agricultural tax law
Written by Barry Ward, Production Business Management Leader and OSU Income Tax Schools Director
Soon after the Tax Cuts and Jobs Act became law in December of 2017 it became evident that cooperatives had been granted a significant advantage under the new tax law. Sales to cooperatives would be allowed a Qualified Business Income Deduction (QBID) of 20% of gross income and not of net income. Sales to businesses other than cooperatives would be eligible only for the QBID of net income which was a significant disadvantage. Suddenly cooperatives had an advantage that non-cooperative businesses couldn’t match and most of the farm sector scrambled to position themselves to take advantage of this tax advantage. Some farmers directed larger portions of their sales or prospective sales toward cooperatives. Non-cooperative businesses lobbied for a change to this piece of the new tax law while looking for ways to add a cooperative model to their own businesses to stay competitive.
Congress passed the Consolidated Appropriations Act of 2018 in March of 2018 which eliminated this advantage to cooperatives and replaced it with a new hybrid QBID for sales to cooperatives which offered more tax neutrality between sales to cooperatives and non-cooperatives. While this new legislation leveled the playing field between cooperatives and non-cooperatives, it left many questions unanswered; chief among them was how taxpayers should allocate expenses between sales to cooperatives and non-cooperatives.
One area that was clarified for calculating the QBID for all businesses including cooperatives was how certain deductions should be handled with respect to the Qualified Business Income Deduction (QBID).
For purposes of the QBID (IRC §199A), deductions such as the deductible portion of the tax on self-employment income under § 164(f), the self-employed health insurance deduction under § 162(l), and the deduction for contributions to qualified retirement plans under § 404 are considered attributable to a trade or business (including farm businesses) to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis.
Under the final regulations, expenses for half the self-employment (SE) tax, self-employed health insurance, and pension contributions must be subtracted from preliminary QBI figure, before any cooperative reductions are made (if applicable).
While final regulations on the new QBID were published on Jan. 18, 2019, there were still many questions left unanswered as to how the deduction would be handled in relation to cooperatives. As the QBID is calculated differently between the income from sales to cooperatives and non-cooperatives, taxpayers and tax practitioners were left with uncertainty.
A simplified explanation of the steps used to calculate the QBID under Internal Revenue Code (IRC) §199A for income attributable to sales to cooperatives is listed here:
Step 1: First, patrons calculate the 20 percent §199A QBID that would apply if they had sold the commodity to a non-cooperative.
Step 2: The patron must then subtract from that initial §199A deduction amount whichever of the following is smaller:
- 9 percent of the QBI allocable to cooperative sale(s) OR
- 50 percent of W2 wages paid allocable to income from sales to cooperatives
Step 3: Add the “Domestic Production Activities Deduction (DPAD)-like” deduction (if any) passed through to them by the cooperative pursuant to IRC §199A(g)(2)(A). The determination of the amount of this new “DPAD-like” deduction will generally range from 0 to 9 percent of the cooperative's qualified production activities income (QPAI) attributable to that patron's sales.
Parts of the new tax law do offer some simplification. Calculating the QBID isn’t necessarily one of those parts.
The result of all of these calculations is that income attributable to sales to cooperatives may result in an effective net QBID that is:
- Possibly greater than 20% if the farmer taxpayer pays no or few W2 wages and coop passes through all or a large portion of the allocable “DPADlike” deduction
- Approximately equal to 20% if the farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through all allocable “DPADlike” deduction
- Possibly less than 20% if farmer taxpayer pays enough W2 wages to fully limit their coop sales QBID to 11% and the coop passes through less than the allocable “DPADlike” deduction
On June 18th, the IRS released proposed regulations under IRC §199A on the patron deduction and the IRC §199A calculations for cooperatives. The proposed regulations provide that when a taxpayer receives both qualified payments from cooperatives and other income from non-cooperatives, the taxpayer must allocate deductions using a “reasonable method based on all the facts and circumstances.” Different reasonable methods may be used for the different items and related deductions. The chosen reasonable method, however, must be consistently applied from one tax year to another and must clearly reflect the income and expenses of the business.
