Sales Tax Slice: Fruit Trees as Exempt Farm ‘Equipment’?

It's no surprise that a laundry list of items that qualify for Illinois' sales and use tax exemption for machinery and equipment used in farming includes tractors, combines, bailers, irrigation equipment, cattle and poultry feeders, and excludes improvements to real estate such as fences, barns, roads, grain bins and silos. But, as what may seem a surprising request, one nonprofit organization requested guidance from the Illinois Department of Revenue as to whether nursery stock, such as fruit- and nut- producing trees, qualify as exempt farming equipment.

Illinois defines such equipment as any independent device or apparatus separate from any machinery, but essential to agricultural production. The Illinois statute does not explicitly state nursery stock of perennial plants as included under the exemption. An Illinois nonprofit organization that develops tree crops, specifically fruit and nut trees, across the Midwest inquired as to whether the definition of equipment would be interpreted to include nursery stock (seedlings) of perennial plants such as fruit and nut trees, shrubs and vines, when the plants are sold to farmers for agricultural production.

The organization explained that, to a farmer growing perennial plants, the purchase of young seedling trees is a significant capital investment, similar to a tractor or any other piece of farming equipment used for agricultural production. The organization offered support for its desired outcome by claiming that other states commonly include perennial plants and other nursery stock under a similar equipment exemption for farmers, and noting that the IRS allows farmers to treat fruit and nut trees as depreciable capital.

While many states may provide sales tax exemptions for seedlings and plants (as seedlings not as "equipment"), the department advised that nursery stock and seedlings are not considered equipment under the farm machinery or equipment exemption in Illinois. The department did not address exemptions available in any other states, and it did not account for any perceived difference in characterization when compared to the federal treatment of such trees.

The department pointed to an Illinois regulation that explains that "Persons who sell seeds to purchasers who employ such seeds in raising vegetables, crops or other plants for sale are selling seeds to purchasers for purposes of resale and are not required to remit Retailers' Occupation Tax measured by their gross receipts from such sales." The department went on to explain that sales of nursery stock made for resale would not be taxable.

But did Illinois get it right?

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Are fruit- and nut-bearing trees, shrubs, and vines potential candidates for a resale exemption, or are they more akin to equipment that is used to produce agricultural goods? Should states take into account treatment for federal income tax purposes?

For more information about sales and use tax exemptions for agriculture, check out Bloomberg BNA's Sales and Use Tax Navigator by  signing up for a free trial of the Bloomberg BNA Premier State Tax Library today. 

By:  Mark Kennedy

Follow BBNA on Twitter at: @BBNAtax.