Iowa Administrative Code › Agency 701 - Revenue Department › Title III - Sales, Use, and Excise Tax › Chapter 285 - Taxable and Exempt Sales Determined by Method of Transaction or Usage › Rule 701-285.29 - Processing, a Definition of the Word, Its Beginning and Completion Characterized With Specific Examples of Processing

Current through Register Vol. 47, No. 3, July 24, 2024
(1)
Processing-a definition.
For the purpose of these rules,
				"processing" means an operation or a series of operations whereby tangible
				personal property is subjected to some special treatment by artificial or
				natural means which changes its form, context, or condition, and results in
				marketable tangible personal property. These operations are commonly associated
				with fabricating, compounding, germinating, or manufacturing.
Linwood
				Stone Products Co. v. State Department of Revenue,
175 N.W.2d 393
				(Iowa 1970).
(2)
The
				beginning of processing.
Processing begins when the "form, context, or
				condition" of tangible personal property is changed with the intent of
				eventually transforming the property into a saleable finished product. The
				severance of raw material from real estate is not processing, even if this
				severance results in a change in the form, context, or condition of the real
				estate.
Linwood Stone Products Co. v. State Department of
				Revenue,
175 N. W.2d 393 (Iowa 1970). Furthermore, transportation of
				raw material after it is severed from real estate but prior to the time the
				initial change in the form, context, or condition of the raw material occurs is
				not processing.
Southern Sioux County Rural Water System, Inc. v. Iowa
				Department of Revenue,
383 N.W.2d 585 (Iowa 1986).
(3)
The completion of
				processing.
Processing ends when the property being processed is in
				the form in which it is ultimately intended to be sold at retail,
Hy-Vee Food Stores v. Iowa Department of Revenue,
379 N.W.2d
				37 (Iowa App. 1985). The storage or transport of property after that property
				is transformed into a finished product is not a part of processing.
(4)
Examples of when processing
				begins and ends.
The following examples are intended to clarify but
				not to contradict the explanation of processing set out in subrules 18.29(2)
				and 18.29(3).
EXAMPLE A: A company blasts limestone from the ground,
				  bulldozers pick the limestone up and put it in trucks; these trucks transport
				  the limestone to a crusher some distance from the quarry site. The first change
				  in the "form" or "condition" of the limestone, while it is tangible personal
				  property, occurs when the stone is crushed in the crusher. The blasting of the
				  stone from the ground and its transport to the crusher would be acts
				  preparatory to and not a part of processing. Thus, fuel used in the bulldozers
				  and transport trucks would not be fuel used in processing,
Linwood
				  Stone Products,
supra.
EXAMPLE B: Pumps remove water from underground wells and pump
				  that water through pipes to a water treatment plant. At the treatment plant,
				  the water passes initially through an aeration system which adds oxygen to it.
				  At other points in the plant, potassium and chlorine are added to the water and
				  iron is removed. After these acts are performed, clean, drinkable water exists.
				  The first change, however, in the condition of the water occurs when it passes
				  through the aeration system and oxygen is added to it. The withdrawal of the
				  water from the ground and its transport to the aeration system would not be a
				  part of processing. Thus, electricity used by the pumps which pump the water to
				  the aeration system would not be used in processing. However, by way of
				  contrast, electricity used to transport the water between, for example, the
				  aeration system and the point where potassium is added to the water would be
				  used in processing.
Southern Sioux Rural Water System, Inc.,
supra.
EXAMPLE C: Water is processed in a treatment plant. The last
				  act at the plant necessary to render the water drinkable or a "finished
				  product" is the addition of chlorine. After the addition of chlorine, the water
				  is pumped first into wells and later into water towers where it is held for
				  distribution. The pumping of this drinkable water from the point where the
				  chlorine is added to the wells and the tower is not a part of processing
				  because processing of the water ended with the addition of the chlorine; thus,
				  electricity used in these pumps is not electricity used in processing.
Southern Sioux County Rural Water System, Inc.,
supra.
(5)
Integral part of the
				production of the product test.
Certain activities may be exempt as
				part of processing if those activities are very closely interconnected with, or
				an integral part of, the operation of the processing equipment while processing
				is occurring.
Southern Sioux Rural Water System, Inc.,
supra.
