House File 634 - Reprinted HOUSE FILE 634 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO HSB 228) (As Amended and Passed by the House April 17, 2013 ) A BILL FOR An Act relating to the policy administration of the tax and 1 related laws and related programs by the department of 2 revenue, including administration of income taxes, sales 3 and use taxes, the orderly wind-up and eventual repeal of 4 the Iowa fund of funds program, the replacement taxes task 5 force, a study report related to administrative appeals 6 processes for tax matters, the distribution of statewide 7 school infrastructure funds, and including effective date 8 and retroactive and other applicability provisions. 9 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 10 HF 634 (3) 85 mm/sc/md

H.F. 634 DIVISION I 1 INCOME TAXES 2 Section 1. Section 2.48, subsection 3, paragraph c, 3 subparagraph (4), Code 2013, is amended by striking the 4 subparagraph. 5 Sec. 2. Section 2.48, subsection 3, paragraph e, 6 subparagraph (5), Code 2013, is amended by striking the 7 subparagraph. 8 Sec. 3. Section 15.119, subsection 2, paragraph c, Code 9 2013, is amended by striking the paragraph. 10 Sec. 4. Section 422.5, subsection 1, paragraph j, 11 subparagraph (2), subparagraph division (a), Code 2013, is 12 amended to read as follows: 13 (a) The tax imposed upon the taxable income of a resident 14 shareholder in an S corporation or of an estate or trust with 15 a situs in Iowa that is a shareholder in an S corporation, 16 which S corporation has in effect for the tax year an election 17 under subchapter S of the Internal Revenue Code and carries 18 on business within and without the state , may be computed by 19 reducing the amount determined pursuant to paragraphs “a” 20 through “i” by the amounts of nonrefundable credits under 21 this division and by multiplying this resulting amount by a 22 fraction of which the resident’s or estate’s or trust’s net 23 income allocated to Iowa, as determined in section 422.8, 24 subsection 2 , paragraph “b” , is the numerator and the resident’s 25 or estate’s or trust’s total net income computed under section 26 422.7 is the denominator. If a resident shareholder , or an 27 estate or trust with a situs in Iowa that is a shareholder, 28 has elected to take advantage of this subparagraph (2), and 29 for the next tax year elects not to take advantage of this 30 subparagraph, the resident or estate or trust shareholder shall 31 not reelect to take advantage of this subparagraph for the 32 three tax years immediately following the first tax year for 33 which the shareholder elected not to take advantage of this 34 subparagraph, unless the director consents to the reelection. 35 -1- HF 634 (3) 85 mm/sc/md 1/ 13

H.F. 634 This subparagraph also applies to individuals who are residents 1 of Iowa for less than the entire tax year. 2 Sec. 5. Section 422.8, subsection 2, paragraph b, 3 unnumbered paragraph 1, Code 2013, is amended to read as 4 follows: 5 A resident’s income , or the income of an estate or trust with 6 a situs in Iowa, allocable to Iowa is the income determined 7 under section 422.7 reduced by items of income and expenses 8 from an S corporation that carries on business within and 9 without the state when those items of income and expenses pass 10 directly to the shareholders under provisions of the Internal 11 Revenue Code. These items of income and expenses are increased 12 by the greater of the following: 13 Sec. 6. Section 422.15, subsection 2, Code 2013, is amended 14 to read as follows: 15 2. Every partnership , including limited partnerships 16 organized under chapter 488 , having a place of business in 17 the state , doing business in this state, or deriving income 18 from sources within this state as defined in section 422.33, 19 subsection 1, shall make a return, stating specifically the net 20 income and capital gains (or losses) reported on the federal 21 partnership return, the names and addresses of the partners, 22 and their respective shares in said amounts. 23 Sec. 7. Section 422.33, subsections 9 and 27, Code 2013, are 24 amended by striking the subsections. 25 Sec. 8. REPEAL. Sections 16.211, 16.212, and 422.11X, Code 26 2013, are repealed. 27 Sec. 9. EFFECTIVE UPON ENACTMENT. This division of this 28 Act, being deemed of immediate importance, takes effect upon 29 enactment. 30 Sec. 10. RETROACTIVE APPLICABILITY. The following 31 provision or provisions of this division of this Act apply 32 retroactively to January 1, 2013, for tax years beginning on 33 or after that date: 34 1. The section of this division of this Act amending section 35 -2- HF 634 (3) 85 mm/sc/md 2/ 13

