Iowa Supreme Court Ruled That Lowe’s Installation Services May Be Taxable

Failure to properly analyze how a service may be classified for sales tax purposes can lead to unexpected liability as Lowe’s found out in this Iowa Supreme Court opinion.

As more and more states expand their sales tax bases to tax services, it is inevitable that sales tax compliance will become more complex.  The main reason for this is that service classifications are not easily defined, which can lead to states taking overly inclusive or aggressive positions on whether a particular service fits within any of the listed taxable services in the state statute.  Even large companies can find themselves on the wrong side of a dispute, as was the case for Lowe’s in a recent Iowa Supreme Court decision addressing the taxability of installment services.[1]

Lowe’s, a home improvement store, sells a variety of products that include lumber, home appliances, electrical and plumbing supplies, etc.  In addition to selling home improvement items, Lowe’s also enters into installation contracts with its customers, whereby Lowe’s agrees to install items,[2] such as windows and doors, faucets, toilets, built-in dishwashers, ceiling fans, patio doors, interior and exterior doors, sinks, vanities, and garbage disposals.  The contracts state specifically that its installation services do not include alterations to existing structures, changing or moving vents or electrical lines/plumbing lines,etc., or installing new electrical boxes.  Lowe’s provides each customer with the price of the items and installation labor.  Lowe’s paid sales/use tax on the cost of the items that are withdrawn from inventory for use in the installment contract.  However, Lowe’s did not charge sales tax on the installation labor.

Upon audit, the Iowa Department of Revenue (“Department”) assessed Lowe’s for sales tax on the installation labor in connection with the items listed above, and this is the subject of dispute in this case.  Interestingly, the Iowa sales tax statute lists almost 75 different categories of taxable services; however, the term “install” or “installation” appears only three times and never as just a stand-alone service.[3]  The state’s position is that Lowe’s installation services are taxable under one or more of the following three classifications of listed taxable services:

• Carpentry – Iowa regulations define this as “[p]ersons 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.”[4]
• Electrical and electronic repair and installation services – Iowa regulations define this as “[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.”[5]
• Pipe fitting and plumbing – Iowa regulations define this as “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.”[6]

The Court agreed with Lowe’s argument that the installation of vanity tops, windows and doors, which involved only carpentry, should not be taxable since the definition of carpentry included only repair and not installation.  With regard to the installation of dishwashers, garbage disposals, faucets, toilets and sinks, the Court agreed with the state’s determination that these involved either electrical or plumbing installation (or both) and are therefore taxable.  Finally, since the installation of ceiling fans involved both carpentry and electrical services, the Court sent the issue back to the Department to address the taxability under the state’s “predominant services rule.”

Lowe’s also argued that regardless of the classification determination above, all of its installation services should be exempt under the state’s statute that exempts “services on or connected with new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer.”[7]  The Court rejected Lowe’s argument, noting that the regulations addressing this exemption take the view that the activity must be larger in scope than just installing certain items, but rather must involve a structure change.[8]  Specifically, the Court stated, “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 involve the scale or structural changes required to result in the equivalent of a new room or structure.” The Court also noted that Lowe’s installment contracts specifically exclude alterations to existing structures.

This case demonstrates the complexities of classifying services for sales tax purposes.  Just because a business describes it service using a certain term that is not specifically listed as taxable does not mean that the state will not attempt to classify it within one of its taxable services.  While these issues can trip up even big box retailers, like Lowe’s, we see these issues arise most often with technology companies, since sales tax statutes often do not anticipate the complexities of classifying technology-related services.

Aprio’s SALT team has the technical expertise and experience in sales tax to assist companies with understanding the potential sales tax implications of their services.  This will ensure that the companies remain in compliance with their sales tax obligations and do not incur unexpected liabilities and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Alissa Graffius, SALT senior associate at alissa.graffius@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the January 2019 SALT Newsletter.

[1] Lowe’s Home Centers, LLC v. Iowa Dep’t of Rev., Case No. 18-0097 (Iowa Sup. Ct., Dec. 14, 2018).

[2] The actual installation is performed by subcontractors.

[3] See Iowa Code § 423.2(6).  In addition to “electrical and electronic repaid and installation” discussed above, the statute lists “sign construction and installation” as well as “installing . . . specified digital products.”

[4] Iowa Admin. Code rule 701-26.12.

[5] Iowa Admin. Code rule 701-26.16.

[6] Iowa Admin. Code rule 701-26.36.

[7] Iowa Code § 423.3(37).

[8] See Iowa Admin. Code rule 701-291.13.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.