LOWE‘S HOME CENTERS, LLC, Appellant, vs. IOWA DEPARTMENT OF REVENUE and COURTNEY M. KAY-DECKER, Appellees.
No. 18-0097
IN THE SUPREME COURT OF IOWA
December 14, 2018
Appeal from the Iowa District Court for Polk County, Lawrence P. McLellan, Judge.
Taxpayer appeals district court judgment upholding department of revenue‘s assessment of sales tax on labor installing home improvements. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH INSTRUCTIONS.
E. Kendrick Smith of Jones Day, Atlanta, Georgia, and Allison M. Heffern and Desiree Kilburg of Shuttleworth & Ingersoll, Cedar Rapids, for appellant.
Thomas J. Miller, Attorney General, and Hristo Chaprazov and James D. Miller, Assistant Attorneys General, for appellee.
In this appeal, we must determine whether the Iowa Department of Revenue (the Department) erred by assessing sales tax on labor installing building components sold by Lowe‘s Home Centers, L.L.C.
Lowe‘s protested the Department‘s sales tax assessment, and an administrative law judge (ALJ) on summary judgment found the disputed transactions were properly taxed as “repairs” and that the services of a general building contractor are only exempt when performed in connection with new construction, reconstruction, alteration, expansion, or remodeling. On intra-agency appeal, the director upheld the sales tax assessment as taxable “installation” services. On judicial review, the district court affirmed. We retained Lowe‘s’ appeal. Lowe‘s does not challenge the validity of the regulations promulgated by the Department but contends the agency erred in applying the
On our review, we conclude the Department‘s application of law to fact is entitled to deference and should be upheld unless it is “irrational, illogical, or wholly unjustifiable.”
I. Background Facts and Proceedings.
Lowe‘s operates eleven big-box home improvement stores in Iowa. It sells a variety of products, including lumber, siding, shingles, paint, electrical and plumbing supplies, doors, windows, cabinets, sinks, ceiling fans, and appliances. Lowe‘s primarily engages in two types of customer transactions: over-the-counter retail
To make an over-the-counter retail purchase, the customer selects products in the store and takes them to a checkout counter. The cashier scans the products’ bar codes, and the store‘s computer system calculates the sales tax based on the item‘s retail price. The customer pays the sales price and tax at checkout and departs with the merchandise. These transactions are not at issue in this case.
The home improvements at issue here are installed custom storm windows and doors, faucets, toilets, built-in dishwashers, ceiling fans, patio doors, interior and exterior doors, sinks, vanities, and garbage disposals. Based on the Department‘s regulations, the retailer must pay tax on the cost of materials used during installation. The fighting issue is whether Lowe‘s is required to collect taxes on the installation labor. The
To have Lowe‘s arrange installation, the customer visits a service station within the store. The customer describes the project and selects the products to be installed. Lowe‘s issues a printed estimate that states in part,
Lowes is a supplier of materials only. Lowes does not engage in the practice of engineering, architecture, or general contracting. Lowes does not assume any responsibility for design, engineering, or construction; for the selection or choice of materials for a general or specific use; for quantities or sizing of materials; for the use or installation of materials; or for compliance with any building code or standard of workmanship.
(Capitalization modified.). Lowe‘s subcontracts with third-party “installers” who install the products in the customer‘s home. The installer may first visit the customer‘s home to outline the scope of the project, take measurements, and estimate the labor cost and quantity of materials needed to complete the project. Lowe‘s charges the customer a detailing fee for this service.
If the installation process is standard, or once an installer has completed an estimate, a description of the materials and the labor cost estimate is entered into the store‘s computer system. The computer tracks the cost of goods and materials and the installation labor charge. Lowe‘s then prepares an “installed sales contract,” which sets forth the cost of materials, cost of labor, sales tax charges for materials and labor (if any), the total cost, and other terms of the sale.
