Impending tax reform, both at the federal and state levels, has been a leading point of contention for the past several months. It seems that every industry or special interest group has weighed in on the various options currently on the table, and farmers and ranchers are certainly no exception. Stakeholders have commented on the repercussions of the proposed border adjustment tax, estate tax reform and property tax relief programs on agricultural producers. However, significantly less time has been spent examining the effects of sales and use tax on these agrarian enterprises. Nevertheless, sales and use tax can have an extensive impact on farmers’ bottom lines, as well as on state and local government coffers, and is worth further examination in this context.
Currently, every state offers some sort of sales tax exemption, deduction or rebate for tangible personal property and services purchased for agricultural use (D.C. is the lone exception, but it also contains no farm land). The types of purchases that qualify for exemption can vary wildly from state to state. For example, while all states provide some sales tax benefit for purchases of farm equipment and machinery, there appears to be no consensus on how to treat purchases of repair and replacement parts for such machinery. Some states provide a sales tax exemption for any parts used in exempt farm equipment or machinery (Massachusetts, North Carolina), while others apply the full sales tax rate to all purchases of repair and replacement parts (Arizona, Wyoming). Further, many states take an in-between approach and exempt only certain categories of parts for agricultural equipment.
This type of conditional benefit was at the center of a case in Nebraska earlier this month, where, until recently, only the sales or use tax paid on “depreciable repairs and parts” was refundable. The Nebraska Supreme Court was tasked with determining exactly which parts were “depreciable” for purposes of the sales tax refund. In Farmers Cooperative v. Nebraska, the court found that parts and repairs on which personal property tax had been paid were “depreciable” and therefore eligible for the refund. The court also allowed the Department of Revenue to request taxpayers’ personal property returns to verify that personal property taxes had been paid before issuing the sales tax refund, over the objections of two farming cooperatives.
Another category of agricultural purchases that is especially relevant right now, as the growing season is underway, is propagative materials such as plants and seeds. This is another area of sales tax where the states differ in their approaches. Alabama and Mississippi have perhaps the most generous offerings, and provide sales tax exemptions for all purchases of seeds, in any quantity and by any buyer. A more common approach, taken in states such as Georgia, Oklahoma, Minnesota and New York, is to exempt plants and seeds only when purchased by a farmer or for agricultural purposes.
A more restrictive tactic, utilized in California and Texas, limits sales tax exemptions to only plants and seeds that will produce food for human (or animal) consumption. In these states, the growers of cotton and similar commodities must pay sales tax on their purchases of seeds or plants. Finally, South Dakota uses a different method, and provides an exemption for seeds when purchased in bulk. There, seeds sold for agricultural purposes are exempt only if bought in quantities of 25 pounds or more.
The variety of positions taken across the states in exempting agricultural purchases from sales tax shows that there may be more room in this arena to negotiate for additional benefits for farmers and ranchers. While other tax types undoubtedly have significant consequences for the industry, lobbyists and legislators alike should remember that sales tax is another avenue to be considered in examining the tax burdens on agriculture.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What approach should states take in determining which agricultural purchases are exempt from sales tax?
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Correction: This piece was originally published on April 13, 2017, stating that New York does not offer a sales tax exemption for propagative materials. New York state offers an exemption for all tangible personal property used or consumed predominantly in farm production. This post has been updated to reflect this.
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