Tax Type
Retail Sales and Use Tax
Description
Agriculture; Exotic Animals
Topic
Taxability of Persons and Transactions
Date Issued
12-23-1992
December 23, 1992
Re: §58.1-1821 Application: Sales and Use Tax
Dear**************
This will reply to your letter of June 19, 1992 in which you seek correction of a sales and use tax assessment for**********(the"Taxpayer") for the period November 1988 through December 1991.
FACTS
The Taxpayer operates a farming concern. The Taxpayer maintains several varieties of nontraditional farm animals along with some of the more traditional species. The department assessed the Taxpayer for its failure to collect and remit sales tax on its sale of the exotic animals sold and for its failure to remit use tax on its purchase and use of exotic animals and other farm equipment in its farming operations. The Taxpayer had never filed a sales or use tax return with department.
The Taxpayer argues that the department cannot assess it for failing to remit sales or use tax on items it sold and purchased before the three year statute of limitations period. Additionally, the Taxpayer claims that its livestock and equipment are not subject to taxation since its operations are exempt under the agricultural exemption.
DETERMINATION
Statute of Limitations
Pursuant to Va. Code §58.1-634, the department is entitled to assess a taxpayer with a deficiency for failing to file a return and remit the appropriate amount of tax due within six years of the date that the return was originally due. P.D. 92-61 (May 1, 1992), and P.D. 88-252 (September 8, 1988, copies enclosed).
Since the Taxpayers had never filed a sales or use tax return, the department is correct in assessing the Taxpayer for unpaid taxes as far back as six years from the date of the audit.
Agricultural Exemption
The Taxpayer claims that despite the timing of certain purchases, its sales and purchases are not subject to the imposition of the sales and use tax since its activities fall within the agricultural exemption. Va. Code §58.1-608(A) (2)(a) provides that certain livestock, feeds and farm machinery are not subject to taxation if such property is used in agricultural production for market. This Code provision is further clarified by Virginia Regulation (VR) 630-10-4 (copy enclosed) which states that the tax does not apply to the sale of certain tangible personal property to farmers for use in agricultural production for market.
In your letter you indicate that the phrase "necessary for agricultural production for market" contained in Va. Code §58.1608(A)(2) (a) only modifies the phrase "structural construction materials" and therefore does not modify or limit the exemptions provided for livestock, supplies etc. The Taxpayer is correct in this interpretation. However, the Taxpayer's argument overlooks the similar language at the end of subsection (A)(2)(a) ("provided the same are sold to and purchased by farmers for use in agricultural production...for market"), which clearly modifies the entire exemption provision. As such, it is clear in both the statute and VR 630-10-4 that tangible personal property must be used in agricultural production for market in order to qualify for exemption.
The department has consistently exempted farmers from taxation of their livestock. However, the has limited its definition of livestock to those traditional farm animals such as cattle, chickens, goats, hogs, and sheep. Nontraditional farm animals are subject to taxation. See P.D. 88-300 (October 31, 1988) in which a rabbit farmer's stock was subject to taxation; see also P.D. 84-126 (August 8, 1984) in which a duck farmer's stock was subject to taxation; see also, P.D. 88-117 (May 20, 1988, copies enclosed) in which llama farming was not exempt from taxation prior to the amendment of the agricultural exemption to include llama farming.
The audit report reveals that the Taxpayer was only assessed tax on its purchase and use of exotic animals. The assessment did not include tax on those animals that are considered livestock. Therefore, the assessment is correct to the extent that it includes taxes on the exotic animals, including wallabies, a zebra, and a rheas, and nontraditional farm animals like deer.
To the extent that equipment is exclusively used in an agricultural activity that qualifies for the exemption, it will not be subject to taxation. However, if such equipment is used in both exempt and nonexempt activities, the exemption will only apply to that portion of the farmers use of the equipment that is related to the exempted activity. See P.D. 88-231 (July 29, 1988, copy enclosed) in which a horse breeder (exempt activity) who also trained race horses (nonexempt activity) was entitled to an exemption only for the portion of its use of the equipment that related to its exempt activity.
The Taxpayer used a tractor and other farm equipment in activities that qualify for the agricultural exemption and in activities that do not qualify for the exemption such as cutting the grass, clearing snow from the driveway, or leveling areas of the driveway. The audit report indicates that 85% of the farmers use of the equipment was for exempt purposes. The remaining 15% of the farmers use of the equipment was taxable. I find this allocation to be reasonable considering the Taxpayers use of the equipment. However, if the Taxpayer can provide evidence that indicates a greater exempt use of the equipment, will adjust the audit accordingly. The inclusion of a tax on a portion of the equipment is, therefore, correct.
Therefore, I find no basis to adjust the amount of the original assessment.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6264O
Rulings of the Tax Commissioner