If the customer agrees to the price and terms, the customer and a Lowe‘s representative sign the contract. Lowe‘s deducts any prior detailing fee and the customer goes to the checkout counter to pay the total project cost. The customer typically leaves the store without the products and materials purchased through the contract, but with a contractual right to their installation in his or her home. Lowe‘s holds any in-stock items for the installer to pick up. The customer does not own the items purchased until they are installed at the customer‘s home. The installer returns surplus materials to the store when the project is complete.
- serve as the general building contractor to ensure the installations are performed correctly;
- complete each home improvement for the specified fixed price; and
- absorb any excess costs if the actual labor and/or material costs exceed the amounts estimated.
If the installation does not meet the customer‘s approval, Lowe‘s arranges for corrective measures. Lowe‘s is responsible for obtaining licenses and building permits if needed and warrants that the installation will be completed in a workmanlike manner. Lowe‘s is also responsible for ensuring the installation work complies with safety rules and building codes, zoning ordinances, and other laws.
Under the terms of the installed sales contracts, Lowe‘s is required to sell the goods, materials, and installation services at the prices set in the contract. The contract price includes the cost of goods sold, installation services, and taxes. Lowe‘s pays sales and use tax based on the cost of the goods and materials sold under installed sales contracts at the time Lowe‘s withdraws the items from its inventory. But Lowe‘s does not collect or pay sales tax on the price customers paid for installation services. Nor do the installers or customers pay sales tax for the installation services.
In 2007, the Department conducted a sales tax audit of Lowe‘s for the three-year period beginning January 1, 2004, and ending December 31, 2006. On January 17, 2008, the Department issued a sales tax assessment of $1,794,450.40 plus interest on the labor performed for the installation of various home-related products sold by Lowe‘s. The Department determined that homeowners who received the installed home improvements should have been separately assessed sales tax on the labor. Because Lowe‘s did not collect this additional tax from its customers, the Department assessed the tax plus interest against Lowe‘s. This sales tax on the labor was in addition to the sales tax Lowe‘s already paid on the items sold. The Department found this incidental work was independently taxable as enumerated repair services under
Lowe‘s and the Department resolved most of the assessment through informal procedures. Lowe‘s filed a timely protest for the sum remaining in dispute: $249,806.22 including interest through November 30, 2012. Interest continues to accrue monthly. The Department rejected Lowe‘s’ protest and the matter proceeded to an appeal before an ALJ. The parties conducted discovery and submitted the matter to the ALJ for summary adjudication.
After a hearing, the ALJ issued a proposed decision granting summary judgment in favor of the Department. The ALJ
Lowe‘s appealed the proposed order to the director of the Department. The director issued a final order affirming the proposed order from the ALJ. The director modified the order to conclude that under the definitions promulgated by the Department, the home improvement installations Lowe‘s performed were not repair services but were subject to sales tax as installation services.
Lowe‘s petitioned the district court for judicial review of the final order. The district court affirmed the final order, concluding that the Department‘s “application of the law to the facts . . . was not irrational, illogical or wholly unjustifiable.” Lowe‘s appealed the district court decision, and we retained the appeal.
II. Standard of Review.
Our review is governed by the Iowa Administrative Procedure Act,
Lowe‘s does not challenge the validity of the rules promulgated by the Department to implement
Factual determinations as to sales tax obligations are vested in the Department. Iowa Ag Constr. Co. v. Iowa State Bd. of Tax Review, 723 N.W.2d 167, 173 (Iowa 2006). We are bound by the
Our review of constitutional questions is de novo. KFC Corp., 792 N.W.2d at 312.
