IN THE SUPREME COURT OF IOWA
No. 09–0166
Filed July 2, 2010
IOWA NETWORK SERVICES, INC.,
Appellant,
vs.
IOWA DEPARTMENT OF REVENUE,
Appellee.
Appeal from the Iowa District Court for Polk County, Donna L.
Paulsen, Judge.
Competitive long distance telephone provider seeks refund for sales
and use tax paid on purchases of computer equipment. AFFIRMED.
Bruce W. Baker, Denise M. Ment, and Dwayne Vande Krol of
Nyemaster, Goode, West, Hansell & O’Brien, P.C., Des Moines, for
appellant.
Thomas J. Miller, Attorney General, and James D. Miller, Assistant
Attorney General, for appellee.
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APPEL, Justice.
Iowa Network Services, Inc. (INS), a competitive long distance
telephone provider, seeks a refund for sales and use taxes it paid on
purchases of computer equipment over the course of several years. The
Iowa Department of Revenue denied the refund. INS sought judicial
review of the final agency action in the district court. The district court
affirmed the decision of the department, and INS appealed. After a
review of the record in this case, we affirm the decision of the district
court.
I. Factual and Procedural History.
INS is an Iowa telephone company with its principal place of
business in West Des Moines, Iowa. As a long distance telephone
provider, INS is required under Iowa Code chapter 433 (2003) to submit
an annual report to the department. Because telephone companies
operate in multiple parts of the state, their property is centrally assessed
by the department.
Between October 1, 1998, and December 31, 2003, INS purchased
computer equipment for use in its telephone business. The computer
purchases were included in three standard, separate accounts—central
office equipment, support computers, and other work equipment—
maintained by the telephone industry. These accounts were submitted
to the department as part of INS’s annual report.
INS filed a claim with the department for a refund of sales and use
taxes paid on these purchases. Iowa generally imposes a tax on the
gross receipts from all sales of tangible personal property sold at retail in
the state to consumers or users except as otherwise provided. In making
its claim for refund, INS asserted that its purchases of computer
equipment were exempt from sales and use tax under Iowa Code section
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422.45(27)(a)(4), which provides that “[c]omputers used in the processing
or storage of data or information by . . . [a] commercial enterprise” are
exempted. The department denied the refund claim, and INS launched
an administrative appeal.
An administrative law judge (ALJ) issued a proposed decision,
denying INS’s refund claim. While the ALJ recognized the tax exemption
contained in Iowa Code section 422.45(27)(a)(4), 1 he found that this
exemption did not apply as a result of Iowa Code sections
422.45(27)(c)(3) and 427A.1(1)(h). Under these provisions, the exemption
from sales and use tax does not apply if the property is assessed by the
department pursuant to Iowa Code chapter 433. Sections
422.45(27)(c)(3) and 427A.1(1)(h) create an exception to the exemption in
section 422.45(27)(a)(4). Because INS is a competitive long distance
telephone company, the ALJ determined that it was assessed pursuant
to chapter 433, and, therefore, was not entitled to the exemption.
The ALJ supported this interpretation by noting that in 2006 the
legislature enacted a new subsection that exempted the central office
equipment of competitive long distance telephone companies from sales
and use tax. 2006 Iowa Acts ch. 1162, § 1 (codified at Iowa Code
§ 423.3(47A)(a) (2007)). The ALJ asserted that this statute would have
been unnecessary if such equipment had been previously exempt.
INS appealed to the director. The director largely adopted the
findings and reasoning of the ALJ in denying INS’s claim, with some
expansions and modifications. The director specifically rejected the
notion that an amendment, passed as part of the deregulation of the
1In 2003, the Iowa General Assembly passed the Streamlined Sales and Use
Taxes Act. 2003 First Extraordinary Session Iowa Acts ch. 2, §§ 94–150. As a result,
many of the code sections relevant to this opinion have been renumbered. Unless
otherwise specified, all references are to the 2003 Code of Iowa.
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Iowa telephone industry, removed competitive long distance telephone
companies from the scope of chapter 433. The amendment’s relevant
language stated that after January 1, 1996, the director of revenue “shall
assess” the property of a long distance telephone company “in the same
manner as all other property assessed as commercial property by the
local assessor” under various chapters of the Iowa Code. Iowa Code
§ 476.1D(10). According to the director, this provision simply provided
the director with a method of valuation of property. The amendment did
not alter the department’s assessment authority under chapter 433. As
a result, INS was not entitled to the sales and use tax exemption.
INS filed a petition for review of agency action with the district
court. The district court affirmed the director’s decision, and INS
appealed.
II. Standard of Review.
Although the parties agree that the Iowa Administrative Procedure
Act, chapter 17A, governs our review of decisions of the Iowa Department
of Revenue, they nevertheless dispute the proper standard of review. See
AOL LLC v. Iowa Dep’t of Revenue, 771 N.W.2d 404, 407–08 (Iowa 2009).
