Tax Type
Retail Sales and Use Tax
Description
Thoroughbred breeding and racing; Feed and supplies for horses; Agriculture
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
04-12-1993
April 12, 1993
Re: §58.1-1821 Application: Sales and Use Tax
Dear ****
This will reply to your letter of February 5, 1993 in which you seek correction of a sales and use tax assessment for **** (the "Taxpayer").
FACTS
The Taxpayer operates a farm which includes a thoroughbred breeding and racing operation. The department recently audited the Taxpayer and assessed it for failure to pay sales and use tax on its purchase and use of tangible personal property. Specifically, the assessment included the imposition of tax upon the Taxpayer's purchase of feed and supplies used for broodmares and their offspring and upon the Taxpayer's exchange of services for farm equipment.
The Taxpayer protests the assessment claiming that the agricultural exemption applies to broodmares, their offspring, and the feed and supplies used to maintain the animals until such time as the animals are used in a nonexempt activity. Additionally, the Taxpayer protests the imposition of the tax on its exchange of services for equipment claiming that the fact that equipment was received instead of a cash payment should not result in the transaction being taxable. Alternatively, the Taxpayer claims that the sale was an occasional sale exempt from taxation.
DETERMINATION
Feed and Supplies
The Taxpayer claims that its purchases of feed and supplies for use in its breeding activities are exempt from taxation. Va. Code § 58.1-608(A)(2)(a) provides that certain livestock, feed 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 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, including feed and supplies.
The department has consistently exempted farmers from taxation on the feed and supplies purchases for broodmares and their foals. See P.D. 91-129 (July 22, 1991), and P.D. 88-231 (July 29, 1988). This exemption continues to apply to such animals until a taxpayer uses a foal in a nonexempt manner, such as racing, showing, or for pleasure. In the case of racing, at the point that a foal begins training to race, it will be subject to taxation as will the feed and supplies used to maintain the foal. The mere fact that the farmer may contemplate placing a foal in training is not the determining issue -- he must actually place the foal in training for the exemption to cease.
Further, the agricultural exemption will apply to a horse previously used in a nonexempt manner once the horse is permanently retired from the nonexempt activity. For example, once a race horse is retired and returned to a farm for breeding, the feed and supplies used in maintaining the horse will no longer be taxable.
Therefore, the taxation of the feed and supplies used for broodmares and their foals, prior to the use of the animal in a nonexempt manner, was incorrect and will be removed from the audit. The Taxpayer's account will be adjusted accordingly.
Farm Equipment
The assessment includes the amount of tax due on the Taxpayer's exchange of services for farm equipment. To the extent that the equipment is used exclusively 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, only a partial exemption is allowed. See P.D. 88-231 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 method in which the Taxpayer obtained the farm equipment, other than in the case of an occasional sale, is irrelevant in determining whether the Taxpayer's use of the equipment is taxable. In fact, the barter transaction in this case is different from cash or credit transactions, as there was clearly an exchange of tangible personal property for consideration. The Taxpayer's use of the farm equipment was not disclosed in the Taxpayer's protest. Generally, this use will determine the taxability of the equipment.
Alternatively, the Taxpayer contends that the sale of the equipment to the Taxpayer was an occasional sale not subject to taxation. An occasional sale is a sale of tangible personal property not held by the seller in the course of an activity for which he is required to hold a certificate of registration and is not a sale in a series of sales and exchanges sufficient in number, scope, and character to constitute an activity requiring the holding of a certificate of registration. Va. Code §58.1-602. Ordinarily, if a seller makes more than three separate sales within a calendar year, the sales would not qualify for the occasional sales exemption. VR 630-10-75.
If the seller of the farm equipment qualifies for the occasional sales exemption, the sale of the equipment would clearly not be taxable, even if the Taxpayer uses the equipment in a taxable manner. However, the Taxpayer must provide evidence that clearly establishes that the occasional sale exemption applies.
The Taxpayer is allowed 30 days from the date of this letter to provide the department with the evidence which clearly establishes that the Taxpayer uses the equipment in an exempt manner or that the sale was an occasional sale. Otherwise the assessment of the tax upon the equipment is correct.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6700O
Rulings of the Tax Commissioner