				Merely because an activity is vital or essential to a processing operation does
				not make that activity exempt as part of processing unless the activity itself
				is closely interconnected with, or an integral part of, the operation of the
				processing equipment while processing is occurring.
Mississippi Valley
				Milk Producers Ass'n v. Iowa Dept. of Revenue,
387 N.W.2d 611 (Iowa
				App. 1986). See the nonexclusive example below.
A manufactures nails. In A's factory is a machine which draws
				  steel into long rods the width of whatever nail A may wish to manufacture.
				  After this machine draws the steel into the desired-size rods, the rods are
				  moved to a second machine by a conveyor belt. This second machine cuts the rods
				  into the length of nail which A desires. A second conveyor belt then transports
				  these cut rods to a third machine which sharpens one end of the rod to a point
				  and puts a "nail head" on the other end of the rod. The activities of the three
				  machines are clearly processing, in that they are activities which change the
				  form, context or condition of raw material, and as a result of those
				  activities, marketable tangible personal property or a finished product is
				  created. The two conveyor belts move the partially finished nails from one
				  piece of processing equipment to another while processing is occurring. Since
				  the activities of the conveyors are very closely interconnected with and an
				  integral part of the operation of the various pieces of processing equipment
				  while processing is occurring, the conveyor belts are involved in processing as
				  well.
(6)
Other
				specific examples of processing.
The Iowa Supreme Court has also
				stated that the following activities are processing: manufacturing ice,
				refrigerating cheese to age it from "green" to edible, refrigerating eggs to
				change their flavor, pasteurizing and subsequent refrigeration of milk, "hard"
				freezing of meat and butter for aging, canning vegetables and cooking
				foodstuffs;
Fischer Artificial Ice & Cold Storage Co. v. Iowa State
				Tax Commission,
248 Iowa 497, 81 N.W.2d 437 (1957); and,
Mississippi Valley Milk Producers v. Iowa Dept. of Revenue and
				Finance,
387 N.W.2d 611 (Ia. App. 1986), also crushing of "flat rock"
				limestone and treating limestone in kilns.
Linwood Stone Products Co.
				v. State Dept. of Revenue,
175 N.W.2d 393 (Iowa 1970). See 701-subrule
				17.3(2) for an expanded definition of processing with regard to food
				manufacturing.
(7)
Other
				department rules concerned with processing.
Various sections of the
				Iowa Code set out activities that are defined by statute to be "processing."
				The rules interpreting these statutes for the purposes of sales and use tax law
				are the following:
a.
										701-15.3 (423) Exemption
				certificates, direct pay permits, fuel used in processing, and beer and wine
				wholesalers.
b.
										701-17.2 (422) Fuel used in
				processing-when exempt.
c.
				701-17.3(422,423) Processing exemptions.
d.
										701-17.9 (422,423) Sales of
				breeding livestock, fowl, and certain other property used in agricultural
				production. See 701-subrules 17.9(4), 17.9(5), 17.9(6), and 17.9(7) for
				processing exemptions.
e.
										701-17.14 (422,423) Chemicals,
				solvents, sorbents, or reagents used in processing.
f.
										701-18.3 (422,423) Chemical
				compounds used to treat water.
g.
				701-18.45(422,423) Sale or rental of computers, industrial machinery and
				equipment; refund of and exemption from tax paid for periods prior to July 1,
				1997.
h.
										701-18.58 (422,423) Sales or
				rentals of machinery, equipment, and computers and sales of fuel and
				electricity to manufacturers and sales or rentals of computers to commercial
				enterprises for periods on and after July 1, 1997, but before July 1,
				2016.
i.
										701-26.2 (422) Enumerated
				services exempt. See 701-subrule 26.2(2) for the processing
				exemption.
j.
										701-28.2 (423) Processing of
				property defined.
k. 701-33.3(423)
				Fuel consumed in creating power, heat, or steam for processing or generating
				electric current.
l. 701-33.7(423)
				Property used to manufacture certain vehicles to be leased.
m. For property sold on or after July 1,
				2016, computers, machinery, equipment, replacement parts, and supplies used for
				an exempt purpose under Iowa Code section
				423.3(47). See
				rules 701-230.14 (423) to
				701-230.22
				(423).