H.F. 634 422.5. 1 2. The section of this division of this Act amending section 2 422.8. 3 3. The section of this division of this Act amending section 4 422.15. 5 DIVISION II 6 SALES AND USE TAXES 7 Sec. 11. Section 423.1, subsection 5, Code 2013, is amended 8 to read as follows: 9 5. “Agricultural production” includes the production of 10 flowering, ornamental, or vegetable plants in commercial 11 greenhouses or otherwise, and production from aquaculture , 12 and production from silvicultural activities . “Agricultural 13 products” includes flowering, ornamental, or vegetable plants 14 and those products of aquaculture and silviculture . 15 Sec. 12. Section 423.2, subsection 6, paragraph a, Code 16 2013, is amended to read as follows: 17 a. The sales price of any of the following enumerated 18 services is subject to the tax imposed by subsection 19 5 : alteration and garment repair; armored car; vehicle repair; 20 battery, tire, and allied; investment counseling; service 21 charges of all financial institutions; barber and beauty; 22 boat repair; vehicle wash and wax; campgrounds; carpentry; 23 roof, shingle, and glass repair; dance schools and dance 24 studios; dating services; dry cleaning, pressing, dyeing, and 25 laundering; electrical and electronic repair and installation; 26 excavating and grading; farm implement repair of all kinds; 27 flying service; furniture, rug, carpet, and upholstery 28 repair and cleaning; fur storage and repair; golf and country 29 clubs and all commercial recreation; gun and camera repair; 30 house and building moving; household appliance, television, 31 and radio repair; janitorial and building maintenance or 32 cleaning; jewelry and watch repair; lawn care, landscaping, 33 and tree trimming and removal; limousine service, including 34 driver; machine operator; machine repair of all kinds; motor 35 -3- HF 634 (3) 85 mm/sc/md 3/ 13

H.F. 634 repair; motorcycle, scooter, and bicycle repair; oilers and 1 lubricators; office and business machine repair; painting, 2 papering, and interior decorating; parking facilities; pay 3 television; pet grooming; pipe fitting and plumbing; wood 4 preparation; executive search agencies; private employment 5 agencies, excluding services for placing a person in employment 6 where the principal place of employment of that person is to 7 be located outside of the state; reflexology; security and 8 detective services , excluding private security and detective 9 services furnished by a peace officer with the knowledge and 10 consent of the chief executive officer of the peace officer’s 11 law enforcement agency ; sewage services for nonresidential 12 commercial operations; sewing and stitching; shoe repair 13 and shoeshine; sign construction and installation; storage 14 of household goods, mini-storage, and warehousing of raw 15 agricultural products; swimming pool cleaning and maintenance; 16 tanning beds or salons; taxidermy services; telephone 17 answering service; test laboratories, including mobile testing 18 laboratories and field testing by testing laboratories, and 19 excluding tests on humans or animals; termite, bug, roach, and 20 pest eradicators; tin and sheet metal repair; transportation 21 service consisting of the rental of recreational vehicles or 22 recreational boats, or the rental of motor vehicles subject 23 to registration which are registered for a gross weight of 24 thirteen tons or less for a period of sixty days or less, or 25 the rental of aircraft for a period of sixty days or less; 26 Turkish baths, massage, and reducing salons, excluding services 27 provided by massage therapists licensed under chapter 152C ; 28 water conditioning and softening; weighing; welding; well 29 drilling; wrapping, packing, and packaging of merchandise other 30 than processed meat, fish, fowl, and vegetables; wrecking 31 service; wrecker and towing. 32 Sec. 13. Section 423.3, subsection 47, paragraph a, 33 unnumbered paragraph 1, Code 2013, is amended to read as 34 follows: 35 -4- HF 634 (3) 85 mm/sc/md 4/ 13