III. Analysis.
This case turns on the application of law to undisputed facts. The governing law includes the sales tax provisions and exemptions in
A. Construction of Tax Statutes. “Statutes which impose taxes are construed liberally in favor of the taxpayer and strictly against the taxing body.” Iowa Auto Dealers Ass‘n v. Iowa Dep‘t of Revenue, 301 N.W.2d 760, 762 (Iowa 1981). But “taxation is the rule, exemption is the exception.” Iowa Network Servs., Inc. v. Iowa Dep‘t of Revenue, 784 N.W.2d 772, 776 (Iowa 2010). “Exemptions from taxation, therefore, are ‘construed strictly against the taxpayer and liberally in favor of the taxing body.‘” Id. (quoting Ranniger v. Iowa Dep‘t of Revenue & Fin., 746 N.W.2d 267, 269 (Iowa 2008)). All doubts must be resolved in favor of taxation. Dial Corp. v. Iowa Dep‘t of Revenue & Fin., 634 N.W.2d 643, 646 (Iowa 2001). “A taxpayer seeking to come under a tax exemption statute has the burden of proving an entitlement to the exemption.” Ballstadt v. Iowa Dep‘t of Revenue, 368 N.W.2d 147, 148 (Iowa 1985); see also Sherwin-Williams Co. v. Iowa Dep‘t of Revenue, 789 N.W.2d 417, 424 (Iowa 2010) (same).
B. Governing Iowa Code Provisions and Administrative Rules. During the relevant time period, the
The
1. Whether the services were taxable under
The legislature did not codify definitions of the services at issue, but the Department promulgated regulations that define them. The regulation defining “carpentry” provides, “Persons 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.”
“Electrical and electronic repair and installation services” are more broadly defined to include services performed by “[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.”
” ‘Pipe fitting and plumbing’ shall mean 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.”
These regulations are binding on the Department. The Department acknowledges that the installation services Lowe‘s provided were not repairs. Lowe‘s argues that because the definition of carpentry is limited to repairs and omits installation services, the sales tax did not apply. We agree. The Department included both installing and repairing in its definitions for electrical and plumbing services but omitted installing from its definition of carpentry. We assume its omission was intentional and give it effect. See Oyens Feed & Supply, Inc. v. Primebank, 808 N.W.2d 186, 193 (Iowa 2011) (assuming legislature‘s placement of term in one provision but not another was intentional). Regardless, “[w]hen an agency elects to be its own lexicographer, persons are entitled to rely upon the established definitions.” AOL LLC v. Iowa Dep‘t of Revenue, 771 N.W.2d 404, 409 (Iowa 2009). Provisions imposing taxes are construed strictly against the Department. Iowa Auto Dealers Ass‘n, 301 N.W.2d at 762. We hold that the Department erred by assessing sales tax on carpentry services for installations not constituting repairs.
By contrast, the definitions of “electrical and electronic repair and installation” and “pipe fitting and plumbing” encompass both repairs and installations. For that reason, the Department‘s imposition of sales tax on those installation services was lawful, subject to the exemption in
2. Whether the services fall under the exemption in
i. “[S]ervices on or connected with new construction, reconstruction, alteration, expansion, [or] remodeling.” We begin with the statutory text.
[t]he sales price of services on or connected with new construction, reconstruction, alteration, expansion, remodeling, or the services of a general building contractor, architect, or engineer. The exemption in this subsection also applies to the sales price on the lease or rental of all machinery, equipment, and replacement parts directly and primarily used by owners, contractors, subcontractors, and builders for new construction, reconstruction, alteration, expansion, or remodeling of real property or structures and of all machinery, equipment, and replacement parts which improve the performance, safety, operation, or efficiency of the machinery, equipment, and replacement parts so used.
The distinction between a repair . . . and new construction, reconstruction, alteration, expansion and remodeling activities . . . can, oftentimes, be difficult to grasp. Therefore, the intent of the parties and the scope of the project may become the factors which determine whether certain enumerated services are taxable. An area of particular difficulty is the distinction between repair and remodeling. Remodeling a building or other structure means much more than making repairs or minor changes to it. Remodeling is a reforming or reshaping of a structure or some substantial portion of it to the extent that the remodeled structure or portion of the structure is in large part the equivalent of a new structure or part thereof.
Lowe‘s does not challenge the validity of this regulation, which has been in effect since 2005. The legislature has not amended
Significantly, this regulation explains the exemption applies to home improvement
The regulation gives examples of projects that constitute “new construction, reconstruction, alteration, expansion, [and] remodeling“:
- The building of a garage or adding a garage to an existing building would be considered new construction.
- Adding a redwood deck to an existing structure would be considered new construction.