The department asserts that as it has been vested with the authority to
interpret Iowa Code chapter 422, its decision is entitled to deference and
can only be overturned if it is irrational, illogical, or wholly unjustifiable.
See City of Sioux City v. Iowa Dep’t of Revenue & Fin., 666 N.W.2d 587,
590 (Iowa 2003); Iowa Code § 422.68(1) (granting the department “the
power and authority to prescribe all rules not inconsistent with the
provisions of [chapter 422]”).
While INS acknowledges the deference due the department in
regards to chapter 422, it asserts that resolution of this case depends on
the proper interpretation of Iowa Code section 476.1D(10), a portion of
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the Code whose interpretation has not been vested in the department.
To that extent, INS argues the department’s decision should be reviewed
for correction of errors of law.
Although the ultimate issue presented in this case is INS’s
entitlement to a tax exemption under chapter 422, resolution of that
issue is dependent on the interplay between chapter 433 and section
476.1D(10). In order to select the proper standard of review, therefore,
we must determine whether the department has been vested with the
authority to interpret section 476.1D(10).
We recently discussed the analysis for determining whether an
agency should be afforded deference in Renda v. Iowa Civil Rights
Comm’n, 784 N.W.2d 8, 10–13 (Iowa 2010). First, we must determine
whether the legislature has explicitly granted the agency authority to
interpret the disputed statute or phrase. Renda, 784 N.W.2d at 11.
Here, as in most cases, there is no such express grant of authority in
section 476.1D(10). When the legislature has not explicitly vested
authority in an agency to interpret a statute, we must examine “the
phrases or statutory provisions to be interpreted, their context, the
purpose of the statute, and other practical considerations to determine
whether the legislature intended to give interpretive authority to an
agency.” Id. at 11–12.
We are not convinced that the legislature intended to vest in the
department the authority to interpret section 476.1D(10). Section
476.1D(10) is part of chapter 476, a chapter of the Code dealing with
public utility regulation. Neither the language nor the purpose of section
476.1D(10) evidences an intent by the legislature to vest authority in the
department of revenue to interpret a section of the utilities code.
Although the legislature vested authority in the department to interpret
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much of chapter 422, we are not convinced that authority was intended
to extend to all sections of the Code that tangentially relate to chapter
422. See Lange v. Iowa Dep’t of Revenue, 710 N.W.2d 242, 247 (Iowa
2006). As a result, the director’s decision is reviewable for correction of
errors of law. Iowa Code § 17A.19(10)(c).
III. Discussion.
A. Competitive Long Distance Telephone Companies and Sales
and Use Tax. Iowa imposes a tax on the gross receipts from the sales of
tangible personal property sold at retail in the state to consumers or
users except as otherwise provided. Id. § 422.43(1). Sales and use tax
exemptions are found in Iowa Code section 422.45. One of these
exemptions exempts from taxation “[c]omputers used in processing or
storage of data or information by an insurance company, financial
institution, or commercial enterprise.” Id. § 422.45(27)(a)(4). The
computers purchased by INS from 1998 to 2003 qualify for this
exemption.
Chapter 422 goes on, however, to provide for an exception to this
exemption. The sole issue in this case is whether INS falls within the
exception to the sales and use tax exemption. That exception provides:
[T]he gross receipts from the sale or rental of the following
shall not be exempt from the tax imposed by this division:
....
(3) Industrial machinery, equipment, and computers
. . . within the scope of section 427A.1, subsection 1,
paragraphs “h” and “i”.
Id. § 422.45(27)(c)(3). Iowa Code section 427A.1(1)(h) includes all
“[p]roperty assessed by the department of revenue and finance pursuant
to . . . [chapter] 433.” Id. § 427A.1(1)(h). As a long distance telephone
company, INS has historically been assessed by the department
pursuant to chapter 433. See id. §§ 433.1–.6. The question presented in
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this appeal thus becomes whether a 1995 amendment removed INS from
the ambit of chapter 433 assessment—thereby entitling it to the tax
exemption—or whether INS continues to be assessed by the department
pursuant to chapter 433—thereby subjecting INS to the exception to the
tax exemption.
B. Position of the Parties. In 1995, the Iowa General Assembly
passed an amendment to chapter 476. 1995 Iowa Acts ch. 199, § 1. The
amendment added section 476.1D(10), which states in relevant part:
The board shall promptly notify the director of revenue
and finance that a long distance telephone company has
been classified as a competitive long distance telephone
company. Upon such notification by the board, the director
of revenue and finance shall assess the property of such
competitive long distance telephone company, which
property is first assessed for taxation in this state on or after
January 1, 1996, in the same manner as all other property
assessed as commercial property by the local assessor under
chapters 427, 427A, 427B, 428, and 441.
Id. § 476.1D(10) (emphasis added).