H.F. 634 The sales price from the sale or rental of computers, 1 machinery, and equipment, including replacement parts and 2 consumable supplies , and materials used to construct or 3 self-construct computers, machinery, and equipment if such 4 items are any of the following: 5 Sec. 14. Section 423.3, subsection 47, paragraph d, Code 6 2013, is amended by adding the following new subparagraph: 7 NEW SUBPARAGRAPH . (02) “Consumable supplies” means tangible 8 personal property, other than computers, machinery, equipment, 9 or raw materials, that is consumed or expended during the 10 manufacture of other tangible personal property. The term 11 “consumable supplies” includes but is not limited to oils, 12 greases, hydraulic fluids, coolants, and lubricants. 13 Sec. 15. Section 423.3, subsection 47, paragraph d, 14 subparagraph (4), Code 2013, is amended to read as follows: 15 (4) “Manufacturer” means as defined in section 428.20 a 16 person who purchases, receives, or holds personal property 17 of any description for the purpose of adding to its value by 18 a process of manufacturing, refining, purifying, combining 19 of different materials, or by the packing of meats, with a 20 view to selling the property for gain or profit , but also 21 includes contract manufacturers. A contract manufacturer is 22 a manufacturer that otherwise falls within the definition of 23 manufacturer under section 428.20 , except that a contract 24 manufacturer does not sell the tangible personal property 25 the contract manufacturer processes on behalf of other 26 manufacturers. A business engaged in activities subsequent 27 to the extractive process of quarrying or mining, such as 28 crushing, washing, sizing, or blending of aggregate materials, 29 is a manufacturer with respect to these activities. This 30 subparagraph (4) shall not be construed to require that a 31 person be primarily engaged in an activity listed in this 32 subparagraph in order to qualify as a manufacturer for purposes 33 of this subsection. 34 Sec. 16. Section 423.3, subsection 47, paragraph d, Code 35 -5- HF 634 (3) 85 mm/sc/md 5/ 13

H.F. 634 2013, is amended by adding the following new subparagraph: 1 NEW SUBPARAGRAPH . (7) (a) “Replacement part” means 2 tangible personal property that meets all the following 3 conditions: 4 (i) The tangible personal property replaces a component of 5 a computer, machinery, or equipment, which component is capable 6 of being separated from the computer, machinery, or equipment. 7 (ii) The tangible personal property performs the same or 8 similar function as the component it replaced. 9 (iii) The tangible personal property restores the computer, 10 machinery, or equipment to its original operating condition, or 11 upgrades or improves the efficiency of the computer, machinery, 12 or equipment. 13 (b) “Replacement part” does not include a consumable 14 supply or a jig, die, tool, or other device that is used in 15 conjunction with machinery or equipment and that is specially 16 designed for use in manufacturing specific products and that 17 may be used interchangeably and intermittently on a particular 18 machine or piece of equipment. 19 Sec. 17. Section 423.3, Code 2013, is amended by adding the 20 following new subsection: 21 NEW SUBSECTION . 99. The sales price from services furnished 22 by forestry consultants and forestry vendors engaged in 23 forestry practices on private or public land. 24 DIVISION III 25 IOWA FUND OF FUNDS 26 Sec. 18. Section 15E.62, Code 2013, is amended by adding the 27 following new subsections: 28 NEW SUBSECTION . 03. “Creditor” means a person, including 29 an assignee of or successor to such person, who extends credit 30 or makes a loan to the Iowa fund of funds or to a designated 31 investor, and includes any person who refinances such credit 32 or loan. 33 NEW SUBSECTION . 04. “Fund documents” means all agreements 34 relating to matters under the purview of this division VII 35 -6- HF 634 (3) 85 mm/sc/md 6/ 13

