This Week in State Tax

The Iowa Department of Revenue recently issued a declaratory order addressing whether a taxpayer's purchase of computer hardware used to mine Bitcoin qualifies for Iowa's sales tax exemption for property "directly and primarily used in processing by a manufacturer." Concluding that the taxpayer was neither engaged in "processing" nor acting as a "manufacturer" within the meaning of the statute, the Department determined that the taxpayer's purchase of the mining hardware was not exempt from Iowa sales tax.

The order arose from a petition filed by a taxpayer whose primary business activity is mining Bitcoin. The taxpayer was in the process of acquiring application-specific integrated circuit ("ASIC") hardware, which it described as computing equipment with no commercial use other than Bitcoin mining. Using the ASIC hardware, the taxpayer performs computations on unconfirmed Bitcoin transaction data and single-use variable numbers to produce a hash code. When a hash code meets the Bitcoin network's requirements, the taxpayer receives newly issued Bitcoin.

The Department first considered whether the taxpayer was engaged in "processing," defined by statute as “a series of operations in which materials are manufactured, refined, purified, created, combined, or transformed by a manufacturer, ultimately into tangible personal property.” The Department reasoned that the end product of the taxpayer's activity is a cryptocurrency that cannot be seen, weighed, measured, felt, or touched, and is therefore an intangible asset rather than tangible personal property. Nor did Bitcoin qualify as prewritten computer software, a form of tangible personal property; as Bitcoin provides no coded instructions causing a computer to perform a task. Because the exemption is limited to property used in activities that result in tangible personal property, the Department concluded that the taxpayer was not engaged in processing.

The Department next considered whether the taxpayer was a "manufacturer," defined as a business that adds value to personal property "by a process of manufacturing with a view to selling the property for gain or profit.” Looking to the statutory definition of "manufacturing," which refers to activities commonly understood within the ordinary meaning of the term, such as refining, purifying, combining materials, and packing meats; the Department found that the taxpayer engaged in none of these activities. Turning to the dictionary meaning of the term, the Department reasoned that the taxpayer was not creating a product or using raw materials to make something, but rather "unlocking" or "mining" Bitcoin using numerical inputs. The Department also rejected the taxpayer's argument that its mining was comparable to the extractive processes referenced in the statute, noting that the statutory language expressly excludes the extractive process itself from "manufacturing," and that the taxpayer did not assert it performed any post-extraction activity comparable to the crushing, washing, sizing, or blending of aggregate materials that the statute references.

Because the taxpayer was neither engaged in processing nor acting as a manufacturer, the Department held that the ASIC hardware was not directly and primarily used by a manufacturer in processing and therefore did not qualify for the sales tax exemption. 

For more information on the Iowa Department of Revenue's declaratory order, please contact Crystal Hildebrand.

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The New Hampshire Supreme Court reversed a lower court decision permitting one member of a combined group to carry back a capital loss to offset a capital gain earned by another member. The taxpayer's combined group reported a capital gain generated by one subsidiary on the group’s original 2017 New Hampshire Business Profits Tax return. After a different group member recognized a capital loss from the sale of a subsidiary in a later year, the taxpayer amended its 2017 return to carry back the loss and offset the earlier gain. The Department of Revenue Administration (DRA) denied the refund, relying on its regulation limiting a capital loss carryback to offset only gains recognized by the same legal entity that generated the loss. The taxpayer ultimately prevailed in superior court, which held that combined reporting required the group to be treated as a single business organization and invalidated conflicting Department regulations, prompting the Department's appeal.

Under New Hampshire law, certain taxpayers must file a combined return “containing the combined net income of the water’s edge combined group … as though the entire combined net income of the water’s edge combined group was that of one business organization or … in such other manner as the commissioner shall determine to be equitable.” A DRA regulation interpreted this statute to require each group member to compute its net income separately, with those member level figures then added together to arrive at the group’s combined net income. The taxpayer argued that this approach conflicts with the statutory language because it did not tax the combined group “as though [it was] one business organization”, and that capital losses should therefore be sharable across group members.

The Supreme Court reversed the lower court decision, holding that the statute unambiguously prescribes a specific method of computing combined net income that does not permit sharing of capital losses. In the court’s view, under the statute’s definitions of “combined net income” and “water’s edge method”, each group member is required to begin by determining its own net income, including its use of capital loss carrybacks, before those incomes are aggregated. Because capital loss carrybacks are accounted for during this member level net income computation stage, the court found that using one member’s loss to offset another member’s gain would be inconsistent with the statute’s step by step computation of the tax base. The court rejected the taxpayer's argument that the combined group must be treated as a single taxpayer for all purposes, explaining that the statutory framework identifies specific stages at which group-level treatment applies, such as apportionment, while preserving separate entity computations at the net-income stage. The court further concluded that the Department's regulations requiring separate member-level income determinations were consistent with the statute.

Contact Jennifer Bates with questions about Hologic, Inc. v. N.H. Department of Revenue.

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