Document Number
07-43
Tax Type
Retail Sales and Use Tax
Description
Exemption denied on supplies for training and maintenance horse related activities
Topic
Agricultural
Exemptions
Date Issued
04-26-2007


April 26, 2007




Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period May 2002 through April 2005. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer specializes in breeding horses for resale. In addition, the Taxpayer offers limited boarding services and riding lessons. The Taxpayer purchased feed, hay, and supplies for horses at its facility exempt of the tax under the agricultural exemption. As a result of the Department's audit, the auditor denied the agricultural exemption and assessed the tax on the purchase of feed, hay, and supplies for horses used by the Taxpayer in training and maintenance activities related to the Taxpayer's provision of services for a fee.

The Taxpayer claims that the Department's interpretation of Va. Code § 58.1-609.2 and Title 23 of the Virginia Administrative Code (VAC) 10-210-50 is flawed in denying the exemption to training and maintenance activities relating to horses. The Taxpayer further claims that the Department's narrow interpretation of the law does not reflect the current market environment or the expressed intent of the legislative and executive branches of the Commonwealth in promoting the horse industry. As such, the Taxpayer asserts that the maintenance and training activities necessary to keep fit horses in its resale inventory should not be denied the exemption in Va. Code § 58.1-
609.2 1.

DETERMINATION


Agricultural Exemption

Virginia Code § 58.1-609.2 1 provides a retail sales and use tax exemption to farmers engaged in producing agricultural products for market. The exemption applies to certain purchases of tangible personal property, including breeding and other livestock. Title 23 VAC 10-210-50 interprets the exemption and states, "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."

In the Taxpayer's case, it charges a fee to teach children how to maintain, train, ride and market horses. In providing such services, the Taxpayer uses horses in its resale inventory. The Taxpayer asserts that the provision of riding lessons provides the horses with necessary training and continuous work to stay in sound condition and fit for sale. While this may be true, such activity goes beyond the intent of the statute and the regulation. The contested property is not purchased for horses that are used exclusively in agricultural production, i.e., breeding horses for sale.

The Department has consistently interpreted the exemption as applying only to horses that are used exclusively in the breeding of horses for market or which are themselves bred and raised exclusively for market. See Public Documents (P.D.) 88­231 (7/29/88), 94-324 (10/24/94) and 91-129 (7/22/91). The Department's interpretation of the exemption is guided by the rule of strict construction as mandated by the Virginia courts. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973) and Title 23 VAC 10-210-540.

While I appreciate the importance of an expanded exemption to the horse industry, absent a statutory change that would broaden the current exemption for farmer-horse breeders, I have no authority to grant such an exemption. Accordingly, the auditor correctly assessed the tax on feed, hay and supplies purchased for horses engaged in activities not covered by the scope of the exemption.

Resale Inventory

Virginia Code § 58.1-602 excludes from the statutory definition of "retail sale" a sale made for resale. Virginia Code § 58.1-623 C states:
    • 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.

Based on Va. Code § 58.1-623 C, the Taxpayer is making a taxable use of a horse when the horse is removed from an exempt resale inventory and used in a revenue producing activity, e.g., riding lessons. According to the audit workpapers, the Taxpayer removes 50 percent of the horses from its resale inventory for use in riding lessons. Therefore, in the future, the Taxpayer is required to accrue and pay the use tax based on the cost price of the horses at such time the horses are removed from the Taxpayer's resale inventory.

Training Horses - Resale Exemption

The Department addressed the application of the tax to the use of horses prior to resale in P.D. 04-162 (10/1/04). In that case, the Department ruled 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 dealer. The Department has reviewed this policy and finds that the training of horses for the exclusive purpose to enhance their resale value will not, by itself, negate the resale exemption. This is because the horse is not put to the dealer's "own use." See Title 23 VAC 10-210-490. If the training activities, however, result in a revenue generating activity such as providing riding lessons for a fee, a taxable use has been made of the horse prior to sale because the dealer has put the horse to its own use in a line of business.

I continue to find that showing a horse goes beyond the intent of the resale exemption and becomes a taxable use by the dealer. Showing a horse or entering it in a competition is an activity for the dealer's own use in a line of business separate from the resale function.

CONCLUSION


Based on the foregoing, there is no basis to make any adjustments to the Department's audit assessment. The Taxpayer will receive an updated bill including accrued interest. This bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest. The Taxpayer should send its payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attn. *****.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have questions about this determination, you may contact ***** at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner




AR/57207T


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46