IN THE SUPREME COURT OF IOWA

No. 07–1534

Filed October 8, 2010

THE SHERWIN-WILLIAMS COMPANY,

Appellee,

vs.

IOWA DEPARTMENT OF REVENUE,

Appellant.

On review from the Iowa Court of Appeals.

Appeal from the Iowa District Court for Polk County, Carla T. 

Schemmel, Judge.

Department of Revenue seeks further review of court of appeals’ 

decision affirming district court’s decision on judicial review that taxpayer 

was entitled to an exemption from use tax. DECISION OF COURT OF 

APPEALS AND JUDGMENT OF DISTRICT COURT AFFIRMED; CASE 

REMANDED.

Thomas J. Miller, Attorney General, and Marcia E. Mason, Assistant 

Attorney General, for appellant.

Bruce W. Baker of Nyemaster, Goode, West, Hansell & O’Brien, P.C., 

Des Moines, and John A. Panno, Joseph F. Timmons, and Laura T. Gorjanc

of The Sherwin-Williams Company, Cleveland, Ohio, for appellee.
2

TERNUS, Chief Justice.

The appellee, The Sherwin-Williams Company, paid Iowa use tax on 

certain machines used in its Iowa retail outlets to mix base paint with 

colorant. The appellant, Iowa Department of Revenue, denied SherwinWilliams’ refund claim for these taxes, refusing to apply the so-called 

manufacturing exemption set forth in Iowa Code section 422.45(27)(a)(1)

(1999).1 On judicial review, the district court reversed the department’s 

ruling, and the Iowa Court of Appeals affirmed the district court. We granted 

the department’s application for further review. Concluding the exemption 

applies, we affirm the decision of the court of appeals and the judgment of 

the district court.

I. Background Facts and Proceedings.

Sherwin-Williams is an Ohio-based company that manufactures, 

distributes, and sells paint and paint-related products. It owns and operates 

thirty-eight retail outlets in Iowa and, in addition, sells its products to 

independent retail stores such as Menards, Home Depot, and Lowes. Since 

the 1960s, Sherwin-Williams has used a decentralized manufacturing 

process that requires retailers to mix colorants with a base liquid according 

to precise formulas to create usable paint.2

To implement this process, each Sherwin-Williams retail location must 

have a spectrographic color-matching machine that determines the mixing 

formula to achieve the precise color desired; a dispensing/tinting machine, 

known as a mini accutinter, to insert the colorant into the base; and a 

mixer/shaker to combine the colorant and base. The base is a thick liquid 

 1This Code section is now found at Iowa Code section 423.3(47)(a)(1) (2009). 

2Paint has approximately a one-year shelf life after colorant is added to the base. 

The decentralized system allows the company to offer 3000 color choices in different sheens 

without maintaining a large inventory or disposing of great quantities of unsold product, 

which is classified as a hazardous waste. 
3

composed of binders and resins. The colorant, which contains additives 

such as glycol and water, gives the base paint flow and leveling abilities. 

Neither the colorant nor the base is salable at retail or usable by itself.

This legal proceeding began when Sherwin-Williams filed a refund 

claim for use taxes it paid from July 1, 1992, through December 31, 2000,

on the machinery used to produce paint in its Iowa stores. It contended it 

had no liability for use tax, relying on a manufacturing exemption contained 

in Iowa Code section 422.45(27)(a). The department denied a refund for 

taxes paid prior to July 1, 1997, the effective date of an amendment to the 

manufacturing exemption that expanded its scope, and issued a refund 

check for taxes paid after the amendment went into effect. Sherwin-Williams 

requested a review of the department’s denial of a refund of pre-July 1, 1997 

taxes. This review request prompted the department to ask the company for 

additional information. Upon reviewing the additional information submitted 

by Sherwin-Williams, the department not only refused to change its denial of 

a refund for pre-July 1, 1997 taxes, but also revoked its earlier decision

granting a refund for the post-July 1, 1997 taxes. Thereafter, SherwinWilliams formally withdrew its request for a refund of taxes paid prior to the 

1997 expansion of the manufacturing exemption.

The department then issued a notice of tax due in the amount of the 

original refund plus interest, which was followed by a notice of assessment. 

Sherwin-Williams filed a protest, prompting an evidentiary hearing before an

administrative law judge (ALJ). The ALJ issued a proposed decision that 

Sherwin-Williams was a “manufacturer” as that term is defined by statute, 

exempted from payment of use taxes by section 422.45(27)(a). The 

department appealed, and the department director issued a final decision 

that Sherwin-Williams was not a “manufacturer” and did not qualify for the 

exemption. The agency decision was reversed by the district court on 
4

judicial review. As noted above, the court of appeals affirmed the district 

court. This court granted the department’s application for further review.

II. Applicable Statutes and Administrative Rules.

It is helpful to provide a context for our discussion of this case by first 

reviewing the applicable statutes and agency rules. At the time relevant to 

this lawsuit, Iowa Code section 423.2 imposed a five percent tax “on the use 

in this state of tangible personal property purchased for use in this state,” 

calculated on the purchase price of the property. Iowa Code section 423.4(4) 

exempted from use tax tangible personal property exempt from sales tax 

under section 422.45. At issue in this case is the manufacturing exemption 

set forth in section 422.45(27)(a)(1). 

Prior to 1997, certain sales of machinery and equipment were 

exempted from use tax, including

[t]he gross receipts from the sale . . . of industrial machinery, 

equipment and computers . . . if the following conditions are 

met: 

a. The industrial machinery, equipment and computers 

shall be directly and primarily used in the manner described in 

section 428.20 in processing tangible personal property or in 

research and development of new products or processes of 

manufacturing, refining, purifying, combining of different 

materials or packing of meats to be used for the purpose of 

adding value to products . . . . 

. . . . 

b. The industrial machinery, equipment and computers 

must be real property within the scope of section 427A.1, 

subsection 1, paragraph “e” or “j”. 

Iowa Code § 422.45(27) (1997) (emphasis added). Iowa Code section 428.20, 

to which reference is made in paragraph (a), states: 

A person who purchases, receives, or holds personal 

property of any description for the purpose of adding to its value 

by a process of manufacturing, refining, purifying, combining of 

different materials, or by the packing of meats, with a view to 

selling the property for gain or profit, is a “manufacturer” for the 

purpose of this title.
5

Iowa Code § 428.20. Section 427A.1(1)(e), to which reference is made in 

paragraph (b), provides that “[m]achinery used in manufacturing 

establishments” is assessed and taxed “as real property.” The term 

“manufacturing establishments” was not defined in the tax statutes. An 

agency rule, however, provided the following definition: 

A manufacturing establishment is a business entity in which the 

primary activity consists of adding to the value of personal 

property by any process of manufacturing, refining, purifying, 

the packing of meats, or the combination of different materials 

with the intent of selling the product for gain or profit. 

