Sale, transfer or exchange of tangible personal property or taxable enumerated services between affiliated corporations, 18.32, 213.24
Notice of Intended Action
Proposing rule making related to affiliated corporations acting as a unit and providing an opportunity for public comment
The Revenue Department hereby proposes to amend Chapter 18, "Taxable and Exempt Sales Determined by Method of Transaction or Usage," and Chapter 213, "Miscellaneous Taxable Sales," Iowa Administrative Code.
Legal Authority for Rule Making
This rule making is proposed under the authority provided in Iowa Code section 421.14.
State or Federal Law Implemented
This rule making implements, in whole or in part, Iowa Code section 423.1(50).
Purpose and Summary
In November 2019, the Department received a petition for a declaratory order, pursuant to Iowa Code section 17A.9 and rule 701—7.24(17A). The petition requested that the Department analyze facts under rule 701—213.24(423) relating to affiliated corporations acting as a unit. Upon review of the rule at issue, the Department determined that a change to its rules regarding affiliated corporations acting as a unit is appropriate.
Before Iowa's conformity to the Streamlined Sales and Use Tax Agreement (Streamlined) in 2005, rule 701—18.32(422,423) was intended to implement Iowa Code section 422.42(12). Prior to 2005, Iowa Code section 422.42(12) defined "person" to include "any individual firm, copartnership, joint adventure, association, corporation, municipal corporation, estate, trust, business trust, receiver, or any other group or combination acting as a unit and the plural as well as the singular number."
In 2005, the Iowa Legislature adopted the Streamlined definition of "person" under current Iowa Code section 423.1(36), which no longer includes the "acting as a unit" language. Subsequently, the Department adopted new rules to reflect the changes brought about by the State's participation in Streamlined. Included in those new rules is rule 701—213.24(423), which is very similar to 701—18.32(422,423). The Department should not have adopted the "acting as a unit" provisions in rule 701—213.24(423) because they no longer have meaning without the "acting as a unit" language in the "person" definition under Iowa Code section 423.1(36). The Department did not rescind or otherwise amend the pre-Streamlined rules at that time.
After reviewing the petition for a declaratory order, the Department has concluded that rescinding rule 701—18.32(422,423) and amending rule 701—213.24(423) is appropriate to improve accuracy and clarity of the Department's rules.
This rule making has no fiscal impact to the State of Iowa.
After analysis and review of this rule making, no impact on jobs has been found.
Any person who believes that the application of the discretionary provisions of this rule making would result in hardship or injustice to that person may petition the Department for a waiver of the discretionary provisions, if any, pursuant to 701—7.28(17A).
Any interested person may submit written or oral comments concerning this proposed rule making. Written or oral comments in response to this rule making must be received by the Department no later than 4:30 p.m. on August 4, 2020. Comments should be directed to:
Department of Revenue
Hoover State Office Building
P.O. Box 10457
Des Moines, Iowa 50306
No public hearing is scheduled at this time. As provided in Iowa Code section 17A.4(1)"b," an oral presentation regarding this rule making may be demanded by 25 interested persons, a governmental subdivision, the Administrative Rules Review Committee, an agency, or an association having 25 or more members.
Review by Administrative Rules Review Committee
The Administrative Rules Review Committee, a bipartisan legislative committee which oversees rule making by executive branch agencies, may, on its own motion or on written request by any individual or group, review this rule making at its regular monthly meeting or at a special meeting. The Committee's meetings are open to the public, and interested persons may be heard as provided in Iowa Code section 17A.8(6).
The following rule-making actions are proposed:
Item 1. Rescind and reserve rule 701—18.32(422,423).
Item 2. Amend rule 701—213.24(423) as follows:
701—213.24(423) Sale, transfer or exchange of tangible personal property or taxable enumerated services between affiliated corporations.
213.24(1) In general. The sales price of the sale, transfer or exchange of tangible personal property or taxable services among affiliated corporations, including but not limited to a parent corporation to a subsidiary corporation, for a consideration is subject to tax. A bookkeeping entry for an "account payable" qualifies as consideration as well as the actual exchange of money or its equivalent. The sales price of transactions between affiliated corporations may not be subject to tax where it can be shown that the affiliated corporations are operating as a unit within the meaning of Iowa Code sections 423.1(32) and 423.1(46).
213.24(2) Affiliated corporations acting as a unit. If an affiliated corporation acts as an agent for another affiliated corporation in a transaction listed in 213.24(1), the corporations may be considered as acting as a unit. There may not be taxable transactions between the affiliates, but this does not create an exemption for the purchase of tangible personal property or taxable services.
Example. Corporation A and Corporation B are affiliated corporations. Corporation A is in the business of negotiation, arbitration, and mediation. Corporation B runs a fleet of taxis. Corporation A acts as Corporation B's agent in negotiating a contract between B and an outside third party C for C to do all of B's vehicle repair at a very favorable price. In spite of a bookkeeping entry listing a sale of the contract for repair from A to B, in securing the contract, the corporations have "acted as a unit," and the "sale" from A to B is not subject to Iowa tax. However, any payments from A to C or from B to C in return for C's performance of taxable vehicle repair would be subject to tax, and C must collect Iowa sales tax on the sales price of those services.
This rule should not be equated with the unitary business concept used in corporation income tax law.