- Replacing a complete roof on an existing structure would be considered reconstruction or alteration.
- Adding a new room to an existing building would be considered new construction.
- Adding a new room by building interior walls would be considered alteration.
. . . .
- Rebuilding a structure damaged by flood, fire or other uncontrollable disaster or casualty would be considered reconstruction.
- Building a new wing to an existing building would be considered an expansion.
- Rearranging the interior physical structure of a building would be considered remodeling.
. . . .
- Replacing an entire water heater, water softener, furnace or central air conditioning unit.
Lowe‘s nevertheless argues that all of its installation services are exempt under
repair or installation work that is not a construction activity.” (Emphasis added.)).
The ALJ‘s and director‘s conclusions that the Construction Exemption requires activity that is significantly larger in size and scope than the Lowe‘s installation contracts are not irrational, illogical or wholly unjustifiable. Rule 701—219.13 demonstrates that the Department since at least 2005 has construed new construction, reconstruction, alteration, expansion, or remodeling to be more than “minor changes.” To be subject to the Construction Exemption the activity must constitute “a reforming or reshaping of a structure or some substantial portion of it to the extent that the remodeled structure or portion of the structure is in large part the equivalent of a new structure or part thereof.” A review of the cases cited in the rule confirms this concept. The conclusion reached by the director on this issue is not irrational, illogical or wholly unjustifiable.
(Footnotes omitted.) We agree with the Department and district court. Exemptions are construed strictly against the taxpayer. Iowa Network Servs., Inc., 784 N.W.2d at 776. We must read
To the contrary, the terms of the Lowe‘s installed sales contracts take the transactions at issue outside the scope of
ii. “[T]he services of a general building contractor, architect, or engineer.” Lowe‘s also argues that it was performing “the services of a general building contractor” within the meaning of
Moreover, the Department‘s regulations limit the exemption to services the general building contractor performs on or connected with new construction, reconstruction, alteration, expansion, or remodeling. See, e.g.,
3. The contractor-retailer rule. Lowe‘s also relies on
Sales of building materials, supplies, and equipment to owners, contractors, subcontractors, or builders for the erection of buildings or the alteration, repair, or improvement of real property are retail sales of tangible personal property in whatever quantity sold. Where the owner, contractor, subcontractor, or builder is also a retailer holding a retail sales tax permit and transacting retail sales of building materials, supplies, and equipment, the person shall purchase such items of tangible personal property without liability for the tax if such property will be subject to the tax at the time of resale or at the time it is withdrawn from inventory for construction purposes.
Under this provision, Lowe‘s as a contractor-retailer pays sales tax when the property “is withdrawn from inventory for construction purposes.” Lowe‘s argues that
inconsistent with its ICG. To the contrary, the ICG applies to “construction contracts” expressly defined as “an agreement that provides labor and materials to erect a structure for a second party.” ICG at 1. As noted above, labor involved in new construction or other structural changes to buildings falls within the exemption for “new construction, reconstruction, alteration, expansion, [or] remodeling.”
C. Lowe‘s Remaining Arguments.
Lowe‘s raises a number of additional arguments. We will address each argument in turn.
1. Predominant service rule. Lowe‘s argues that it is exempt from taxation because the primary service provided under these contracts was the installation of nontaxable capital improvements. Under the predominant service rule,
When taxable and nontaxable services are performed as part of one transaction and the charge for the transaction is a lump-sum fee that is not itemized or separately contracted, the taxation of the fee for the entire transaction is determined by the predominant service being performed. Iowa Movers and Warehousemen‘s Association v. Briggs, 237 N.W.2d 759 (Iowa 1976). If the predominant service being provided in the transaction is a taxable enumerated service, then the entire fee for the transaction is subject to Iowa tax. However, if the predominant service being performed is a nontaxable service, then the entire fee charged for the transaction is not subject to Iowa tax.
The Iowa Tax Review Committee explained this rule with regard to installing an air conditioning system:
Some enumerated services may be involved with the installation of the air conditioning equipment such as electrical installation and pipe fitting and plumbing services.