So what “reasonable methods” might be accepted by the IRS? The final regulations (when they are provided) may give us further guidance or we may be left to choose some “reasonable” method in allocating expenses between the two types of income. Acceptable methods may include allocating expenses on a prorated basis by bushel/cwt or by gross sales attributable to cooperatives and non-cooperatives. Producers may also consider tracing costs on a per field basis and tracking sales of those bushels/cwt to either a cooperative or non-cooperative.
Included in the proposed regulations released in June was a set of rules for “safe harbor”. A taxpayer with taxable income under the QBID threshold ($157,500 Single Filer / $315,000 Joint Filer) may ratably apportion business expenses based on the amount of payments from sales to cooperative and non-cooperatives as they relate to total gross receipts. In other words, expenses may be allocated between cooperative and non-cooperative income based on the respective proportions of gross sales that fall to cooperatives and non-cooperatives.
Some questions that haven’t been answered clearly is how certain other income should be allocated between income from cooperatives and non-cooperatives. Tax reform now requires farmers to report gain on traded-in farm equipment. In many cases, farm income will be negative and all of the income for the business will be from trading-in farm equipment. The question is how do we allocate this income (IRC §1245 Gain)? Some commentators contend that none of these gains should be allocated to cooperative income which would eliminate the issue, however, the depreciation deduction taken on the equipment was likely allocated to cooperative income, thus reducing the effect of the 9% of AGI patron reduction. This would suggest that these gains may have to be allocated between cooperative and non-cooperative income.
How should government payments be allocated? If a farmer sells all of their commodities to a cooperative and receive a government payment (i.e. ARC or PLC), should that be treated as cooperative income or not. Hopefully, the final regulations will provide some further clarity on these issues.
The information in this article is the opinion of the author and is intended for educational purposes only. You are encouraged to consult professional tax or legal advice in regards to your facts and circumstances regarding the application of the general tax principles cited in this article.
Written by Barry Ward, Leader, Production Business Management & Director, OSU Income Tax Schools
Prevented Planting Crop Insurance Indemnity Payments
With unprecedented amounts of prevented planting insurance claims this year in Ohio and other parts of the Midwest, many producers will be considering different tax management strategies in dealing with this unusual income stream. In a normal year, producers have flexibility in how they generate and report income. In a year such as this when they will have a large amount of income from insurance indemnity payments the flexibility is greatly reduced. In a normal year a producer may sell a part of grain produced in the year of production and store the remainder until the following year to potentially take advantage of higher prices and/or stronger basis. For example, a producer harvests 200,000 bushels of corn in 2019, sells 100,000 bushels this year and the remainder in 2020. As most producers use the cash method of accounting and file taxes as a cash based filer, the production sold in the following year is reported as income in that year and not in the year of production. This allows for flexibility when dealing with the ups and downs of farm revenue.
Generally, crop insurance proceeds should be included in gross income in the year the payments are received, however Internal Revenue Code Section (IRC §) 451(f) provides a special provision that allows insurance proceeds to be deferred if they are received as a result of “destruction or damage to crops.”
As prevented planting insurance proceeds qualify under this definition, they can qualify for a 1 year deferral for inclusion in taxable income. These proceeds can qualify if the producer meets the following criteria:
- Taxpayer uses the cash method of accounting.
- Taxpayer receives the crop insurance proceeds in the same tax year the crops are damaged.
- Taxpayer shows that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred.
The third criteria is the sometimes the problem. Most can meet the criteria, although if producers want reasonable audit protection, they should have records showing the normal practice of deferring sales of grain produced and harvested in year 1 subsequently stored and sold in the following year. To safely “show that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred” the taxpayer should follow IRS Revenue Ruling 75-145 that requires that he or she would have reported more than 50 percent of the income from the damaged or destroyed crops in the year following the loss. A reasonable interpretation in meeting the 50% test is that a farmer may aggregate the historical sales for crops receiving insurance proceeds but tax practitioners differ on the interpretation of how this test may be met.
One big problem with these crop insurance proceeds is that a producer can’t divide it between years. It is either claimed in the year the damage occurred and the crop insurance proceeds were received or it is all deferred until the following year. The election to defer recognition of crop insurance proceeds that qualify is an all or nothing election for each trade or business IRS Revenue Ruling 74-145, 1971-1.
