Legislators and policymakers constantly contend with a big challenge: to keep the law current with technology. The sales and use tax law is no exception. Recent state guidance highlights a cutting edge of the law, namely how states treat transactions involving unmanned aerial vehicles (UAVs), or drones.
Several states have released guidance regarding drones over the past few years. Often at issue is whether a purchaser must pay sales and use tax to buy a drone used for agricultural purposes. That’s because many states exempt agricultural machinery and equipment but limit the exemption to machinery and equipment purchased for use directly in the agricultural process. It can be challenging to determine whether or not a farmer’s drone use is direct or indirect to the farming business.
It seems states are reaching different results based on comparable fact patterns. Consider Missouri and Tennessee. The Missouri Department of Revenue explained in a May 2016 letter ruling that a farmer must pay sales and use tax when purchasing a drone used to surveil agricultural property. The department acknowledged that Missouri exempts qualified sales of farm machinery, one requirement of which is to use the machinery directly for agricultural purposes. The department also recognized that Missouri considers aircraft as qualifying farm machinery if the farmer uses it only to apply agricultural chemicals aerially to crops. Even still, the department concluded that this seller’s drones were taxable because the purchasing farmers would not use them to apply agricultural chemicals or to produce agricultural products. Instead, the drones would “merely allow a visual inspection of property, saving a farmer from performing a physical inspection.” That use was too indirect to qualify the drones as exempt farm machinery.
Contrast that result with 2014 guidance from the Tennessee Department of Revenue. Like Missouri, Tennessee exempts appliances used directly and principally for producing agricultural and nursery products. So, in Tennessee Notice #14-05, Tennessee explained that “[t]he Department considers unmanned aircraft systems (UAS) used in sowing, planting, growing, monitoring, managing or harvesting farm products and nursery stock to be an appliance that qualifies for the agricultural exemption.” The notice also explained that relevant UAS support equipment is also exempt, such as:
Thus, it appears Tennessee may have exempted the Missouri taxpayer’s drone transactions as an eligible monitoring use.
New York’s general standard for farm purchases is different and fairly broad. New York switched from a “directly” standard to a “predominantly” standard in September 2000, opening up the exemption for more farm-related purchases. A farmer’s purchases of machinery, equipment, and supplies are exempt from New York’s sales tax if the farmer uses the property “predominantly” (i.e., more than 50 percent of the time) in farm production operations. Same for the farmer’s purchases of vehicles, such as all-terrain vehicles, boats, and snowmobiles. However, New York’s guidance does not yet specify eligibility for the exemption for drones used in agriculture.
Outside of the agricultural context, one wonders whether a state might exempt drone-related transactions broadly. In 2013, California saw a movement to exempt for a decade purchases of tangible personal property used to manufacture drones. A common sales and use tax policy dispute was at play: whether to offer competitive business tax incentives or to fully fund important government services. The bill’s proponents believed California could “reap tremendous benefits” by positioning itself at the fore of an emerging sector. But opponents cited the large percentage of county revenue that the state sales tax generates, and they challenged the bill’s authors to reimburse counties and local agencies for that lost revenue. The bill died in committee.
In New York, sales of “general aviation aircraft” have been exempt since Sept. 1, 2015. New York defines a “general aviation aircraft” as an “aircraft that is used in civilian aviation.” So, drone sales are exempt in New York, right? Not so fast—the general aviation aircraft exemption explicitly does not include “an unmanned aerial vehicle or drone,” among other things.
Drones’ growing use poses property tax questions, too. For example, in July 2015, the Florida Department of Revenue published a bulletin that addressed aerial drone photography. The bulletin explained that if a person has a reasonable expectation of privacy in her privately owned real property, then Florida generally prohibits someone from capturing an image of or surveilling the property with a drone. However, it also explained that Florida does allow a property appraiser to assess property for ad valorem tax purposes using a drone.
I hope I have not droned on about drones. Stay tuned to see when and how other states will address the fascinating issues drones pose for tax professionals.
Continue the discussion on LinkedIn: Should states exempt sales of drones or drone-related manufacturing equipment? Why or why not?
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By Ryan J. Voorhees
 Emphasis supplied.
 The bill also would have offered UAV manufacturers an income tax credit based on qualified employee wages.
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