Iowa Admin. Code r. 701—71.1(6)(a) (emphasis added).

During the 1997 legislative session, section 422.45(27) was amended. 

1997 Iowa Acts ch. 87, § 1. According to the explanation contained in the 

house bill that was adopted by the legislature, the bill rewrote the statute “by 

defining those manufacturing activities which give rise to the [sales and use 

tax] exemption.” H.F. 126, 77th G.A., Reg. Sess., explanation (Iowa 1997).

As of July 1, 1997, the effective date of this amendment, section 

422.45(27)(a) exempts the following receipts from use tax: 

The gross receipts from the sale or rental of computers, 

machinery and equipment . . . if such items are any of the 

following: 

(1) Directly and primarily used in processing by a 

manufacturer.

Iowa Code § 422.45(27)(a)(1) (1999) (emphasis added). Iowa Code section 

422.45(27)(d)(4) provides that “ ‘[m]anufacturer’ means as defined in section 

428.20.” 

A comparison of the pre and postamendment versions of this statute 

reveals two notable changes effected by the amendment. First, the 

requirement that the items sold “be real property,” i.e., “used in 

manufacturing establishments,” was eliminated. Second, the amendment 

changed the interplay between the manufacturing exemption and section 
6

428.20. Under the amended statute, the equipment must be used “by a 

manufacturer” as defined in section 428.20. Prior to the 1997 amendment, 

the statute only required that the equipment be used “in the manner 

described in section 428.20.” The fiscal note that accompanied the bill 

predicted a decrease in revenue to the general fund of approximately $4 

million in fiscal year 1998 and thereafter. H.F. 126, 77th G.A., Reg. Sess., 

fiscal note (Iowa 1997). We conclude from this information that the general 

assembly understood the amendment would have the effect of broadening 

the applicability of the manufacturing exemption, thereby resulting in less 

sales and use tax collections. 

The department’s primary argument in support of its position that the 

amended exemption does not apply under the facts of this case is that 

Sherwin-Williams is not a “manufacturer” for purposes of machinery used in 

its retail operation.3 The department relies in part on its administrative rule 

defining the term “manufacturer”:

“Manufacturer” means any . . . corporation that purchases, 

receives, or holds personal property for the purpose of adding to 

its value by any process of manufacturing, refining, purifying, 

combining of different materials, or by packing of meats with an 

intent to sell at a gain or profit. 

Iowa Admin. Code r. 701—18.58(1). This definition essentially mirrors the 

statutory definition of “manufacturer.” Compare id., with Iowa Code 

§ 428.20. The departmental rule goes on, however, to provide examples of 

businesses that do and do not fall within this definition: 

Those who are in the business of printing, newspaper 

publication, bookbinding, lumber milling, and production of 

drugs and agricultural supplies are illustrative, nonexclusive 

examples of manufacturers. Construction contracting; 

 3The department also contends the spectrographic color-matching machines fail to 

qualify for the exemption for the additional reason that they are not “directly used” in 

processing as required by the manufacturing exemption. We discuss this contention 

separately below.
7

remanufacture or rebuilding of tangible personal property (such 

as automobile engines); provision of health care; farming; 

transportation for hire; and the activities of restaurateurs, 

hospitals, medical doctors, and those who merely process data 

are illustrative, nonexclusive examples of businesses which are 

not manufacturers. See Associated General Contractors of Iowa 

v. State Tax Commission, 255 Iowa 673, 123 N.W.2d 922 (1963) 

and River Products Co. v. Board of Review of Washington County, 

332 N.W.2d 116 (Iowa Ct. App. 1982). The term “manufacturer” 

includes a contract manufacturer. Ordinarily, the word does not 

include those commercial enterprises engaged in quarrying or 

mining.

Id. 

Before we consider whether the department correctly decided that 

Sherwin-Williams was not entitled to the manufacturing exemption for 

equipment used in its retail outlets, we must determine the appropriate 

standard of review.

III. Scope of Review.

Our review of this agency decision is governed by Iowa Code chapter 

17A. See Iowa Code § 17A.19.4 The department asserts it has discretion to 

interpret the statutory manufacturing exemption and, therefore, urges us to 

apply the standard of review reserved for matters vested in the discretion of 

the agency: 

The court shall reverse, modify, or grant other appropriate relief 

from agency action, equitable or legal and including declaratory 

relief, if it determines that substantial rights of the person 

seeking judicial relief have been prejudiced because the agency 

action is any of the following: 

. . . . 

l. Based upon an irrational, illogical, or wholly 

unjustifiable interpretation of a provision of law whose 

interpretation has clearly been vested by a provision of law in the 

discretion of the agency. 

Id. § 17A.19(10)(l) (emphasis added). Relying on this standard of review, the 

department claims its interpretation of section 422.45(27)(a)(1)––the 

 4All references to the Iowa Administrative Procedure Act are to the 2009 Iowa Code. 
8

manufacturing exemption––can be overturned only if it is “irrational, illogical 

or wholly unjustifiable.” Id. 

Sherwin-Williams argues only an agency’s “official” interpretation of a 

statute is entitled to deference, and here, the department has no rule on 

point to which deference could be given. On the latter point, we agree. The 

application of the manufacturing exemption in this case turns initially on 

whether Sherwin-Williams is a “manufacturer” for purposes of its use of the 

equipment at issue. With a few insignificant changes, the department’s rule 

defining the term “manufacturer” simply parrots the statutory definition of 

this term, and consequently, the rule does not interpret the statute. See

Webster’s Third New International Dictionary 1182 (unabr. ed. 2002) (defining 

“interpret” as “to explain or tell the meaning of”). The text that follows the 

rule’s paraphrasing of the statutory definition lists examples of businesses 

that do and do not fall within that definition. In our view, this part of the 

rule represents the department’s illustrative application of the statutory 

definition to specific businesses. We conclude, therefore, that the 

department has not further explained––by rule––the meaning of the term 

“manufacturer.” 

