Tax Type
Consumer Use Tax
Description
Agricultural exemptions
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
07-25-2002
July 25, 2002
Re: § 58.1-1821 Application: Consumer Use Tax
Dear *****:
This will reply to your letter regarding the consumer use tax assessment issued to your client, ***** (the "Taxpayer"), for the period December 1999. Your letter is being treated as an application for correction of an erroneous assessment pursuant to Code of Virginia § 58.1-1821.
FACTS
The Taxpayer purchased a tractor for use on a horse farm. At the request of the Virginia Department of Taxation's ***** District Office, the Taxpayer was asked to provide documentation that the tractor was used in agricultural production for market, thus supporting the agricultural certificate of exemption (Form ST-18) provided by the Taxpayer to the vendor. The documentation requested may have been in the form of a Schedule F, Profit or Loss from Farming, or invoices showing sales of horses. Because the Taxpayer did not furnish the requested documentation, an assessment for consumer use tax was issued to the Taxpayer.
It is your contention that the agricultural exemption under Code of Virginia § 58.1-609.2(1) for farm equipment sold to farmers does not require the equipment to be used in producing an agricultural product for market. In addition, you believe that the department's regulation with respect to agriculture, Title 23 of the Virginia Administrative Code (VAC) 10-210-50, does not reflect the current statute with respect to the agricultural exemption. You request that the audit assessment be abated.
DETERMINATION
Agricultural Exemption - Generally
Code of Virginia § 58.1-609.2(1) provides an exemption from the retail sales and use tax for ". . . farm machinery; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor." [Emphasis added.]
The department has consistently applied the exemption to the specified items only if used by farmers in agricultural production for market. As stated in Title 23 VAC 10-210-50, "A farmer not engaged in the business of producing agricultural products for market cannot claim any agricultural exemptions." [Emphasis added.] This interpretation of the agricultural exemption is supported by an Opinion of the Attorney General. See 1989 Att'y Gen. Ann. Rep. 327. The rationale behind the exemption is that many items purchased by farmers are used to produce or become component parts of products which themselves are subsequently taxed. Therefore, the exemption prevents double taxation by only subjecting the ultimate retail sale of the product to the tax. See 1995-1999 Virginia Sales and Use Tax Expenditure Study, December 1994, Volume 2, No. 1, p. 76. If an item is not used in producing agricultural products for market, there is no rationale for exempting it under Code of Virginia § 58.1-609.2(1).
Agricultural Exemption - Horse Farms/Breeders
Subsection B of Title 23 VAC 10-210-50 sets forth the department's interpretation of the agricultural exemption as it applies to farmers/horse breeders:
-
- The production for sale of colts on a horse farm is regarded as "agricultural production." Horses used exclusively for the purpose of breeding colts for sale and the feed and supplies for such horses can be purchased tax exempt by the farmer-horse breeder.
-
- Horses purchased for racing or showing are subject to the tax since they are not used exclusively for breeding purposes. The tax must also be paid on feed and supplies for such horses.
As can be seen from the exemption statute and regulation cited above, the exemption of tangible personal property depends on the use of the property, not the nature of the property being purchased. For example, a tractor may be exempt when used in agricultural production for market; however, the same tractor would be taxable when used for cutting grass or plowing snow. In this case, the "agricultural production for market requirement" contained in the exemption statute is correctly reflected in the department's regulation.
In order to substantiate the tax exempt status of the tractor in question, it is the responsibility of the Taxpayer to demonstrate that the farm is breeding horses for sale and, therefore, the tractor is being used in agricultural production for market. Absent this information, there is no basis for abating the assessment.
Validity of Department's Regulation
You state that the department's regulation cannot be used as authority for interpreting the exemption statute when it is inconsistent with the statutory language. To support your position, you cite an editor's note that states "[t]his regulation is not reflective of current law." You also point out that Code of Virginia § 58.1-609.2(1) was amended in 1993, 1994 and and the regulation has not been updated to reflect the law changes; therefore, the regulation is invalid.
The amendments to the law that you cite did not change the "used in agricultural production for market" requirement in the exemption statute. The 1993 amendment involved grouping the retail sales and use tax exemptions in Title 58.1 of the Code of Virginia into ten categories. The substance of the agricultural exemption did not change. The 1994 amendment to Code of Virginia § 58.1-609.2(1) extended the agricultural exemption to property purchased by beekeepers, provided such property is used in agricultural production for market. The 1999 amendment did not change
§ 58.1609.2(1); rather, it modified the exemption under § 58.1-609.2(6), which applies to harvesting of forest products. Accordingly, your position that the department's regulation is invalid and without merit.
Conclusion
I will allow the Taxpayer 30 days from the date of this letter to provide documentation substantiating that the farm for which the tractor was purchased is in the business of breeding and selling horses. If the Taxpayer is unable to provide such documentation within the allotted time, the assessment will be upheld and a bill for the outstanding balance will be sent to the Taxpayer. Additional documentation may be sent to Office of Policy and Administration, Policy Development, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
PD/39228K
Rulings of the Tax Commissioner