Tax planning options for producers depend a great deal on past income and future income prospects. Producers that have lower taxable income in the last 3 years (or tax brackets that weren’t completely filled) may want to consider claiming the prevented planting insurance proceeds this year and using Income Averaging to spread some of this year’s income into the prior 3 years. Producers that have had high income in the past 3 years and will experience high net income in 2019 may consider deferring these insurance proceeds to 2020 if they feel that this year may have lower farm net income.
Market Facilitation Payments
When the next round(s) of Market Facilitation Payments (MFPs) are issued, they will be treated the same as the previous rounds for income tax purposes. These payments must be taken as taxable income in the year they are received. As these payments are intended to replace income due to low prices stemming from trade disputes, these payments should be included in gross income in the year received. As these payments constitute earnings from the farmers’ trade or business they are subject to federal income tax and self-employment tax. Producers will almost certainly not have the option to defer these taxes until next year. Some producers waited until early 2019 to report production from 2018 and therefore will report this income from the first round of Market Facilitation Payments as taxable income in 2019.
Producers will likely not have the option of delaying their reporting and subsequent MFP payments due to the fact they are contingent upon planted acreage reporting of eligible crops and not yield reporting as the first round of MFP payments were.
Cost Share Payments
Increased prevented planting acres this year have many producers considering cover crops to better manage weeds and erosion and possibly qualify for a reduced MFP. There is also the possibility that producers will be eligible for cost-share payments via the Natural Resources Conservation Service for planting cover crops. Producers should be aware that these cost-share payments will be included on Form 1099-G that they will receive and the cost-share payments will need to be included as income.
You are advised to consult a tax professional for clarification of these issues as they relate to your circumstances.
This article is being reposted with the author's permission from the Ohio Ag Manager blog.
A landowner may present evidence regarding the value and acreage of his or her land, but the Board of Tax Appeals (BTA) is free to weigh that evidence as it wishes, according to the Ohio Supreme Court. All seven justices agreed that the BTA in the case of Johnson v. Clark County Board of Revision acted with appropriate discretion, although two justices did not sign onto the reasoning as to why the BTA acted appropriately. The case involved a property owner’s challenge of the Clark County Auditor’s determination of Current Agricultural Use Valuation (CAUV) for property tax purposes.
Continue reading for more information about what CAUV is, how CAUV determinations and tax assessments can be appealed, what happened in the Johnson v. Clark County Board of Revision case, and the main takeaways from the Supreme Court’s decision.
What is CAUV?
CAUV permits owners of land devoted exclusively to agricultural uses to request that the county auditor assess property for tax purposes based upon the value of the land’s current agricultural use, rather than its true market value. Since its inception, CAUV has generally provided landowners with qualifying property a lower tax bill than they otherwise would have using market value. Ohio most recently changed the formula for CAUV in 2017. If CAUV land is converted to a use that no longer qualifies for CAUV treatment, the land is again assessed based upon its fair market value and the landowner must pay to the county the difference between the CAUV value and the fair market value for the prior three years. To learn more about CAUV, visit the Ohio Department of Taxation’s CAUV webpage here.
How can a CAUV determination be appealed?
First, if a landowner believes that all or part of his or her parcel qualifies for CAUV, an application must be submitted to the county auditor where the land is located. County auditors are the “chief assessing officers of their respective counties” and have the authority, within the guidelines of the state tax commissioner, to make the initial CAUV determination under Ohio Revised Code § 5715.01(B). Landowners should contact their county auditors about filing instructions.
Second, the procedure to appeal whether land qualifies for CAUV is different than the procedure to appeal a tax valuation assessment. If a landowner does not agree with their county auditor’s determination as to whether or not land qualifies for CAUV, they have thirty days to file an appeal with their county court of common pleas under Ohio Revised Code § 929.02(A)(2). Decisions of courts of common pleas can be appealed to the state district court of appeals, and those decisions can be appealed to the Ohio Supreme Court.
