves the efficiency of the computer, computer peripheral, machinery, or equipment.
Iowa Code section 423.3(47)(d)(8) defines “supplies” as tangible personal property, other than computers, computer peripherals, machinery, equipment, or replacement parts, that meets one of the following conditions:
- The tangible personal property is to be connected to a computer, computer peripheral, machinery, or equipment and requires regular replacement because the property is consumed or deteriorates during use, including but not limited to saw blades, drill bits, filters, and other similar items with a short useful life.
- The tangible personal property is used in conjunction with a computer, computer peripheral, machinery, or equipment and is specially designed for use in manufacturing specific products and may be used interchangeably and intermittently on a particular computer, computer peripheral, machine, or piece of equipment, including but not limited to jigs, dies, tools, and other similar items.
- The tangible personal property comes into physical contact with other tangible personal property used in processing and is used to assist with or maintain conditions necessary for processing, including but not limited to cutting fluids, oils, coolants, lubricants, and other similar items with a short useful life.
- The tangible personal property is directly and primarily used in an activity listed in Iowa Code section 423.3(47)“a”, including but not limited to prototype materials and testing materials.
Computer and Computer Peripheral Defined
As defined in Iowa Code section 423.1(10), “computer” means an electronic device that accepts information in digital or similar form and manipulates the information for a result based on a sequence of instructions. Iowa Code section 423.1(10A) defines “computer peripheral” as “an ancillary device connected to the computer digitally, by cable, or by other medium, used to put information into or get information out of a computer.” For additional discussion of the taxability of computers and computer peripherals, see this additional guidance.
Materials Used To Construct Or Self-construct Computers, Computer Peripherals, Machinery, Equipment, Replacement Parts, And Supplies Defined
As defined in rule 701—215.14(2), “materials used to construct or self-construct computers, computer peripherals, machinery, equipment, replacement parts, and supplies” means tangible personal property that is incorporated into a computer, machinery, equipment, replacement part, or supply when the computer, computer peripheral, machinery, equipment, replacement part, or supply is constructed or assembled.
Pollution Control Equipment Defined
As defined in rule 701—215.20(2), “pollution-control equipment” refers to:
- Any disposal system or apparatus used or placed in operation primarily for the purpose of reducing, controlling, or eliminating air or water pollution
- Any equipment required or certified by a government agency of Iowa or the United States, such as:
- Wastewater treatment facilities
- Scrubbers used in smokestacks
“Pollution-control equipment” does NOT include:
- Noise pollution equipment
- Equipment used only for worker safety, such as a gas mask
Directly and Primarily Defined
To be exempt, machinery, equipment, replacement parts, supplies, computers, computer peripherals, or materials used to construct or self-construct those items must not only be used in processing, but must be used directly and primarily in processing. Rule 701—215.15 provides further detail about the exemption including definitions of “directly used” and “primarily used.”
Property is directly used only if it is used to initiate, sustain, or terminate the transformation of any activity.
To determine if property is directly used, consider the following:
- Physical proximity of the property in question to the activity in which it is used
- Proximity of the time of use of the property in question to the time of use of other property used before and after it in the activity involved
- Active causal relationship between the use of the property in question and the activity involved.
Just because a particular piece of property may be essential to the activity because its use is required by law or practical necessity does not, of itself, mean that the property is directly used.
The following examples are not directly used in manufacturing and processing; machinery and equipment is taxable when used:
- Exclusively for the comfort of workers, such as air cooling, air conditioning, and exhaust systems
- In support operations, such as a machine shop in which production machinery is assembled, maintained, or repaired
- By administrative, accounting, and personnel departments>
- By plant security, fire prevention, first aid, and hospital stations
- In plant cleaning, disposal of scrap and waste, plant communications, lighting, safety, or heating
The primary use of property is the activity or activities for which the property is used more than half of the time.
Processing Defined
“Processing” is defined in rule 701—215.15(3) as "a series of operations in which materials are manufactured, refined, purified, created, combined, transformed, or stored by a manufacturer, ultimately into tangible personal property." In general, processing begins with receiving or producing raw materials and ends at the point the products are delivered for shipment or transferred from the manufacturer.
Receiving or producing raw materials means activities performed on tangible personal property only. Activities performed on real property are not exempt for manufacturing purposes.
Processing Includes:
- Refinement or purification of materials
- Treatment of materials to change their form, context, or condition
- Maintenance of the quality or integrity of materials, components, or products
- Maintenance of environmental conditions necessary for materials, components, or products
- Quality control activities
- Construction of packaging and shipping devices
- Placement into shipping containers or any type of shipping device or medium
- Movement of materials, components, or products until shipment from the manufacturer
Example 1 - processing begins
Company A manufactures fine furniture. It owns a grove of walnut trees which it uses as raw material. Employees cut the trees, transport the logs to the factory, offload them, and store the logs in a warehouse to begin curing the wood before taking it to the sawmill.
Processing begins when the logs are loaded at the grove for transport to the factory.
The same company also buys mahogany logs from a supplier in Honduras. Company A uses its own equipment to offload the logs from railroad cars at its manufacturing facility. It then transports, stores, and saws the logs.
Processing begins when Company A offloads the logs from the railroad cars.
Example 2 - middle stages of processing
Company C is a microbrewery. It uses a variety of kettles, vats, tanks, tubs, and other containers to mix, cook, ferment, settle, age, and store the beer it brews. It also uses a variety of pipes and pumps to move the beer among the various containers involved in brewing.
All stages of this brewing are part of processing. Transforming the raw materials from one state to another, such as fermenting and aging, is part of processing. Simply holding the materials in an existing state, such as storage of hops in a bin or storage of beer prior to bottling, is also a part of processing. Any movement of the beer between containers is an activity which is a part of processing, whether this movement is an integral part of the production of beer or not.
Example 3 - end of processing
After the brewing process is complete, Company C places its beer in various containers, stores it, and moves it to its customers by a common carrier that picks up the beer at the brewery. The following are still part of processing: C’s activities of placing the beer into bottles, cans, and kegs; storing it after packaging; and moving the beer by use of a forklift to the common carrier’s pickup site.