Tax Type
Retail Sales and Use Tax
Description
Agriculture; Miniature horses
Topic
Taxability of Persons and Transactions
Date Issued
10-24-1994
October 24, 1994
Re: §58.1-1821 Application: Sales and Use Tax
Dear******************
This will reply to your letter in which you seek correction of a sales and use tax assessment for*******(the "Taxpayer") for the period August 1986, through July 1992. 1 apologize for the delay in responding to your request.
FACTS
The Taxpayer operates a farming concern which primarily focuses on the breeding and raising of miniature horses. The department assessed the Taxpayer for its failure to pay use tax on its purchase and use of various items in its operations. The Taxpayer claims that its miniature horses, other livestock, and equipment are exempt from the tax.
DETERMINATION
The Taxpayer has contested the imposition of the tax on several specific items. I shall address each item separately.
Miniature Horses
The Taxpayer claims that its purchases and sales of miniature horses are not subject to the sales and use tax since its activities fall within the agricultural exemption. Code of Virginia §58.1-609.2 provides that 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) 630-104, 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. The department has consistently exempted farmers from taxation of their livestock. The definition of "livestock" had been limited to traditional farm animals and the department has ruled previously that miniature horses do not qualify as exempt livestock (see P.D. 93-5, January 8, 1993, copy enclosed).
However, the department has recently issued a ruling (P.D. 94-155, May 16, 1994, copy enclosed) in which it deemed the exemption to apply to certain animals based upon the definition of "livestock" found in Code of Virginia § 3.1-796.66. This definition broadly includes all equine animals and as such, there is basis for modifying the policy set out previously in P.D. 93-5 with respect to miniature horses.
Notwithstanding the new policy set forth in P.D. 94-155, the mere fact that a particular type of animal is enumerated in the definition of livestock does not necessarily entitle the purchaser of such animal to claim the benefits of the exemption. The animal must be used in an agricultural production process. The department has consistently held that the breeding of qualifying animals is an exempt activity despite the fact that such animal may be subsequently used by a purchaser in a nonexempt activity. See P.D. 91-294 (November 19, 1991, copy enclosed).
As of July 1, 1993 (the effective date of the legislative change to Code of Virginia §3.1-796.66), to the extent the Taxpayer uses the miniature horses in its breeding activities, the Taxpayer will enjoy the benefits of the agricultural exemption. However, once the Taxpayer uses a miniature horse in a nonexempt activity the animal will be subject to the use tax. A nonexempt activity includes showing the horses or using them in a petting zoo. This differentiation between exempt breeding activities and taxable nonagricultural activities is consistent with the department's long-standing treatment of race and show horses.
Unfortunately, the assessment was issued against the Taxpayer for a period prior to this change in the taxation of miniature horses. Therefore, the assessment as it was imposed on the Taxpayer's miniature horse operations was proper. However, as of July 1, 1993, the Taxpayer's purchase of tangible personal property for use in its breeding activities will be exempt. This will include the purchase of a miniature horse for breeding and the feed and supplies used to sustain the animal. The exemption also applies to the food and supplies purchased to sustain the foals produced from the breeding activity. However, consistent with the department's policy on race horses, once the Taxpayer uses a particular foal in a nonexempt activity, e.g. training a horse for show, the feed and supplies used to sustain the foal will no longer be exempt.
Items Purchased For Resale
The Taxpayer alternatively argues that its purchase of certain miniature horses, equipment, and souvenirs were purchased for resale and thus exempt of the tax. A taxpayer may purchase items for resale, exempt from the tax, as long as the taxpayer does not make a taxable use of an item purchased prior to its resale. Code of Virginia § 58.1 -602 defines a retail sale as a sale for the purpose other than for resale and use as the exercise of any right or power over property incidental to the ownership of such property. The Taxpayer's purchase of miniature horses, equipment, and souvenirs for resale is exempt from the tax as long as the items are not used in a taxable manner prior to the time the Taxpayer sells such items.
However, the audit workpapers indicate that the Taxpayer's records were insufficient to verify that purchases were made for resale or that they were inventoried prior to such resale. Also, it appears that the items were used in the Taxpayer's petting farm operation. Therefore, it could not be verified whether the resale exemption was applicable and the items were properly included in the audit. However, if you can provide evidence that such items were not claimed as a deduction or not capitalized and then depreciated for income tax purposes, the assessment will be adjusted.
Repair Parts and Related Labor Charges
The sales tax is imposed upon the total cost of the repair parts and equipment and installation charges if the costs are not separately stated. VR 630-10-90. The assessment includes tax on several repair and installation charges paid by the Taxpayer. An examination of the invoices revealed that the equipment, parts, and installation charges were not separately stated, therefore, the entire invoiced amounts were subject to taxation. Accordingly, the inclusion of the invoices in the audit was proper.
Services Fees Paid
The audit also includes tax on a fee paid for the inclusion of the Taxpayer in a list of breeders. Since this was a fee for the provision of a service and not the purchase of tangible personal property, it is not subject to the tax. The inclusion of this fee in the audit was, therefore, incorrect. It shall be removed.
Additionally, the Taxpayer obtains sawdust from a local mill for use on the farm. The Taxpayer hires an individual to collect the sawdust and transport it to the farm. The audit included the costs the Taxpayer incurred for hiring the individual to collect and transport the sawdust. Since these costs were for the provision of services and not for the purchase of the sawdust, they are not subject to the tax. The inclusion of these items in the audit was also incorrect and will likewise be removed from the assessment.
Waiver of Interest
Finally, the Taxpayer requested that the department waive the interest portion of the assessment, claiming that it was under the mistaken impression that its business operations were not subject to the tax. As set forth in VR 630-10-80, the "application of interest to all audit deficiencies is mandatory." Therefore, the department cannot waive the audit interest. However, I will agree to the abatement of any interest which has accrued since the date of your appeal (March 4, 1993).
Accordingly, upon the receipt of the documentation substantiating the resale exemption within 60 days of your receipt of this letter, the audit will be revised in accordance herewith and a revised notice of assessment will be sent to the Taxpayer as soon as practicable. Please forward any information to****Audit Review Unit, Office of Compliance, Department of Taxation, P.O. Box 615, Richmond, Virginia 23205-0615.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6807O
Rulings of the Tax Commissioner