If a landowner does not agree with their county auditor’s valuation assessment, the landowner may file a complaint with their county Board of Revision. The forms for these complaints are generally available at the county auditor’s office or website. If a Board of Revision believes that the county auditor made an error in applying the CAUV statute and rules, the board has the authority to revise tax assessments. If the landowner still does not agree with the Board of Revision’s decision, he or she may appeal to the Ohio Board of Tax Appeals within thirty days of the Board of Revision’s decision under Ohio Revised Code § 5717.01. More information is available on the BTA’s website here. Alternatively, under Ohio Revised Code § 5717.05, the landowner may appeal the Board of Revision’s decision to the appropriate county court of common pleas.
Decisions of the BTA can be appealed to the respective state district court of appeals where the land in question is located, and those decisions can be appealed to the Ohio Supreme Court. However, there are certain cases in which landowners can appeal decisions of the BTA directly to the Ohio Supreme Court under Ohio Revised Code § 5717.04. However, the types of appeals of a BTA decision eligible for direct appeal to the Ohio Supreme Court were reduced in September 2017 through House Bill 49.
What happened in Johnson v. Clark County Board of Revision?
Mr. Johnson challenged the Clark County Auditor’s 2013 tax assessment of his 154.61 acre farm. Neither party disagreed that the land qualified for CAUV, but Mr. Johnson disagreed with how much the Clark County Auditor said the farm was worth under the CAUV formula. For tax year 2013, the auditor assessed the property’s CAUV at $457,250.
Mr. Johnson appealed to the Clark County Board of Revision. He testified, and also elicited testimony from an employee of the Clark County Soil and Water Conservation District and an employee of the Clark County Auditor’s office. Further, Mr. Johnson presented photographs, official records from the tax commissioner and auditor, and a “self-prepared written statement purporting to convey [the SWCD employee’s] site-visit findings.” The Board of Revision rejected Mr. Johnson’s claims.
Mr. Johnson then appealed to the Ohio Board of Tax Appeals. Again, Mr. Johnson testified and produced a number of exhibits. At this appeal, he elicited testimony from an employee of the Ohio Department of Taxation. The BTA also rejected Mr. Johnson’s claims, finding that the Clark County Auditor had acted appropriately. Mr. Johnson then filed an appeal to the Ohio Supreme Court in 2016. Mr. Johnson represented himself pro se, or without an attorney.
What are the main takeaways, and why did the landowner not succeed?
First, the Ohio Supreme Court explained that a landowner challenging a Board of Revision or Auditor’s tax assessment must convince the BTA that his or her valuation assessment is correct and the one they are challenging is incorrect. This requirement to convince the Board of Tax Appeals is known as the burden of proof. The burden of proof determines which party must play an active role in proving his or her argument, while the opposing side will only have to present proof to counter if the board finds that the first party has carried its burden. Here, the court said that Mr. Johnson, as the landowner challenging the assessment, had the burden to convince the BTA. The court disagreed with Mr. Johnson’s argument that the county should have to rebut his evidence and prove the value that it assessed.
Second, even though the BTA properly said that Mr. Johnson had the burden of proof, this does not mean that the BTA should have presumed the Board of Revision’s decision to have been correct. Instead, the BTA must independently analyze the evidence presented to it, and not simply defer to and accept the Board of Revision’s decision. Here, the Ohio Supreme Court found that the BTA did conduct an independent assessment in confirming the Board of Revision’s determination.
Third, while an owner may present evidence as to the value of his or her land, a BTA has discretion to determine how much weight to give to that evidence. An owner’s opinion as to the value of his or her land is not determinative, but is merely a piece of evidence that the BTA may consider.
Fourth, instead of looking at the acreage, the focus of the assessment should be on boundaries and a property’s uses within those boundaries. The Ohio Supreme Court explained the distinction between calculating acres and delineating boundaries by using dictionary definitions, and the distinction is essentially that a bounded area is fixed in space, while acreage alone describes an area without a specific line of demarcation. To prove that a parcel or portion of a parcel qualify for CAUV treatment, the boundaries of the qualifying land must be determined. Acres can only be determined after the boundaries are established. Here, Mr. Johnson did not prove the boundaries of CAUV areas on his land to the BTA’s satisfaction, and the Ohio Supreme Court said that it was within the BTA’s discretion to reject Mr. Johnson’s evidence.
