Tax Type
Retail Sales and Use Tax
Description
Horse breeding and training facility
Topic
Exemptions
Property Subject to Tax
Date Issued
10-01-2004
October 1, 2004
Re: Ruling Request: Retail Sales and Use Tax
Dear **********:
This will reply to your letter in which you request a ruling on behalf of your client, (the "Taxpayer"), with respect to the proper application of the retail sales and use tax to the Taxpayer's horse breeding and training operation. I apologize for the delay in the Department's response.
FACTS
The Taxpayer operates a horse breeding and training facility. You represent that the Taxpayer's purchases of horses are divided into the following classes: (1) breeding stock, (2) mixed breeding stock, (3) resale inventory, (4) training resale inventory, and (5) competing resale inventory. In addition to breeding and training horses for resale, the Taxpayer trains and boards horses owned by its customers. You request a ruling on the application of the sales and use tax to various transactions in connection with the Taxpayer's business operation.
RULING
Breeding Stock/ Mixed Breeding Stock
The Taxpayer purchases horses that are used exclusively as breeding stock. In addition, the Taxpayer purchases breeding stock that are not for sale but that the Taxpayer will train, compete and show.
The Department has consistently held that horse farmers are exempt from the retail sales and use tax on the feed and supplies purchased for horses for use in breeding activities, pursuant to the agricultural exemption under Va. Code § 58.1609.2.1. You are correct in that this exemption continues to apply to such animals until a taxpayer uses a horse in a nonexempt manner, such as racing, showing, or for pleasure. Further, you are correct that the exemption will apply to a horse previously used in a nonexempt manner once the horse is permanently retired from the nonexempt activity. Conversely, the feed and supplies are no longer exempt when breeding stock is used in a nonexempt manner, e.g., showing, racing, or for pleasure.
Accordingly, the Taxpayer's purchases of horses in class (1) used exclusively for breeding purposes qualify for the agricultural exemption provided under Va. Code § 58.1-609.2.1. Similarly, feed and supplies for horses used exclusively in breeding are exempt from the tax. The tax does apply to the Taxpayer's purchases of horses in class (2) because these horses are not used exclusively for breeding purposes.
Resale Inventory
The Taxpayer's inventory of horses for resale consists of: (a) horses that are not trained or placed in competition or shows; (b) horses that are trained to enhance their resale value; and (c) horses that are placed in competition or shows to enhance their value prior to resale.
Virginia Code § 58.1-602 excludes from the statutory definition of "retail sale" a sale made for resale. Virginia Code § 58.1-623 states, however, that:
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- If a taxpayer ...makes any use of the property (purchased for resale) other than an exempt use or retention, demonstration, or display while holding property for resale ...such use shall be deemed a taxable sale by the taxpayer as of the time the property ...is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.
The Department addressed the application of the tax on the use of property prior to resale in Public Document (P.D.) 93-5 (1/8/93). In that ruling, the Department determined that the purchase of miniature horses used in breeding or in the amusement park for rides and other entertainment prior to resale constitutes a taxable use for which the taxpayer is liable.
Accordingly, the Taxpayer's purchases of horses in category (a) are exempt from the tax provided such horses are not used in a taxable manner prior to resale. Conversely, I find that the training or the showing of horses prior to resale to enhance their value goes beyond the intent of the resale exemption and becomes a taxable use by the Taxpayer. Therefore, horses in resale categories (b) and (c) that are purchased with the intent of being trained or placed in competition or shows prior to resale are subjected to a taxable use. Such horses are not eligible for the resale exemption. The subsequent sale of such horses is subject to the sales tax unless the purchaser provides the Taxpayer a certificate of exemption indicating the purchase is exempt from the tax.
Boarding and Training Operation
Title 23 of the Virginia Administrative Code (VAC) 10-210-790 specifically states the tax does not apply to charges for keeping pets. Operators of kennels, stables and pet shops are required to pay the tax on purchases of tangible personal property used in their operations.
You are correct that charges for the boarding of horses are not subject to the sales and use tax. Title 23 VAC 10-210-4040(E) provides that "a service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services." As a service provider, the Taxpayer is liable for the payment of the sales tax to its suppliers of tangible personal property (nonprescription drugs, feed and other supplies) used in providing its boarding services, whether separately stated or not.
Training Services
You are correct that the training of horses represents the provision of a nontaxable service as provided in Va. Code § 58.1-609.5(1). As a provider of such services, the Taxpayer would not charge its customers sales tax on fees for training services.
Veterinary Services
The Taxpayer may purchase veterinarian services exempt from the tax under Va. Code § 58.1-609.5(1), as veterinarians are engaged in rendering professional services. Veterinarians are the users or consumers of medicines, drugs, medical supplies, equipment and all other tangible personal property purchased for use in their practice. They must pay the tax to their suppliers on purchases of this property. Further, as provided in Va. Code § 58.1-609.7(1), veterinarians must pay the tax on the purchase of all prescription medicines and drugs that are dispensed or sold. Therefore, you are correct that the Taxpayer may purchase exempt of the tax prescription medication dispensed by a veterinarian.
Property Purchased for Use in Taxable and Exempt Activities
Title 23 VAC 10-210-280 indicates that the burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. This regulation also indicates that reasonable care and judgment must be used in giving or receiving certificates of exemption, and mandates that certificates of exemption "cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate."
In those instances where purchases of taxable property are commingled with exempt property, the Taxpayer must use reasonable care in applying the exemption only to that property entitled to such an exemption. Therefore, the Taxpayer may not claim the agricultural exemption on all purchases of feed and supplies used in its operation and then accrue use tax on those items used in a taxable activity.
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/46987T
Rulings of the Tax Commissioner