We consider, then, whether only an agency’s interpretation of a statute 

as embodied in an agency rule is entitled to deference or whether an 

agency’s interpretation of a statute in a specific matter pending before it can 

also be accorded deference. In addressing this question, we turn first to the 

relevant language of section 17A.19(10)(l), which focuses on the agency’s 

“interpretation of a provision of law whose interpretation has clearly been 

vested by a provision of law in the discretion of the agency.” There is 

nothing in this language that restricts the “irrational, illogical or wholly 

unjustifiable” standard of review to interpretations embodied in an agency 

rule. Therefore, the fact that an agency’s interpretation is made in the 
9

course of a pending proceeding does not mean the agency’s action cannot be 

reviewed under this more deferential standard.5 

We have recently clarified and refined our analysis for deciding when 

an agency has been granted interpretative authority with respect to a 

statute. See Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8, 10–14 (Iowa 

2010). In the absence of an express statement by the legislature granting 

interpretive authority to an agency, we review “the precise language of the 

statute, its context, the purpose of the statute, and the practical 

considerations involved” to determine whether the interpretation of a statute 

has been clearly vested in the discretion of the agency. Arthur E. Bonfield, 

Amendments to Iowa Administrative Procedure Act, Report on Selected 

Provisions to Iowa State Bar Association and Iowa State Government 63

(1998) [hereinafter “Bonfield, Amendments to Iowa Administrative Procedure 

Act”]. This search for legislative intent focuses on the specific statutory 

provision or language at issue. Renda, 784 N.W.2d at 12. Indications that 

an agency has interpretive authority include rule-making authority, 

decision-making or enforcement authority that requires the agency to 

interpret the statutory language, and the agency’s expertise on the subject or 

on the term to be interpreted. Id. at 12–14. 

With respect to the department of revenue, the legislature has granted 

the department “the power and authority to prescribe all rules not 

 5In General Electric Co. v. Iowa State Board of Tax Review, this court held the 

department of revenue was not entitled to deference with respect to the matter at issue in 

that case. 702 N.W.2d 485, 489 (Iowa 2005). We noted there was no “agency regulation 

that [was] directly on point,” and therefore, the agency had “no official interpretation to 

which [the] court should defer.” Id. In reaching this conclusion, we relied on our decision 

in City of Marion v. Iowa Department of Revenue & Finance, 643 N.W.2d 205, 206–07 (Iowa 

2002). In City of Marion, we gave the department’s interpretation of a statute, as set forth in 

an agency rule, “appropriate deference” under section 17A.19(11)(c). 643 N.W.2d at 207. 

We did not state, however, that only an interpretation found in an agency rule could be 

given deference. We disavow any contrary implication in our General Electric opinion. 
10

inconsistent with the provisions of [chapter 422], necessary and advisable for 

its detailed administration and to effectuate its purposes.” Iowa Code 

§ 422.68(1). Moreover, the department director’s enforcement power 

certainly requires the director to interpret the Code provisions relevant to a

taxpayer’s liability. See id. § 422.70 (detailing director’s power to ascertain 

correctness of return and to hold hearings on that issue). We have held in 

prior cases that the legislature has given the department discretion to 

interpret chapter 422. See, e.g., Ranniger v. Iowa Dep’t of Revenue & Fin., 

746 N.W.2d 267, 268 (Iowa 2008); City of Sioux City v. Iowa Dep’t of Revenue 

& Fin., 666 N.W.2d 587, 590 (Iowa 2003).

Notwithstanding these indications of interpretive discretion, it is 

difficult to find a clear legislative delegation of interpretive authority with 

respect to the precise statutory term at issue here––“manufacturer.” 

Significantly, the dispute here does not center on an interpretation of the 

manufacturing exemption in general or even on an interpretation of the 

statutory definition of “manufacturer.” The issue here is simply whether a 

retail establishment can be considered a “manufacturer” under the statutory 

definition of that term. The insurmountable obstacle to finding the 

department has authority to interpret the word “manufacturer” in this 

context is the fact that this word has already been interpreted, i.e., 

explained, by the legislature through its enactment of a statutory definition. 

See id. §§ 422.45(27)(d)(4), 428.20. Under these circumstances, we do not 

think the legislature intended that the department have discretion to 

interpret––give meaning to––this term. 

Because the legislature has not clearly vested the interpretation of the 

word “manufacturer” in the discretion of the agency, the deferential standard 

of review in section 17A.19(10)(l) does not apply. Accordingly, we review the 
11

agency decision on this issue to determine whether it was “[b]ased upon an 

erroneous interpretation of a provision of law.” See id. § 17A.19(10)(c).

IV. Parties’ Positions.

Sherwin-Williams contends the statutory definition of “manufacturer” 

is unambiguous and clearly encompasses the equipment used in its retail 

stores to produce usable paint. It asserts: 

Sherwin-Williams holds personal property for the purpose of 

adding to its value by a process of combining different materials, 

specifically precisely measured base and colorants, with a view 

to selling the newly created colored paint for a gain or profit.

Notably, the director similarly opined in his decision, “It is true that 

Sherwin-Williams may hold property, mix materials, and sell the combined 

product for a profit.” 

Nonetheless, the department contends that only equipment used by 

one whose principal business is manufacturing is exempt. It suggests two 

reasons for this result: (1) the term “manufacturer” is ambiguous, and 

ambiguous terms in a tax exemption statute must be interpreted in favor of

taxation; and (2) allowing the exemption to be applied to a retail 

establishment would produce the absurd result of including “as 

manufacturers restaurants, bars, lemonade stands, and various homeimprovement stores.” To avoid such a broad and absurd interpretation of 

this tax exemption, argues the department, the word “manufacturer” must 

be interpreted consistently with its common meaning, encompassing only 

those whose principal business is manufacturing. Because the equipment at 

issue here is used in establishments whose principal business is retail sales, 

the department argues the manufacturing exemption does not apply. 

In considering the parties’ arguments, we keep in mind that “ ‘[t]ax 

exemption statutes are construed strictly, with all doubts resolved in favor of 

taxation.’ ” Dial Corp. v. Iowa Dep’t of Revenue, 634 N.W.2d 643, 646 (Iowa 
12

2001) (quoting Heartland Lysine, Inc. v. State, 503 N.W.2d 587, 588 (Iowa 

1993)). Sherwin-Williams, as the party relying on the exemption, bears the 

burden of proving it is entitled to the benefit of the exemption. See id.

V. Discussion of “Manufacturer” Definition.

We commence our discussion by determining whether the term 

“manufacturer” is ambiguous. “A statute is ambiguous if reasonable minds 

could differ or be uncertain as to the meaning of the statute.” Carolan v. 

