Sales tax and agriculture

Many industries come with confusing sales tax complexities. So does agriculture, and several aspects make this industry trickier than others for sales tax.

Here are points to keep in mind regarding sales tax and agriculture.

Laws vary by state

Sales tax changed dramatically in 2018 with the Supreme Court Wayfair decision in a case that greenlighted states mandating online retailers collect and remit sales tax on transactions in states where they had no physical presence.

Without physical presence in those states and jurisdictions, companies, including suppliers to the agriculture industry, had had no sales tax nexus, aka the connection between a company and a tax jurisdiction that creates sales tax obligations. After Wayfair, companies selling into states where they had no physical presence had to also consider sales tax nexus thresholds in sales each year into a state in total dollars, sales volumes or both.

In five major farming states, for instance, these annual thresholds are now $100,000 in sales in Iowa or South Dakota; and, in Illinois, Nebraska and Minnesota, $100,000 in sales or 200 transactions.

Sales tax laws regarding farming can be as diverse as food itself and states, particularly those with a big farming presence, tweak sales tax laws a lot. Recently, for instance, Alabama degreed that some agriculture products exempt from sales and use tax. (Examples include cuts of meat, flowers, jams, jellies and peanuts.)

In most states, goods and equipment used directly in agricultural production are also exempt – a clear enough distinction for many supplies and large pieces of farm equipment. Some smaller equipment, though, such as mowers and trailers, can be used for both agricultural or residential/recreational use; dealers may charge sales tax on these purchases.

More on exemptions

Depending on the state, many farming and agriculture products and supplies can be exempt from sales tax obligations, but often with conditions. “Sales and use taxes on sales of agricultural products are complex. With the definitions of food and prepared food, the original state of a product and the difference between wholesale and retail sales, it is very easy to misunderstand how sales and use tax applies to sales of agricultural products,” reads the product sales tax fact sheet for farmers in North Carolina, where exemptions depend not just on the farm product sold but who does the selling.

“Here in Illinois, the equipment exemption applies to ‘new and used farm machinery and equipment the buyer certifies will be used primarily for production agriculture,’” notes the consultancy CliftonLarsonAllen Wealth Advisors. “From this you may assume that all equipment used on the farm qualifies, but again it does not. The Illinois Code actually defines production agriculture as follows: ‘With respect to crops, production agriculture is limited to activities necessary in tilling the soil, planting, irrigating, cultivating, applying herbicide, insecticide, or fertilizer, and harvesting and drying crops.’

“Note that the definition does not include crop scouting, mowing, or improvements to waterways, making UTVs, batwings and excavators, among other things, fully taxable,” CLA adds. “Consumable supplies such as fuel, grease, and anti-freeze are not repair or replacement parts and do not qualify under the Illinois exemption, either.”

In New York, farm operations (lumped in commercial horse breeding) are exempt from paying sales tax on items used in the farming operation, but no exemption is automatic. “You must either present an exemption certificate to the vendor when purchasing products or you can claim a refund if you have evidence to show you paid the sales tax,” the regs read.

This NYS form exempts a farming operation from paying sales tax on the purchase of tangible personal property used predominantly (more than 50%) in farm production or horse boarding. This includes building materials, production equipment and supplies, animals, feed, hardware, motor vehicles, fuel (not motor fuel), gas/propane, electricity, refrigeration, and labor and services hired for repairing, maintaining or servicing property used in farming.

As with similar cases in other industries, an exemption certificate is often required to substantiate how an agriculture-related transaction takes place free from sales tax. These certificates, a staple of sales tax compliance generally, should have state tax ID numbers, the name of the seller and the customer, the type of exemption and a valid signature and date from the customer. Certificates generally need to be renewed every two to three years, though this too varies by state.

Note that another area of sales tax exemption has historically been services, such as those for repairing farm facilities or equipment. Services are incurring sales tax in many states now, agriculture services included.

If sales tax developments affect your industry, contact TaxConnex. We provide services to become your outsourced sales tax department.