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IN THE SUPREME COURT OF IOWA
No. 72 / 04-1836 Filed September 15, 2006 IOWA AG CONSTRUCTION CO., INC., an Iowa Corporation, and IOWA SELECT FARM, an Iowa Limited Liability Partnership, Appellants, vs. IOWA STATE BOARD OF TAX REVIEW, Appellee.

Appeal from the Iowa District Court for Polk County, Robert J. Blink, Judge.

Taxpayers appeal judicial review decision that affirmed their tax assessment. AFFIRMED.

Burns Mossman of Nyemaster, Goode, West, Hansell & O'Brien, P.C., Des Moines, for appellants.

Thomas J. Miller, Attorney General, and Marcia Mason, Assistant Attorney General, for appellee.

2 LAVORATO, Chief Justice. Iowa Ag Construction Co., Inc. (Iowa Ag) and Iowa Select Farms, L.L.P. (Iowa Select) appeal from a district court decision affirming the decision of the Iowa State Board of Tax Review (Board). The Board held that property used in pork production was not exempt from Iowa sales or consumer use tax under Iowa Code section 422.45(26), (39) (2001). Because we agree with the conclusions the district court reached, we affirm. I. Background Facts. Iowa Ag constructed buildings for DeCoster Farms. Hog confinement buildings built by Iowa Ag were always owned by Austin J. DeCoster. Some of these buildings were leased to Iowa Select. In the hog confinement business, different buildings are used for confining hogs of different ages to isolate disease and control the environment. Hog operations use farrowing facilities. In those facilities sows give birth to pigs, and those pigs stay with the sow for three to four weeks. Hog operations also use nurseries in which pigs are confined until they reach a weight of forty or fifty pounds. Finishing facilities are also used to confine pigs weighing 50 to 250 pounds. A typical hog confinement building is 200 to 280 feet in length and forty feet wide. The foundation is made of poured concrete, with walls from one to four feet high. These walls have a two-inch ledge to allow for

installation of slatted concrete flooring or nursery floor frames. Piers in the pits are poured concrete walls that run the length of the building. The pit walls and piers support the slats or nursery floor frames. The pigs and the people tending the pigs walk into a hog confinement building on the same level where the concrete slats or nursery floor frames are located. Below the slatted or nursery flooring is a manure pit that is between one and four feet deep.

3 Farrowing and nursery barns consist of separate rooms because of the need to regulate the temperature in the rooms. In finishing barns, which are open, the hogs are separated into pens. Nursery flooring is used in farrowing and nursery buildings. Nursery flooring is galvanized steel mesh wire cut to fit a frame. The frames are typically four-by-eight feet or six-by-ten feet and weigh 144 pounds and 270 pounds, respectively. The frame rests on top of concrete beams and is attached by a "J" bolt to the pen dividers. Bolts are used to secure the flooring to the floor frame in the corners. There are four bolts for each frame. Nursery flooring suspends pigs from their waste, which falls through the wire mesh to the pit below. The nursery flooring is designed to separate the animals from their waste thereby keeping them clean and dry. Concrete slats are used in finishing buildings. These slats are usually four by ten feet or four by eight feet. A four by ten feet slat weighs about 1340 pounds. The slats are designed to separate the hogs from their waste, which falls through the floor into the waste pit. The weight of the slat holds it in place on the two-inch ledge in the wall of the building. Exhaust fans are located in the sides or ends of buildings or in pits to exchange air. Ventilation is necessary for the pigs' proper growth. The exhaust fans are made of fiberglass and vary in size and weight from eleven inches square to fifty-three inches square and weigh from 19 pounds to 287 pounds. The wall fans are inserted into a hole in the wall. Four to eight screws or bolts attach the fan to the building. If a fan is removed, a square opening would be left in the building. The size of the opening would match the size of the fan. The pit fans typically sit on top of a rectangular concrete box that is part of the pit structure and located outside the building. A ventilation controller turns the fans on and off, and a motor powers the fans.