However, these enumerated services were incidental to the overall installation of the air conditioning equipment. It has been the Department‘s position that, where a name[d] service is incidental to a service not specifically enumerated,the entire service is not subject to tax. Therefore it is the position of the Committee that the installation of air conditioning systems, whether a new installation or a replacement, is exempt from the sales tax.
J. Elliott Hibbs, Iowa Tax Review Comm., Findings of the Tax Review Committee in Regard to Tax Question by Field Personnel (May 11, 1976).
Lowe‘s argues the homeowners were purchasing new, installed home improvements and that all of the services at issue in this case were “on or connected with new construction, reconstruction, alteration, expansion, [or] remodeling” of real property. Lowe‘s argues that because the predominant service was installing permanent capital improvements, pursuant to the predominant service rule, the incidental labor portions of installation contracts that
We have already determined that Lowe‘s was performing installation services subject to sales tax rather than services exempt under
The predominant service rule does come into play for installations involving carpentry and plumbing or electrical services. For example, the Department found that the installation of ceiling fans involved both carpentry and electrical services. Whether sales tax applies for the installation of ceiling fans should be determined under the predominant service rule. Neither the Department nor the district court made that determination. We will not decide that issue on appeal. See Plowman v. Fort Madison Cmty. Hosp., 896 N.W.2d 393, 413 (Iowa 2017) (“A supreme court is ‘a court of review, not of first view.’ ” (quoting Cutter v. Wilkinson, 544 U.S. 709, 718 n.7, 125 S. Ct. 2113, 2120 n.7 (2005))); see also Felderman v. City of Maquoketa, 731 N.W.2d 676, 679 (Iowa 2007) (“Ordinarily we do not decide an issue on appeal that was not raised by a party or decided by the district court.“). Rather, that determination must be made by the Department on remand as to ceiling fan installations and any other transactions involving carpentry and electrical or plumbing services. Sales tax shall not be assessed on labor in transactions in which the predominant service was carpentry installation.
2. Bifurcation. Lowe‘s argues that because the installation contracts charged a lump sum, the Department erred by splitting the transaction into separate sales tax events for the goods and labor to be paid by separate taxpayers. Lowe‘s argues that neither the Iowa Code nor the Department‘s regulations authorize the bifurcation of sales tax charges.
Lowe‘s argues that there are only three types of transactions that a contractor-retailer can perform: (1) an over-the-counter retail sale of products, for which the customer owes sales tax for the entire transaction; (2) the installation of products pursuant to a construction contract, for which the contractor-retailer would owe use tax on the cost of installed product; and (3) repair of a product for which the customer would owe sales tax on the entire transaction.
The administrative code explains that
[chapter 423] details the obligation of contractors, contractor-retailers, retailers, and repairpersons to pay or collect sales tax on the sales price from sales of building materials, supplies, equipment, and other tangible personal property and the obligation of these parties to collect tax or claim exemption for their performances of taxable services.
The statutes at issue are separate and distinct. One imposes tax on the owner, contractor, subcontractor or builder for materials purchased to erect buildings or alter, repair or improve real property.
Iowa Code § 423.2(1)(b) (emphasis added). The other statute exempts the sales price of enumerated services when they are performed in connection with new construction, reconstruction, alteration, expansion or remodeling.Id. § 423.3(37) . There is nothing in the exemption statute that exempts the sales price of services when performed in the context of a repair or improvement of real property that occurs outside the scope of a larger construction project.
We agree with the Department and reject Lowe‘s bifurcation argument.
3. Other states. Lowe‘s argues that Department‘s interpretation of the relevant statutes conflicts with the interpretations of other state courts and taxing authorities and violates Iowa‘s commitment to uniformity under the Streamlined Sales and Use Tax Agreement (SSUTA). See
The purpose of the SSUTA is “to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance for all sellers and for all types of commerce.”