Hill, 553 N.W.2d 882, 887 (Iowa 1996); accord 2A Norman J. Singer & 

J.D. Shambie Singer, Statutes and Statutory Construction § 46:4, at 179 (7th 

ed. 2007) [hereinafter “Sutherland Statutory Construction”] (“A statute is 

ambiguous when it is capable of being understood by reasonably wellinformed persons in two or more different senses.”). “Ambiguity may arise 

from specific language used in a statute or when the provision at issue is 

considered in the context of the entire statute or related statutes.” Midwest 

Auto. III, LLC v. Iowa Dep’t of Transp., 646 N.W.2d 417, 425 (Iowa 2002); 

accord State v. McCullah, 787 N.W.2d 90, 94 (Iowa 2010) (“Ambiguity arises 

in two ways––either from the meaning of specific words or ‘from the general 

scope and meaning of the statute when all of its provisions are examined.’ ” 

(quoting Carolan, 553 N.W.2d at 887)).

It is significant that the legislature has chosen to define the word 

“manufacturer” as used in the manufacturing exemption. “We recognize the 

legislature ‘may act as its own lexicographer.’ When it does so, we are 

normally bound by the legislature’s own definitions.” State v. Fischer, 785 

N.W.2d 697, 702 (Iowa 2010) (quoting Henrich v. Lorenz, 448 N.W.2d 327, 

332 (Iowa 1989)). Under these circumstances, “ ‘the common law and 

dictionary definitions which may not coincide with the legislative definition 

must yield to the language of the legislature.’ ” Hornby v. State, 559 N.W.2d 

23, 25 (Iowa 1997) (quoting State v. Steenhoek, 182 N.W.2d 377, 379 (Iowa 
13

1970)). Therefore, this court is obligated to apply the statutory definition of 

“manufacturer” as written, absent an ambiguity in that definition. 

The department has not directed this court to any language in the 

statutory definition that is capable of being reasonably understood to require 

that a “manufacturer” be principally engaged in the business of 

manufacturing. Rather, it relies on this court’s decision in Associated 

General Contractors of Iowa v. State Tax Commission, 255 Iowa 673, 123 

N.W.2d 922 (1963), in which we held the term “manufacturer” as used in 

Iowa Code section 422.42(11) (1958) was ambiguous. 

In Associated General Contractors, the tax commissioner sought to 

impose a use tax on a paving contractor’s mixing of asphaltic concrete that it 

then used to pave the roadbed. 255 Iowa at 674, 123 N.W.2d at 922–23. 

Iowa Code section 422.43 (1958) imposed a tax on “all sales of tangible 

personal property . . . sold at retail in the state to consumers or users.” Id.

at 677, 123 N.W.2d at 924. The commissioner relied on section 422.42(11),

which provided that “ ‘a sale at retail’ ” included the use of “ ‘tangible 

personal property by the manufacturer thereof, as building materials . . . in 

the performance of construction contracts or for any other purpose except for 

resale or processing.’ ” Id. at 674, 123 N.W.2d at 923 (emphasis added)

(quoting Iowa Code § 422.42(11) (1958)). 

At that time, the term “manufacturer” was defined in section 428.20 

similarly to the current definition, and this statutory definition was, by its 

own terms, applicable to chapter 422. Id. at 675, 123 N.W.2d at 923; see 

also Iowa Code § 428.20 (1958) (defining “manufacturer” as one who adds to 

the value of personal property by any process of manufacturing “with a view 

to selling the same for gain or profit”). Prior to the legislature’s enactment of 

section 422.42(11), this court had suggested the intent underlying the 

statutory definition of “manufacturer” in section 428.20
14

“was to exempt from taxation manufacturers who are engaged in 

manufacturing personal property for sale, and not builders or 

‘constructors’ who are engaged in erecting permanent 

structures, such as paving, which become a permanent part of 

the real estate.”

Id. (emphasis added) (quoting In re Koss Constr. Co., 214 Iowa 125, 128, 241 

N.W. 495, 497 (1932)).6

The ambiguity in section 422.42(11) arose from the fact that this 

statute in essence provided that the manufacturer was the consumer of the 

manufactured product. Id. at 677, 123 N.W.2d at 924. In other words, the 

use contemplated in section 422.42(11) did not contemplate a sale of the 

manufactured personal property to another party. Yet, that statute used the 

defined term, “manufacturer,” which this court had interpreted to 

contemplate a sale of the manufactured goods. 

The commissioner argued the legislature used the term 

“manufacturer” in section 422.42(11) in a sense different than the meaning 

set forth in section 428.20, intending that term to encompass “one who 

performs construction contracts making an article for use in performance of 

such contracts.” Id. at 676, 123 N.W.2d at 923. This court noted the 

ordinary meaning of “manufacturer” supported the commissioner’s 

interpretation of the statute. Id. at 677–78, 123 N.W.2d at 924. For several 

reasons, however, we concluded the term “manufacturer” in section 

422.42(11) had the meaning ascribed to that term in section 428.20, and 

 6It is clear from a reading of In re Koss Construction Co. that the factor prompting the 

court to hold that a paving contractor was not a “manufacturer” was that the contractor did 

not sell the product it manufactured. We said in our opinion,

[i]t is apparent from the stipulation that the appellee does not make a 

product and sell it to some other party who in turn uses it to make a 

pavement. It not only “combines” the several ingredients, but it uses this 

combination itself in making the finished product which becomes a 

permanent part of the realty. 

In re Koss Constr. Co., 214 Iowa at 127, 241 N.W. at 496.
15

therefore, the paving contractor was not a “manufacturer” and was not

subject to the use tax. Id. at 680, 123 N.W.2d at 926. 

We do not find our conclusion that the term “manufacturer” was 

ambiguous as used in section 422.42(11) to be persuasive authority for 

finding the term “manufacturer” ambiguous as used in the manufacturing 

exemption. As our decision in Associated General Contractors made 

apparent, there was an inherent conflict in section 422.42(11) because its 

express terms encompassed a use that did not include a sale, which was at 

odds with the statute’s reference to “the manufacturer,” a defined term that

envisioned a sale of the manufactured goods. The department has identified 

no similar, inherent conflict in section 422.45(27)(a)(1). Section 

422.45(27)(a)(1) exempts sales of equipment “used in processing by a 

manufacturer,” a concept compatible with the statutory definition of 

“manufacturer.”

Perhaps the most support for the department’s position found in the 

Associated General Contractors opinion is the following statement by this 

court regarding an agency rule that referred to a “manufacturer”: “The word 

‘manufacturer’ as used in [the agency rule] is used in the sense of one whose 

principal business is manufacturing.” 255 Iowa at 679, 123 N.W.2d at 925. 

The basis for this conclusion is not apparent from our opinion.7 More 

importantly, however, this statement was not pertinent to our resolution of 

 7The agency rule provided:

“Where a manufacturer uses or consumes tangible personal property 

which has been made, compounded, fabricated or assembled by him, he is 

liable for either retail sales or use tax as the case may be. The measure of the 

tax is two per cent of the cost of the manufacture of the tangible personal 

property so used and consumed.” 