4 Curtains are used in the hog confinement buildings and are part of a system that, together with other equipment in the building, provide proper ventilation for the animals. These buildings are built with rectangular openings along the sides of the buildings to provide for natural ventilation. The curtains are made of vinyl over a polyethylene material, woven together in strands. The curtains can be raised or lowered manually. Curtain controllers control the ventilation within the hog confinement buildings. A curtain controller receives information from thermostats or sensors inside and outside the building. Based on that information, the curtain controller causes fans to go off and on and the curtains to go up and down. The controller can also control heaters and water misters that drip water on the animals. The controller is usually attached to a control board in the center of the building with two to four one-half-inch screws. The controller has three wires coming in to it, and the number of wires going out would depend on how many items the controller was to control. A curtain machine raises and lowers the curtains. The curtain

machine replaces a hand crank. The curtain machine weighs between 100 and 150 pounds and is usually attached to the outside of the confinement building with six screws or bolts. Three electrical wires provide power to the curtain machine, and additional wires connect it to the curtain and ventilation controller. The curtain machine has a cable attached to a drum, which is operated by electrical power. When the drum turns, the cable lifts or lowers the curtains on the side of the building. As part of the biosecurity procedures at Iowa Select and DeCoster Farms, personnel who work in the hog confinement buildings are required to shower every morning upon arrival before entering a hog confinement building. Both Iowa Select and DeCoster Farms provide uniforms for their

5 employees, which are worn by the employees and are washed on-site. These procedures are necessary because hogs are susceptible to disease that is easily carried and transmitted by clothing. At each building, refrigerators are used to keep medications for hogs at the proper temperature. Such medication might include immunizations or vitamin or mineral supplements that need refrigeration to maintain effectiveness. Today, most hogs are bred artificially. After semen is collected and delivered to the farm, the semen must be stored at a specific temperature. A special refrigerator is used at the Iowa Select and DeCoster Farms to store the semen. Iowa Select uses mowers to cut grass and weeds around the hog confinement buildings for rodent control. Mowers are also used around sewage lagoons located on the site as required by the Iowa Department of Natural Resources. The agency requires the mowing so that its employees can properly inspect the lagoons to determine if there are any cracks, leaks, or degradation around the outside of the lagoons. The mowers were used more than fifty percent of the time to cut grass and weeds to control rodents and to mow grass around the lagoons. II. Proceedings. On November 23, 1999, as a result of a field audit, the Iowa Department of Revenue and Finance (department) sent Iowa Ag a notice of assessment for sales/use tax, covering the period from April 1, 1992, through June 30, 1998. The tax, penalty, and interest amounted to

$1,414,714.51. On January 5, 2000, Iowa Ag filed a protest, disputing the entire amount of the assessment. On November 23, 1999, as a result of a field audit, the department sent Iowa Select a notice of assessment for sales/use tax covering the

6 period from January 1, 1993, through December 31, 1998. The tax,

penalty, and interest amounted to $708,410.87. On April 7, 2000, Iowa Select filed a protest, disputing the entire amount of the assessment. Later, Iowa Select paid the assessment under protest and filed a claim for refund of the amount paid. Iowa Ag and Iowa Select agreed to consolidate the two cases. An administrative law judge (ALJ) heard the case. The issues pertinent to the appeal before this court were whether certain items of property described above were exempt from tax pursuant to Iowa Code section 422.45(39) and whether other items of property described above were exempt from tax pursuant to Iowa Code section 422.45(26). The department appealed the ALJ's proposed decision to the director, who issued an order reversing a part of the ALJ's proposed decision. Iowa Ag and Iowa Select [hereinafter taxpayers] appealed the director's order to the Board. Following a hearing, the Board issued its decision. The Board

concluded that the following items of property pertinent to the appeal to this court and described above were subject to tax: nursery flooring, concrete slats, exhaust fans, curtains, curtain controllers, curtain machines, washers, dryers, refrigerators, and mowers. The taxpayers filed a petition for judicial review in the district court. The taxpayers alleged that the Board erred in its legal conclusion that the property described was subject to tax. Following a hearing, the district court affirmed the Board's decision. It is from this ruling that the taxpayers appeal. III. Issues. The first issue is whether the following items of property are exempt from Iowa sales/use tax pursuant to Iowa Code section 422.45(39): nursery

7 flooring, concrete slats, exhaust fans, curtains, curtain controllers, curtain machines, washers, dryers, and refrigerators. The second issue is whether the mowers are exempt from such tax pursuant to Iowa Code section 422.45(26). IV. Scope of Review. Our review of agency action is governed by the standards set forth in Iowa's Administrative Procedure Act. See Iowa Code

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