H.F. 634 entered into prior to the effective date of this division of 1 this Act between or among the state, the Iowa fund of funds, a 2 fund allocation manager or similar manager, the Iowa capital 3 investment corporation, the board, a creditor, a designated 4 investor, and a private seed or venture capital partnership, 5 and includes other documents having the same force and effect 6 between or among such parties, as any of the foregoing may be 7 amended, modified, restated, or replaced from time to time. 8 Sec. 19. Section 15E.65, subsection 2, paragraph h, Code 9 2013, is amended to read as follows: 10 h. Fifty years after the organization of the Iowa fund 11 of funds As soon as practicable after the effective date 12 of this division of this Act , the Iowa capital investment 13 corporation , in conjunction with the department of revenue, 14 the board, and the attorney general, shall wind up the Iowa 15 fund of funds pursuant to section 15E.72 and shall cause the 16 Iowa fund of funds to be liquidated with all of its assets 17 distributed to its owners in accordance with the provisions of 18 its organizational documents and in accordance with the fund 19 documents . In liquidating such assets, the capital investment 20 corporation, the department of revenue, the board, and the 21 attorney general shall act with prudence and caution in order 22 to minimize costs and fees and to preserve investment assets to 23 the extent reasonably possible. 24 Sec. 20. NEW SECTION . 15E.72 Program wind-up and future 25 repeal. 26 1. Findings. The general assembly finds that the Iowa fund 27 of funds program established pursuant to this division has 28 not fulfilled the purposes described in section 15E.61 to the 29 extent necessary to justify the fifty-year timeframe for the 30 program that was originally envisioned in this division VII and 31 that an early and orderly wind-up of the program is desirable. 32 2. Organization of additional funds prohibited. 33 Notwithstanding section 15E.65, an Iowa fund of funds shall not 34 be organized on or after the effective date of this division 35 -7- HF 634 (3) 85 mm/sc/md 7/ 13

H.F. 634 of this Act. 1 3. New investments by the fund of funds prohibited. 2 Notwithstanding section 15E.65, the Iowa fund of funds shall 3 not make new investments in private seed and venture capital 4 partnerships or entities on or after the effective date of this 5 division of this Act except as required by the fund documents. 6 4. New investments by designated investors prohibited. 7 a. Except as provided in paragraph “b” , and notwithstanding 8 any other provision in this division VII, a designated investor 9 shall not invest in the Iowa fund of funds on or after the 10 effective date of this division of this Act. 11 b. Notwithstanding the prohibition in paragraph “a” , a 12 designated investor may invest in the Iowa fund of funds on or 13 after the effective date of this division of this Act to the 14 extent such investment is required by the fund documents. In 15 addition, the director of revenue, with the approval of the 16 attorney general, may authorize additional investment in the 17 Iowa fund of funds but only if such an investment is necessary 18 to preserve fund assets, repay creditors, pay taxes, or 19 otherwise effectuate an orderly wind-up of the program pursuant 20 to this section. 21 5. Issuance, verification, and redemption of new certificates 22 prohibited. 23 a. Except as provided in paragraph “b” , and notwithstanding 24 any other provision in this division VII, the board shall not 25 issue, verify, or redeem a certificate or a related tax credit 26 on or after the effective date of this division of this Act. 27 b. Notwithstanding the prohibition in paragraph “a” , the 28 board may issue, redeem, or verify a certificate or a related 29 tax credit under any of the following conditions: 30 (1) The board is required to do so under the terms of the 31 fund documents. 32 (2) The issuance, redemption, or verification is deemed 33 necessary by the director of revenue and the attorney general 34 in order to arrange new financing terms with a creditor. 35 -8- HF 634 (3) 85 mm/sc/md 8/ 13