Associated Gen. Contractors, 255 Iowa at 678, 123 N.W.2d at 925 (quoting agency rule 10). 

The court did not explain how this language supported the conclusion that the rule refers to

“one whose principal business is manufacturing.”
16

the statutory interpretation issue in that case, which depended on whether 

one could be a “manufacturer” if one did not intend to sell the manufactured 

property to another. Whether a manufacturer was only “one whose principal 

business is manufacturing” was not outcome determinative in that case or 

even pertinent to the basis for our ultimate decision. This court’s

observation regarding the agency rule was, therefore, dicta. See Wilson v. 

Farm Bureau Mut. Ins. Co., 714 N.W.2d 250, 260 (Iowa 2006) (refusing to 

follow reasoning expressed in prior case because it was dicta, stating 

reasoning was not pertinent to issue that resulted in reversal); Keystone 

Nursing Care Ctr. v. Craddock, 705 N.W.2d 299, 308 (Iowa 2005) (disavowing 

discussion of statute in prior case with respect to specific factual scenario, 

concluding it was dicta because claim made in prior case did not involve 

facts addressed in dicta).

Although the department has not demonstrated an ambiguity arising

from the language of the statutory definition of “manufacturer,” an ambiguity 

may arise from the general scope of the statute when it is considered in its 

entirety. As noted earlier, the department claims a literal interpretation of 

the statutory definition of “manufacturer” would result in application of the 

manufacturing exemption to businesses that typically are not viewed as 

being engaged in manufacturing. The department suggests such a broad 

application of the exemption is absurd.

This court has said that, “[w]here the language is of doubtful meaning, 

or where an adherence to the strict letter would lead . . . to absurdity, or to 

contradictory provisions, the duty of ascertaining the true meaning devolves 

upon the court.”8 Case v. Olson, 234 Iowa 869, 872, 14 N.W.2d 717, 719 

 8This court has also noted that “[a]voidance of unreasonable or absurd consequences 

is one of several rules of construction courts apply only in case of ambiguity.” Kruck v. 

Needles, 259 Iowa 470, 478, 144 N.W.2d 296, 301 (1966) (emphasis added). 

Notwithstanding this statement, we believe that, when a literal interpretation of a statute 
17

(1944) (emphasis added); accord Sutherland Statutory Construction § 45:12, 

at 101 (“It is fundamental, however, that departure from the literal 

construction of a statute is justified when such a construction would 

produce an absurd and unjust result and would clearly be inconsistent with 

the purposes and policies of the act in question.”). Nonetheless, we are 

mindful of the cautionary advice of one commentator that “the absurd 

results doctrine should be used sparingly because it entails the risk that the 

judiciary will displace legislative policy on the basis of speculation that the 

legislature could not have meant what it unmistakably said.” Sutherland 

Statutory Construction § 45:12, at 105–07. The Hawaii Supreme Court 

articulated the proper balance in such situations when it stated: 

[E]ven in the absence of statutory ambiguity, departure from 

literal construction is justified when such construction would 

produce an absurd and unjust result and the literal 

construction in the particular action is clearly inconsistent with 

the purposes and policies of the act.

Pac. Ins. Co. v. Or. Auto. Ins. Co., 490 P.2d 899, 901 (Haw. 1971).

As noted, the department contends application of the manufacturing 

exemption to establishments whose principal business is retail sales 

produces an absurd result. The absurdity of this result is not self-evident, 

however. Although it may appear counterintuitive, we will not ignore clear 

legislative language merely because it leads to a result that seems contrary

to the court’s expectations. See State ex rel. Miller v. Cutty’s Des Moines 

Camping Club, Inc., 694 N.W.2d 518, 524–25 (Iowa 2005) (relying on 

statutory definition, even though it was counterintuitive). 

The department points out a potential contradiction, however, 

observing the same definition of “manufacturer” at issue here applies to 

_________________________

results in absurd consequences that undermine the clear purpose of the statute, an 

ambiguity arises.
18

property-tax issues. See generally Sutherland Statutory Construction § 46:4, 

at 188–89 (“Even when a statute appears unambiguous on its face it can be 

rendered ambiguous by its interaction with and its relation to other 

statutes.”). Under the agency rules applicable to property taxes, the agency 

classifies as industrial only “manufacturing establishments.” Iowa Admin. 

Code r. 701—71.1(6)(a). Under this rule, which we quoted previously,

[a] manufacturing establishment is a business entity in which 

the primary activity consists of adding to the value of personal 

property by any process of manufacturing, refining, purifying, 

the packing of meats, or the combination of different materials 

with the intent of selling the product for gain or profit. 

Id. (emphasis added). In contrast, the department’s classification rules 

provide that “commercial real estate” includes land and structures “which 

are primarily used or intended as a place of business where goods, wares, 

services, or merchandise is stored or offered for sale at wholesale or retail.” 

Id. r. 701—71.1(5) (emphasis added). Sherwin-Williams’ retail stores are 

assessed for property-tax purposes as commercial real estate, not industrial 

real estate.

The primary-use requirement employed in classifying property as 

industrial or commercial makes sense because the entirety of the real estate

(land, improvements, and structures) is subject to property tax. Therefore, 

the whole must be classified as either industrial or commercial; it cannot be 

both. See id. r. 701—71.1(1) (“There can be only one classification per 

property. An assessor shall not assign one classification to the land and a 

different classification to the building or separate classifications to the land 

or separate classifications to the building (dual classification).”). It makes 

sense, then, that the classification of the whole would depend on the primary 

use of the property.
19

But for purposes of taxing the use of equipment located on the 

property, it is not absurd or illogical to impose the tax based on the use of 

the specific equipment as opposed to the taxpayer’s use of the premises as a 

whole. See Heartland Lysine, Inc., 503 N.W.2d at 589 (stating “the propriety 

of a use tax assessment or exemption turns largely on the specific use made 

of the property”). Consequently, we are not convinced it would be absurd for 

the legislature to accord a retailer a manufacturer’s exemption when specific 

equipment is used by the retailer in the same manner and for the same 

purpose as such equipment would be used by a taxpayer whose principal 

business is manufacturing.9

 9Our research revealed two state agency proceedings in which a taxing authority 

considered the very process at issue here––the mixing of base and colorants to produce 

usable paint––for purposes of determining the applicability of relevant tax statutes. See The 

Sherwin-Williams Co. v. Comm’r of Revenue, No. C259901, 2003 WL 21040567 (Mass. App. 

Tax Bd. May 9, 2003) (administrative review of decision of the commissioner of revenue); Op. 