Lowe‘s relies on decisions from Indiana, Kansas, and Oklahoma to support its argument that the installation services here are not subject to tax. The Indiana and Oklahoma cases addressed the issue of taxing the products, not the installation labor. See, e.g., Lowe‘s Home Ctrs., LLC v. Ind. Dep‘t of State Revenue, 23 N.E.3d 52 (Ind. T.C. 2014); In re Sales Tax & Use Tax Protest of Lowe‘s Home Ctrs., LLC, No. P-09-195-H (Okla. Tax Comm‘n July 7, 2014), aff‘d, 2015 WL 1530422 (Okla. Tax Comm‘n Feb. 26, 2015).
The Kansas case addressed installation services, but the Kansas statute differs from Iowa‘s by providing a much broader exemption. The Kansas statute stated,
No tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building, or facility, the original construction, reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence or the construction, reconstruction, restoration, replacement or repair of a bridge or highway.
In re Lowe‘s Home Ctrs., L.L.C., No. 2014-34-DT, at 8–9 (Kan. B.T.A. Jan. 21, 2016) (quoting
Lowe‘s has satisfied its burdens by presenting substantial credible, mostly uncontroverted evidence that the built-in transactions at issue all involved improvements toresidential properties and, further, that Lowe‘s, in undertaking these installations, was acting as a contractor. Moreover, the Board finds these installations of real property improvements were performed in connection with the reconstruction, restoration, remodeling, renovation, repair and/or replacement
of a residence and are, therefore, exempt from the retailers’ sale tax pursuant to [the relevant tax statute].
Id. at 14. The Kansas Court of Appeals, in an unpublished decision, affirmed the Board of Tax Appeals. In re Lowe‘s Home Ctrs., L.L.C., No. 115,254, 2017 WL 1369944, at *26 (Kan. Ct. App. Apr. 14, 2017) (per curiam). The court declined to rely on decisions cited by Lowe‘s from other jurisdictions, noting “the statutes in those states differ from the statutes in Kansas.” Id. at *23.
For the same reason, we decline to rely on cases from other states interpreting statutes that differ from
4. Constitutional claims. Lowe‘s argues that the Department violated its federal and state constitutional rights to due process and equal protection. The district court found that Lowe‘s had failed to preserve the due process issue for review because Lowe‘s failed to raise the issue before the agency. Lowe‘s argues that it raised a due process challenge in paragraphs thirty-nine through forty-five of its amended protest. These paragraphs discuss Lowe‘s’ claim that the Department‘s attempt to apply the electrical services rule to contractors and other nonelectrical construction services violates the Iowa Administrative Procedure Act.
On appeal, Lowe‘s argues that the provisions at issue are unconstitutionally vague. The void-for-vagueness doctrine has threeprinciples: (1) the “statute cannot be so vague that it does not give persons of ordinary understanding fair notice that certain conduct is prohibited[,]” (2) the statute “provide[s] those clothed with authority sufficient guidance to prevent the exercise of power in an arbitrary or discriminatory fashion[,]” and (3) the “statute cannot sweep so broadly as to prohibit substantial amounts of constitutionally-protected activities.” State v. Nail, 743 N.W.2d 535, 539 (Iowa 2007).
Lowe‘s argues that the statutes at issue here are unconstitutionally vague because, when reading the statutes together with the applicable regulations and the SSUTA, there was no authority for the Department to have assessed sales tax against Lowe‘s related to incidental installation labor, thereby violating Lowe‘s right to due process.
We agree with the district court that Lowe‘s failed to raise a due process challenge before the agency. Regardless, Lowe‘s’ due process challenge is without merit. When reading the statutes and regulations, we conclude that a person of ordinary understanding would have fair notice of what activities are taxable. The Department is not permitted to exercise its authority arbitrarily or discriminatorily under the statute and regulations, and Lowe‘s has failed to show that the sweep of the statute is unconstitutionally overinclusive.