H.F. 634 (3) The issuance, redemption, or verification is deemed 1 necessary by the director of revenue and the attorney general 2 to preserve fund assets, repay creditors, or otherwise 3 effectuate an orderly wind-up of the program pursuant to this 4 section. 5 6. New fund allocation managers prohibited. 6 a. Notwithstanding any other provision in this division 7 VII, the Iowa capital investment corporation shall not have 8 authority to solicit, select, terminate, or change a fund 9 allocation manager or similar manager on or after the effective 10 date of this division of this Act. 11 b. On or after the effective date of this division of this 12 Act, all decisions pertaining to relationships with a fund 13 allocation manager or similar manager selected prior to the 14 effective date of this division of this Act shall be made 15 by the director of revenue with the approval of the attorney 16 general. This subsection shall not be construed to impair the 17 terms of the fund documents. 18 7. Pledging of certificates prohibited. 19 a. Except as provided in paragraph “b” , and notwithstanding 20 any other provision of law to the contrary, a certificate and a 21 related tax credit or verified tax credit issued by the board 22 shall not be pledged by a designated investor as security for a 23 loan or an extension of credit on or after the effective date 24 of this division of this Act. 25 b. Notwithstanding the prohibition in paragraph “a” , a 26 certificate and related tax credit or verified tax credit 27 issued by the board may be pledged by a designated investor as 28 security for a loan or an extension of credit to the extent 29 such pledge is required by the fund documents. In addition, 30 the board, with the approval of the director of revenue and the 31 attorney general, may authorize a certificate and related tax 32 credit to be pledged as security for a loan or an extension 33 of credit, but only if such a pledge is necessary to arrange 34 new financing terms with a creditor or to repay creditors for 35 -9- HF 634 (3) 85 mm/sc/md 9/ 13

H.F. 634 moneys loaned or credit extended to a designated investor. 1 8. Rural and small business loan guarantees prohibited. 2 Notwithstanding any other provision in this division VII 3 to the contrary, the Iowa capital investment corporation 4 shall not make rural and small business loan guarantees or 5 otherwise administer a program to provide loan guarantees and 6 other related credit enhancements on loans to rural and small 7 business borrowers within the state of Iowa on or after the 8 effective date of this division of this Act. 9 9. Iowa capital investment corporation purposes amended. 10 Notwithstanding section 15E.64, on or after the effective date 11 of this division of this Act, the purposes of the Iowa capital 12 investment corporation shall be to comply with its obligations 13 under the fund documents and to assist the board, the director 14 of revenue, and the attorney general in effectuating the 15 orderly wind-up of the Iowa fund of funds. In effectuating 16 such a wind-up, the Iowa capital investment corporation shall 17 comply with all reasonable requests by the board, the director 18 of revenue, the attorney general, or the auditor of state. 19 10. Use of revolving fund prohibited. 20 a. Notwithstanding section 15E.65, subsection 2, paragraph 21 “a” , on or after the effective date of this division of this 22 Act, all investment returns received by the Iowa capital 23 investment corporation that are in excess of those payable to 24 designated investors shall be deposited in the general fund of 25 the state. 26 b. This subsection shall not be construed to impair the 27 terms of the fund documents. It is the intent of the general 28 assembly that this subsection only applies in the event that 29 there are investment returns in excess of those necessary to 30 repay creditors and designated investors under the terms of the 31 fund documents. 32 11. Preservation of existing rights. This section is not 33 intended to and shall not limit, modify, or otherwise adversely 34 affect the fund documents, including any certificate or related 35 -10- HF 634 (3) 85 mm/sc/md 10/ 13