Comm’r of Tax. & Fin., No. TSB–A–99(21)5, 1999 WL 304816 (N.Y. Tax. Comm’r April 8, 

1999) (advisory opinion of commissioner of taxation and finance). In both proceedings, 

Sherwin-Williams’ retail outlets were given tax treatment reserved for manufacturers or 

manufacturing, some indication that the application of Iowa’s manufacturing exemption to 

Sherwin-Williams’ retail outlets is not absurd. 

In the Massachusetts administrative proceeding, the appellate tax board ruled that 

Sherwin-Williams’ retail stores in that state qualified as “manufacturing corporations” based 

on their business of “mix[ing] colorants with base paint to create colored paints” for sale. 

2003 WL 21040567, at *1, *5. The facts before the board showed that “77% of SherwinWilliams’ sales are from the sale of paint, and that 80–90% of those sales are sales of 

colored paint produced at the retail stores.” Id. at *2. The board stated these activities 

fall within the broad definition ascribed to manufacturing of “change wrought 

through the application of forces directed by the human mind, which results 

in the transformation of some preexisting substance or element into 

something different, with a new name, nature or use.” 

Id. at *5 (quoting Assessors of Boston v. Comm’r of Corps. & Taxation, 84 N.E.2d 129, 136 

(Mass. 1949)). 

In the New York tax commissioner’s advisory opinion, Sherwin-Williams asked 

whether its “mixing and blending machinery and equipment, and related computer 

equipment, used in the paint tinting process” in its company-owned retail stores were 

exempt from sales and use tax. 1999 WL 304816, at *1. It relied on an exemption for 

“ ‘[m]achinery or equipment for use . . . directly and predominantly in the production of 

tangible personal property . . . by manufacturing, processing . . . .’ ” Id. at *2 (quoting N.Y. 

Tax Law § 1115(a)(12)). The commissioner opined that “the Color Matching Systems, 

Automatic Colorant Dispensers, Shakers and related computer equipment [were] used 
20

The department also contends giving a retailer like Sherwin-Williams 

the benefit of the manufacturing exemption is contrary to the purpose 

underlying this exemption. Quoting an Oklahoma case, the department 

suggests “[t]he object of this exemption was undoubtedly to encourage 

manufacturing industries to locate in the state.” Dairy Queen of Okla., Inc. v. 

Okla. Tax Comm’n, 238 P.2d 800, 802 (Okla. 1951). An Arizona court, 

however, has suggested a broader purpose of such an exemption: “The 

purpose is to encourage manufacturing businesses and investment in 

manufacturing equipment by exempting sales of such equipment.” Ariz. Dep’t 

of Revenue v. Blue Line Distrib., Inc., 43 P.3d 214, 216 (Ariz. Ct. App. 2002) 

(emphasis added). We cannot conclude that allowing Sherwin-Williams an 

exemption for its investment in equipment to process paint at its retail 

locations in Iowa is contrary to our legislature’s purpose in adopting a 

manufacturing exemption. See State v. Hopkins, 465 N.W.2d 894, 896 (Iowa 

1997) (stating court looks “beyond the ordinary meaning of the statutory 

language when a statute’s literal terms are in conflict with its general 

purpose” (emphasis added)). A significantly stronger showing that legislative 

intent would be undermined by permitting an exemption under the facts of 

this case is required before we will ignore the statutory definition of 

“manufacturer.” See Sutherland Statutory Construction § 46:4, at 178 (“The 

plain meaning of the statute is conclusive, except in a case where a literal 

application of the statute will produce a result demonstrably at odds with the 

intention of the drafters.” (Emphasis added.)). 

We have also examined four cases cited by the department in support 

of its position and conclude they are readily distinguishable. See Blue Line 

Distrib., 43 P.3d 214; HED, Inc. v. Powers, 352 S.E.2d 265 (N.C. Ct. App. 

_________________________

directly in the production of paint for sale” and, therefore, were exempt from sales and use 

tax. Id. at *4.
21

1987); McDonald’s Corp. v. Okla. Tax Comm’n, 563 P.2d 635 (Okla. 1977); 

Dairy Queen of Okla., Inc., 238 P.2d 800. In each of these cases, retail 

establishments, Little Caesar’s Pizza, Hardee’s, McDonald’s, and Dairy 

Queen, were denied the benefit of a manufacturing exemption from sales or 

use tax because they were not a manufacturer or did not engage in 

manufacturing within the meaning of the statutory exemption. Blue Line 

Distrib., 43 P.3d at 216; HED, Inc., 352 S.E.2d at 267; McDonald’s Corp., 563 

P.2d at 641; Dairy Queen of Okla., Inc., 238 P.2d at 802. 

In the Arizona case, the exemption applied to sales of “ ‘[m]achinery, or 

equipment, used directly in manufacturing, [and] processing . . . operations. 

The terms “manufacturing” [and] “processing” . . . as used in this paragraph 

refer to and include those operations commonly understood within their 

ordinary meaning.’ ” Blue Line Distrib., 43 P.3d at 215 (emphasis added)

(quoting Ariz. Rev. Stat. § 42–5061(B)(1) (Supp. 2000)). Given the absence of 

a statutory definition of “manufacturing,” there was no barrier to the

reviewing court’s acceptance of the agency’s rule that interpreted the 

exemption as applying only to “ ‘[m]anufacturing [as] the performance as a 

business of an integrated series of operations’ that transform personal 

property into a different product.” Id. (quoting Ariz. Admin. Code r. 15–5–

120(A)). Applying this agency rule, the Arizona court concluded a Little 

Ceasar’s pizzeria is not commonly understood to be a manufacturing 

operation. Id. at 216. 

The North Carolina exemption considered in the HED, Inc. case applied 

to “manufacturing industries and plants.” 352 S.E.2d at 266. Like the 

Arizona statute, the North Carolina statute did not define these terms, so the 

court applied the common meaning of these words. Id. The North Carolina 

court reviewed decisions from other jurisdictions that had considered 

whether a restaurant qualifies as a manufacturer, and observed: 
22

One discernible pattern is that when the statutes do not provide 

a definition of manufacturing, as is the case in North Carolina, 

courts tend to apply a common sense approach and conclude 

that a restaurant is not a manufacturer. On the other hand, 

when the statute does provide a definition, that definition is 

mechanically applied and courts conclude that a restaurant is a 

manufacturer.

Id. at 267. Relying on the common meaning of “manufacturing,” the 

North Carolina court concluded a Hardee’s restaurant was not a 

“manufacturing” industry or plant. Id. 