With regard to equal protection, Lowe‘s argues that the structural change requirement directly conflicts with the Department‘s published regulations and subjects Lowe‘s to a higher tax burden than other contractors. For that reason, Lowe‘s argues Department has violated its right to equal protection. Lowe‘s raises this claim under the Equal Protection Clause of the
“The equal protection clause . . . protects the individual from state action which selects him out for discriminatory treatment by subjecting him to taxes not imposed on others of the same class.” Allegheny Pittsburgh Coal Co. v. Cty. Comm‘n, 488 U.S. 336, 345–46, 109 S. Ct. 633, 639 (1989) (quoting Hillsborough Township v. Cromwell, 326 U.S. 620, 623, 66 S. Ct. 445, 448 (1946)). “[T]he legislature acts with broad authority in the realm of taxation.” LSCP, LLLP, 861 N.W.2d at 859. “We recognize a presumption favoring the constitutionality of taxing statutes.” Sperfslage v. Ames City Bd. of Review, 480 N.W.2d 47, 49 (Iowa 1992). We review the challenged tax statutes under the rational basis test. LSCP, LLLP, 861 N.W.2d at 860. “The rational basis standard is easily met in challenges to tax statutes.” Qwest Corp. v. Iowa State Bd. of Tax Review, 829 N.W.2d 550, 558 (Iowa 2013) (quoting Hearst Corp. v. Iowa Dep‘t of Revenue & Fin., 461 N.W.2d 295, 306 (Iowa 1990)).
While both the state and federal constitutional provisions on a basic level establish the general rule that similarly situated citizens should be treated alike, “[w]e may conclude [article I, section 6] is more protective” than the [Equal Protection Clause of the Fourteenth Amendment]. Tyler v. Iowa Dep‘t of Revenue, 904 N.W.2d 162, 166 (Iowa 2017) (alterations in original) (quoting LSCP, LLP, 861 N.W.2d at 856); Racing Ass‘n of Cent. Iowa v. Fitzgerald (RACI II), 675 N.W.2d 1, 5–7(Iowa 2004). In RACI II, we applied the rational basis test more stringently than the United States Supreme Court in a taxation context. Id. We have applied the RACI II test in other tax cases. See Tyler, 904 N.W.2d at 165–72; LSCP, LLP, 861 N.W.2d at 856–58; Qwest Corp., 829 N.W.2d at 558–66. Here, however, even under the approach of RACI II and prevailing federal law, Lowe‘s has failed to mount a successful equal protection attack.
“The first step of [analyzing] an equal protection claim is to identify the classes of similarly situated persons singled out for differential treatment.” LSCP, LLLP, 861 N.W.2d at 859 (alteration in original) (quoting Grovijohn v. Virjon, Inc., 643 N.W.2d 200, 204 (Iowa 2002)). “If a plaintiff fails to articulate, and the court is unable to identify, a class of similarly situated individuals who are allegedly treated differently under the challenged statute,’ our analysis ends.” Id. (quoting Timberland Partners XXI, LLP v. Iowa Dep‘t of Revenue, 757 N.W.2d 172, 175 (Iowa 2008)). The district court determined that
[s]ection 423.2(6)(a) provides that all enumerated services are subject to taxation. The statute provides that the enumerated services may be exempt from taxation if the taxpayer can establish that the services provided meet the Construction Exemption. Thus every contractor including Lowe‘s is being treated the same. If Lowe‘s could have established that its installation contracts were performed on or in connection with new construction, reconstruction, expansion, alteration or remodeling they would have been exempt. In this case they could not but Lowe‘s inability to establish the necessary facts to demonstrate
the applicability of the exemption does not create an equal protection violation.
We agree with the district court that every contractor installing home improvements faces the same sales tax consequences subject to the same regulations and exemptions, without disparate treatment. Thislegal conclusion is fatal to Lowe‘s equal protection claim under the Iowa and Federal Constitutions. See LSCP, LLLP, 861 N.W.2d at 859.
IV. DISPOSITION.
For these reasons, we affirm in part and reverse in part the judgment of the district court. The Department‘s assessment is upheld except as to those transactions in which the predominant service or only service provided was carpentry installation work. We remand the case with instructions for the district court to direct the Department to recalculate the sales tax assessment consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH INSTRUCTIONS.