H.F. 634 tax credit issued before the effective date of this division 1 of this Act. 2 12. Future repeal. This division VII is repealed upon the 3 occurrence of one of the following, whichever is earlier: 4 a. The expiration or termination of all fund documents. The 5 director of revenue shall notify the Iowa Code editor upon the 6 occurrence of this condition. 7 b. December 31, 2027. 8 Sec. 21. EFFECTIVE UPON ENACTMENT. This division of this 9 Act, being deemed of immediate importance, takes effect upon 10 enactment. 11 DIVISION IV 12 REPLACEMENT TAXES 13 Sec. 22. Section 437A.15, subsection 7, paragraph b, Code 14 2013, is amended to read as follows: 15 b. The task force shall study the effects of the replacement 16 tax on local taxing authorities, local taxing districts, 17 consumers, and taxpayers through January 1, 2013 2016 . If the 18 task force recommends modifications to the replacement tax that 19 will further the purposes of tax neutrality for local taxing 20 authorities, local taxing districts, taxpayers, and consumers, 21 consistent with the stated purposes of this chapter , the 22 department of management shall transmit those recommendations 23 to the general assembly. 24 DIVISION V 25 STUDY REPORT 26 Sec. 23. ADMINISTRATIVE APPEALS PROCESS FOR TAX MATTERS 27 AND NEW TAX APPEAL BOARD —— REPORT. The department of 28 revenue, in consultation with the department of management 29 and other interested stakeholders, shall study the 30 independence, effectiveness, and fairness of the state’s 31 current administrative appeals processes for tax matters and 32 shall make recommendations for changes, if necessary, and 33 shall additionally study the desirability, practicality, and 34 feasibility of replacing components of these processes with 35 -11- HF 634 (3) 85 mm/sc/md 11/ 13

H.F. 634 a new consolidated and independent administrative appeals 1 board for tax matters within the executive branch to resolve 2 disputes between the department of revenue and taxpayers. The 3 department of revenue shall prepare and file a report detailing 4 its findings and recommendations with the chairpersons and 5 ranking members of the ways and means committees of the senate 6 and the house of representatives and with the legislative 7 services agency by January 8, 2014. This section of this Act 8 shall not be construed to provide the department of revenue 9 with the power or authority to eliminate or in any way modify 10 the property assessment appeals board created pursuant to 11 section 421.1A. 12 DIVISION VI 13 SECURE AN ADVANCED VISION FOR EDUCATION FUND 14 Sec. 24. Section 423F.2, subsection 1, paragraph b, Code 15 2013, is amended to read as follows: 16 b. The increase in the state sales, services, and use taxes 17 under chapter 423, subchapters II and III , from five percent 18 to six percent shall replace the repeal of the county’s local 19 sales and services tax for school infrastructure purposes. The 20 distribution of moneys in the secure an advanced vision for 21 education fund and the use of the moneys for infrastructure 22 purposes or property tax relief shall be as provided in this 23 chapter . However, the formula for the distribution of the 24 moneys in the fund shall be based upon amounts that would have 25 been received if the local sales and services taxes under 26 former chapter 423E, Code and Code Supplement 2007, continued 27 in existence. 28 Sec. 25. Section 423F.2, subsection 3, Code 2013, is amended 29 to read as follows: 30 3. The moneys available in a fiscal year in the secure an 31 advanced vision for education fund shall be distributed by the 32 department of revenue to each school district in an amount 33 equal to the amount the school district would have received 34 pursuant to the formula in section 423E.4 as if the local sales 35 -12- HF 634 (3) 85 mm/sc/md 12/ 13

H.F. 634 and services tax for school infrastructure purposes was imposed 1 on a per pupil basis calculated using each school district’s 2 budget enrollment, as defined in section 257.6, for that fiscal 3 year . Moneys in a fiscal year that are in excess of that needed 4 to provide each school district with its formula amount Prior 5 to distribution of moneys in the secure an advanced vision for 6 education fund to school districts, two and one-tenths percent 7 of the moneys available in a fiscal year shall be distributed 8 and credited to the property tax equity and relief fund created 9 in section 257.16A . 10 Sec. 26. APPLICABILITY. This division of this Act applies 11 to fiscal years beginning on or after July 1, 2014. 12 -13- HF 634 (3) 85 mm/sc/md 13/ 13