In Oklahoma, the manufacturing exemption is more explicit. It 

allowed an exemption for the use of certain machinery and equipment 

“ ‘used by persons in the operation of manufacturing plants.’ ” McDonald’s 

Corp., 563 P.2d at 636 (quoting Okla. Stat. tit. 68, § 1305(p) (1971)). The 

Oklahoma statute further states: “ ‘The term “manufacturing plants” shall 

mean those establishments primarily engaged in manufacturing or 

processing operations, and generally recognized as such.’ ” Id. (emphasis 

added) (quoting Okla. Stat. tit. 68, § 1305(p)). Clearly, the Oklahoma court’s 

decisions in McDonald’s Corp. and Dairy Queen of Oklahoma, Inc. are readily 

distinguishable given the clearly expressed legislative intent that the 

exemption only be given to businesses primarily engaged in manufacturing. 

The comparable Iowa statute simply does not contain that limitation.10

Finally, we state that we are also influenced by the legislative history 

of the manufacturing exemption. As we explained earlier in our opinion, 

prior to the 1997 amendment, the exemption encompassed machinery and 

equipment (1) “used in the manner described in section 428.20” and (2)

qualifying as “real property within the scope of section 427A.1[(1)(e)].” Iowa 

 10Some states specifically exclude certain businesses or establishments that 

incidentally engage in manufacturing or processing. See, e.g., Elias Bros. Rests., Inc. v. 

Treasury Dep’t, 549 N.W.2d 837, 839 (Mich. 1996) (applying exemption that excluded “ ‘the 

preparation of food and beverages by a retailer for retail sale’ ” (quoting Mich. Comp. Laws 

§ 205.94(g)). Iowa’s statutory exemption does not do so.
23

Code § 422.45(27) (1997) (emphasis added). Section 427A.1(1)(e) referred to 

machinery used in “manufacturing establishments,” a term not defined by 

the legislature. Id. § 427A.1(1)(e). The prior statute did not use the term 

“manufacturer” and did not otherwise unambiguously incorporate that term 

or its full definition into the manufacturing exemption other than to 

incorporate “the manner” of use of the machinery and equipment as 

described in section 428.20. Under the prior statute, therefore, the agency 

had much greater leeway in interpreting the term “manufacturing 

establishment” in a manner consistent with its meaning in the property-law 

context.

When the legislature amended the manufacturing exemption in 1997, 

however, it had the stated intent to broaden its applicability. To achieve this 

purpose, the legislature removed the reference to section 427A.1(1)(e) and its 

focus on “manufacturing establishments” and in its place imposed the 

requirement that the entity seeking the exemption be a “manufacturer” “as 

defined in section 428.20.” We are convinced it would be contrary to the 

principles that guide our interpretation of legislative enactments to ignore 

these changes and give the exemption the same meaning with respect to the 

taxpayers who qualify for the exemption that this statute had prior to its

amendment in 1997. 

Accordingly, we reject the department’s contention that only those 

taxpayers who are primarily engaged in manufacturing are eligible for the 

exemption. The department’s interpretation of section 428.20 is, therefore, 

erroneous. We agree with the district court that Sherwin-Williams qualifies 

as a “manufacturer” under section 422.45(27). 

VI. Direct Use of Spectrographic Color-Matching Machine.

In addition to concluding Sherwin-Williams was not a “manufacturer,” 

the department’s director ruled the spectrographic color-matching machine 
24

did not qualify for the exemption because it was not “directly and primarily 

used in processing” as required by section 422.45(27)(a)(1). Before we 

determine whether this ruling should be upheld, we address the standard 

applicable to our review. 

A. Standard of Review. The director’s decision turned on whether 

the color-matching machine was used “directly” in processing. The term

“directly” is not defined in the statute, but is defined in an agency rule. 

Sherwin-Williams does not question the agency’s definition of this term. 

Rather, the dispute between the parties with respect to the color-matching 

machine is the director’s application of that definition to the facts of this 

case. 

In a contested case such as the one before us, the agency has 

discretion in its application of the law to the facts. Iowa Ag Constr. Co. v. 

Iowa State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa 2006) (holding 

application of law to facts in proceeding in which taxpayer sought refund of 

sales/use tax was vested in the discretion of the agency); see also Drake 

Univ. v. Davis, 769 N.W.2d 176, 183 (Iowa 2009) (holding workers’ 

compensation commissioner had discretion to apply the law to the facts in 

contested-case proceeding under workers’ compensation statute). Therefore, 

the appropriate standard of review is found in Iowa Code section 

17A.19(10)(m). Iowa Ag Constr. Co., 723 N.W.2d at 174 (applying standard 

of review found in section 17A.19(10)(m) to agency’s application of law to 

facts in decision denying sales/use tax refund); see also Insituform Techs., 

Inc. v. Employment Appeal Bd., 728 N.W.2d 781, 801 (Iowa 2007) (applying 

same standard of review to agency’s assessment of penalty for OSHA 

violation). 
25

Section 17A.19(10)(m) provides: 

The court shall reverse, modify, or grant other appropriate relief 

from agency action, equitable or legal and including declaratory 

relief, if it determines that substantial rights of the person 

seeking judicial relief have been prejudiced because the agency 

action is any of the following: 

. . . . 

m. Based upon an irrational, illogical, or wholly 

unjustifiable application of law to fact that has clearly been 

vested by a provision of law in the discretion of the agency.

A decision is “irrational” when it is “not governed by or according to reason.” 

Webster’s Third New International Dictionary 1195. A decision is “illogical” 

when it is “contrary to or devoid of logic.” Id. at 1127. A decision is 

“unjustifiable” when it has no foundation in fact or reason. See id. at 2502 

(defining “unjustifiable” as “lacking in . . . justice”); id. at 1228 (defining 

“justice” as “the quality or characteristic of being just, impartial or fair”); id.

(defining “just” as “conforming to fact and reason”). One commentator has 

suggested that the “irrational, illogical, or wholly unjustifiable” standard of 

review is substantively similar to “the unreasonable, arbitrary, capricious, 

and abuse of discretion standards.” Bonfield, Amendments to Iowa 

Administrative Procedure Act 69. 

B. Discussion. As noted, the department asserts the spectrographic 

color-matching machine does not qualify for the tax exemption because it is 

not “directly and primarily used in processing” as required by section 

422.45(27)(a)(1). The color-matching machine determines the mixing 

formula to achieve the precise color desired. In explaining his decision that 

this machine did not qualify for the exemption, the director stated: 

The Spectrograph machine does not come into contact 

with the base or final product being purchased by the customer 

in any way. This machine does not change the substance or 

color of the paint. Instead, this color eye only provides SherwinWilliams with a formula for the color of paint desired by the 

customer. Consequently, . . . the Spectrograph machine is one 
26

step removed from processing and would not qualify for the 

exemption from Iowa sales tax under this statute.

