Home Improvement Labor Subcontracted by Big Box Retailer is Subject to Iowa Sales Tax

The Supreme Court of Iowa has ruled that installation labor for specific home improvement projects subcontracted by Lowe’s is subject to Iowa sales tax while other specified subcontracted  installation labor is exempt. Lowe’s had appealed a district court’s judgement affirming the Iowa Department of Revenue’s (DOR) sales tax assessment on labor to install home improvements. The district court had affirmed that the labor in question was properly taxed as repairs and that a general contractor’s services are only exempt if performed in connection with new construction, reconstruction, alteration, expansion, or remodeling.

Lowe’s subcontracts with third-party installers to install products such as windows, doors, dishwashers, toilets, sinks and ceiling fans in Lowe’s customers’ homes. Lowe’s prepares an installed sales contract indicating the cost of materials, cost of labor, sales tax charges, and additional information. Lowe’s pays Iowa sales and use tax on the cost of goods and materials sold under the contracts at the time that Lowe’s withdraws the items from its inventory. Lowe’s does not collect or pay Iowa sales tax on the price customers pay for the installation services. Iowa imposes sales tax on a number of services, including carpentry, electrical and electronic repair and installation, and pipe fitting and plumbing. However, the state provides an exemption for services performed in connection with “new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer.” The state also distinguishes between repair and installation services, which are taxable, and remodeling services, which are exempt.

Lowe’s argued that the subcontracted installation services were exempt since they were connected with new construction, reconstruction, alteration, expansion, or remodeling. The Supreme Court of Iowa disagreed with this argument. The Court declined to construe the 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 installation contracts in this case did not involve structural changes to real property. Therefore, the labor is not exempt from Iowa sales tax. Plumbing and electrical installation services were properly assessed sales tax by the DOR. The Court held that the DOR erroneously assessed sales tax on carpentry services for installations not constituting repairs. This included the installation of vanity tops, windows, storm doors, patio doors, and interior and exterior doors. (Lowe’s Home Centers, LLC v. Iowa Department of Revenue, Iowa Supreme Court, No. 18-0097, December 14, 2018)

Posted on December 20, 2018