INS asserts that section 476.1D(10) supplants the department’s
assessment authority under chapter 433. While the department retains
the authority to centrally assess the company, it does so under the
mandate of section 476.1D(10) and not chapter 433. In support, INS
cites the legislative history of 1985 and 1995 amendments to the Iowa
tax code, which expanded property and sales tax exemptions to
numerous industries. According to INS, these exemptions were intended
by the legislature to work in tandem, which is evidenced by the nearly
identical language of the two exemptions. Because no party disputes
that INS is entitled to a property tax exemption on the computers at
issue here, INS argues that it should likewise be entitled to a sales and
use tax exemption. INS further argues that it would be illogical for the
department to construe the two exemptions differently.
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While INS takes an expansive interpretation of section 476.1D(10),
the department advocates for a narrow interpretation. It contends
section 476.1D(10) does not supplant the department’s power to assess
INS under chapter 433, but merely dictates the manner or method of the
department’s assessment. The department further asserts that its
interpretation of the sales and use tax exemption is not at odds with the
property tax exemption. Assessment and taxation are not the same.
Assessment is merely the first step in the taxation process. As a result,
simply because a property is not taxed does not mean it is not assessed.
The department, therefore, asserts that assessing property exempt from
property taxation is not a violation of section 476.1D(10)’s directive to
assess property “in the same manner” as the local assessor. Finally, the
department asserts that the legislature could not have intended section
476.1D(10) to remove its assessment power from chapter 433 and,
thereby, extend the sales and use tax exemption to INS. Had that been
the legislature’s intention in 1995, it would not have been necessary for
it to explicitly exempt central office equipment from sales and use
taxation in 2006.
C. Application. We agree with the department. A party seeking a
tax exemption bears a heavy burden. As our prior cases demonstrate,
taxation is the rule, exemption is the exception. Van Buren County Hosp.
& Clinics v. Bd. of Rev., 650 N.W.2d 580, 586 (Iowa 2002) (noting that
exemptions exist only as a matter of legislative grace and are generally
disfavored as inequitable and unfair). Exemptions from taxation,
therefore, are “ ‘construed strictly against the taxpayer and liberally in
favor of the taxing body.’ ” Ranniger v. Iowa Dep’t of Revenue & Fin., 746
N.W.2d 267, 269 (Iowa 2008) (quoting Iowa Auto Dealers Ass’n v. Iowa
Dep’t of Revenue, 301 N.W.2d 760, 762 (Iowa 1981)). The department’s
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narrow view of the statutes at issue is consistent with the narrow
construction of tax exemption statutes, while the taxpayers’ more
sweeping view is not. Id.
Entitled “Telegraph and Telephone Companies Tax,” chapter 433 is
a comprehensive chapter governing the assessment and taxation of
telegraph and telephone companies within the State of Iowa. Section
433.4 directs the department to assess “all property of every kind and
character whatsoever, real, personal, or mixed, used by the companies in
the transaction of telegraph and telephone business.” Iowa Code
§ 433.4. Without a clear expression to the contrary, we cannot assume
that the legislature intended to limit this broad grant of authority.
No such clear expression exists in section 476.1D(10). All that is
evidenced by the language in section 476.1D(10) is an intention to alter
the manner of the assessment of competitive long distance telephone
companies—not the power of the department to assess. Tellingly, section
476.1D(10) does not reference chapter 433, nor does it refer to the
department’s original power to assess. In fact, the section seems to
assume that the department already has the power to assess competitive
long distance telephone companies and merely directs the department to
assess the companies’ property “in the same manner” as the local
assessor. Id. § 476.1D(10). While INS advances policy arguments in
support of its position, we derive legislative “intent from what the
legislature said, not from what it might or should have said.” Iowa
Comprehensive Petroleum Underground Storage Tank Fund Bd. v. Shell Oil
Co., 606 N.W.2d 376, 379 (Iowa 2000).
Finally, the department’s narrow interpretation is supported by a
recent amendment to chapter 423. In 2006, the Iowa General Assembly
added subsection 423.3(47A)(a), which explicitly exempted the central
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office equipment of telecommunication companies from sales and use
tax. 2006 Iowa Acts ch. 1162, § 1. While INS correctly points out that
the 2006 law was more expansive and applied to more than simply
competitive long distance telephone companies, its interpretation would
render the legislature’s specific inclusion of competitive long distance
telephone companies redundant. See Rojas v. Pine Ridge Farms, L.L.C.,
779 N.W.2d 223, 231 (Iowa 2010) (“We also presume the legislature
included all parts of the statute for a purpose, so we will avoid reading
the statute in a way that would make any portion of it redundant or
irrelevant.”).
IV. Conclusion.
We conclude that INS has not met its burden in proving its
entitlement to a tax exemption of its purchases of computer equipment.
For the reasons expressed above, the decision of the district court,
therefore, is affirmed.
AFFIRMED.