Iowa Code section 422.45(27)(d)(5) defines processing as “a series of 

operations in which materials are manufactured, refined, purified, created, 

combined or transformed by a manufacturer, ultimately into tangible 

personal property.” The statute does not define “directly,” but an agency 

rule states that “[p]roperty is ‘directly used’ only if it is used to initiate, 

sustain, or terminate an exempt activity.” Iowa Admin. Code r. 701—

18.58(1). This rule suggests three factors to consider in determining 

whether property is “directly used”: 

1. The physical proximity of the property in question to 

the activity in which it is used;

2. The 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; and

3. The active causal relationship between the use of the 

property in question and the activity involved. 

Id. Rule 701—18.58(1) also states: “The fact that a particular piece of 

property may be essential to the conduct of the activity because its use is 

required either by law or practical necessity does not, of itself, mean that the 

property is directly used.” The agency’s definition is consistent with the 

dictionary meaning of “directly”: “without any intervening space or time :

next in order.” Webster’s Third New International Dictionary 641; see Iowa 

Ag Constr. Co., 723 N.W.2d at 176 (noting department’s definition of 

“directly” as used in the section 422.45(39) exemption tracked dictionary 

definition, citing Iowa Admin. Code r. 701—18.48(1)(e)).

Applying the agency rule and the factors deemed relevant to 

determining when property is “directly used” in processing, we conclude the 

agency’s decision that the color-matching machines do not qualify for the 

manufacturing exemption is wholly unjustifiable. In contrast to the 
27

machinery and equipment considered in the cases cited by the department, 

which we discuss below, the color-matching machine plays an integral role 

in the actual processing of usable paint. This machine initiates the in-store 

process of manufacturing usable paint by selecting the formula for the 

customer’s desired color. The color-matching machine is integrated with the 

mini accutinter, sending the formula directly to the mini accutinter where 

the proper type and amount of colorant is dispensed into the can of base 

paint. The color-matching machine is located in physical proximity to the 

mini accutinter and the mixer/shaker. The time of use of the color-matching 

machine is immediately prior to the tinting of the base paint. In addition, 

the color-matching machine has an active causal connection to the 

processing of the paint, dictating the type and amount of colorant and base 

paint used in that process. We are convinced the director’s contrary 

conclusion does not conform to the facts and is an unreasonable application 

of the agency rule.

We have studied the four cases upon which the department relies to 

support the director’s determination that the color-matching machines are 

not “directly used” in processing paint and find them distinguishable. In 

Iowa Ag Construction Co., we affirmed the denial of an exemption for a 

mower used to cut grass around hog confinement centers and associated 

sewage lagoons because it was not used directly in the production of 

livestock, as required by the exemption. 723 N.W.2d at 180–81. The mower 

was not part of the process of raising the livestock; it simply supported the 

ancillary environment for that process, a very different situation than that 

presented in the case before us.

In Heartland Lysine, this court affirmed the department’s denial of an 

exemption for electrical equipment that regulated the flow of electricity in a 

lysine plant to ensure the production equipment provided the environment 
28

necessary for the manufacture of lysine. 503 N.W.2d at 590–91. The 

exemption at issue in that case required that the equipment “ ‘be directly 

and primarily used in the manner described in section 428.20 in processing 

tangible personal property.’ ” Id. at 590 (quoting Iowa Code § 422.45(27) 

(1987)). Noting the electrical equipment’s function was “preliminary to the 

actual processing,” this court held the equipment did not “directly perform 

the manufacturing functions contemplated by section 428.20.” Id. at 591. 

In contrast, the color-matching machine at issue in the present case initiates 

the tinting process by sending the required formula to the mini accutinter 

which then dispenses colorant into the base in accordance with that 

formula. See Iowa Admin. Code r. 701—18.58(1) (“Property is ‘directly used’ 

only if it is used to initiate, sustain, or terminate an exempt activity.” 

(Emphasis added.)). 

A third case cited by the department, Dial Corp., 634 N.W.2d 643, 

involved an exemption that also had the same language as the statute at 

issue in the present appeal: “directly and primarily used in . . . processing.” 

634 N.W.2d at 647 (quoting Iowa Code § 422.45(27) (1997)). In Dial Corp., 

we affirmed the denial of the taxpayer’s exemption request for machinery 

and equipment that produced usable electricity for the assembly line, 

holding the equipment played “no part in changing the form, context or 

condition” of the product being manufactured. Id. at 648–49. Citing 

Heartland Lysine, we also noted the equipment’s “function [was] preliminary 

to processing, not part of it.” Id. at 649 (emphasis added). As the 

undisputed facts in the present case show, the function of the colormatching machine is not “preliminary to processing”; rather, this machine

initiates the process, a function falling within the agency rule. 

Finally, in Dain Manufacturing Co. v. Iowa State Tax Commission, 237 

Iowa 531, 22 N.W.2d 786 (1946), we held a drill grinding machine “used to 
29

service the machinery or equipment that was being ‘directly’ used in the 

actual act of processing property” was not within an exemption for 

equipment “directly used” in manufacturing. 237 Iowa at 538, 22 N.W.2d at 

790–91. We noted the drill grinding machine “did not come in physical 

contact with the property that was being made salable or . . . take any part in 

the actual processing of that property.” Id. at 538, 22 N.W.2d at 791 

(emphasis added). This case is also clearly distinguishable from the case 

before us in which the color-matching machine played an integral part in the 

actual processing of the paint. 

While these cases provide some illumination of the meaning of 

“directly used,” the department’s own rule on this subject is the most 

pertinent to our analysis. Focusing on that rule, we conclude the 

department’s application of its rule to the facts of this case to reach a

conclusion that the color-matching machines are not “directly used” in 

processing salable paint has no foundation in fact or reason and is, 

therefore, wholly unjustifiable. Accordingly, we reverse the department’s 

decision holding the color-matching machines are not eligible for the 

manufacturing exemption. 

VII. Conclusion and Disposition.

We hold Sherwin-Williams qualifies for an exemption from use tax for 

the spectrographic color-matching machines, dispensing/tinting machines, 

known as mini accutinters, and the mixers/shakers used in its retail stores 

to process base paint and colorant into usable, salable paint. The decision 

of the court of appeals and the judgment of the district court are affirmed. 

We remand this case to the district court for remand to the department for 

further proceedings consistent with our opinion.

DECISION OF COURT OF APPEALS AND JUDGMENT OF DISTRICT 

COURT AFFIRMED; CASE REMANDED. 

All justices concur except Wiggins, J., who takes no part.