The Ohio Supreme Court’s full opinion, cited as 2018-Ohio-4390, is available here. Additional facts about the case can be found within the court’s opinion.
Ohio's Senate has settled on its solution for fixing Ohio's CAUV formula. The Senate unanimously passed S.B. 36 yesterday after the Senate Ways and Means Committee adopted two amendments to the bill. The legislation aims to stem recent increases in property taxes for farmland enrolled in Ohio's Current Agricultural Use Valuation (CAUV) program. The Senate's bill will ensure that the CAUV formula "sticks to valuing farmland based on agricultural production," stated the bill's sponsor, Sen. Cliff Hite (R-Findlay).
In addition to including new factors in the CAUV formula, making changes to the capitalization rate calculation and addressing rates used for conservation lands (explained in detail in our earlier post on S.B. 36), the bill passed by the Senate yesterday contained two new provisions:
- A three year phase-in of the changes to the CAUV formula, which would begin the first tax year after 2016 in which a county's sexennial appraisal or triennial update occurs. The purpose of the phase-in is to reduce the financial impact of lowered property valuations on school districts.
- Replacement of the seven year rolling average determination of the equity yield rate with an equity yield rate that equals the 25-year average of the "total rate of return on farm equity" determined by the United States Department of Agriculture but that cannot exceed the loan interest rate used in the debt factor of the capitalization rate computation.
Last week, Ohio's House passed legislation containing different solutions for revising the CAUV program in H.B. 49 (see our summary of H.B. 49 here). Senate leaders yesterday indicated a willingness to work with the House to resolve the differences between the two bills. H.B. 49 is now before the Senate Finance Committee.
By Larry R. Gearhardt, Assistant Professor and Field Specialist in Taxation, OSU Extension
Farmers have enjoyed an exemption from the Ohio and county sales tax for many years. Historically, obtaining the exemption from the sales tax was relatively simple. The farmer merely filled out a post card sized exemption form at his local agricultural retailer, checked the box that he was involved in “agriculture,” and most of his subsequent purchases from that agricultural retailer were exempt.
More recent, agricultural retailers seem increasingly reluctant to give farmers the agricultural exemption. Numerous questions have arisen regarding why sales tax is being charged on certain items of tangible personal property that the farmer feels should be exempt.
Much has already been written on the subject of the agricultural exemption from sales tax. For a good overview of the agricultural sales tax exemption, see OCES Bulletin 761, written by Paul L. Wright, Douglas E. Sassen, and Nan M. Still, (November 1987), and Fact Sheet OAM-2-12, written by Chris Bruynis, PhD (2012). Both of these documents remain good resources.
However, to fully understand why sales tax is now being charged on items that once appeared to be exempt, one must delve deeper into the Ohio law and its practical application to purchases. The Ohio Revised Code, the Ohio Administrative Code, legal cases that further interpret those codes, the Ohio Department of Taxation, and the sales tax collection process all have a bearing on the agricultural exemption from sales tax.
ALL SALES BEGIN AS TAXABLE
Initially, all sales are taxable. Ohio Revised Code section 5739.02 states: “. . . an excise tax is hereby levied on each retail sale made in this state.” ORC sec. 5739.02(C) expands this requirement by stating: “(C) For the purpose of the proper administration of this chapter, and to prevent the evasion of the tax, it is presumed that all sales made in this state are subject to the tax until the contrary is established.” The effect of this statement is to place the burden of proving that a sale is exempt on the purchaser. As a general legal principle, exemptions from tax are narrowly construed.
HOW DO SALES BECOME NON-TAXABLE?
There are two ways that sales become non-taxable. One way is for a sale to be “excepted” from the definition of a sale by statute. The other way is for a sale to be “exempted” from the sales tax requirement.A sale is non-taxable if it is specifically excepted from the definition of a “sale.” Ohio Revised Code section 5739.01(B) provides the definition of “sale” and the act of “selling.” One can find an extensive list of transactions that are considered to be a “sale” or the act of “selling” in this section. Also contained in this list are specific exceptions for transactions that are not considered to be sales or the act of selling within the legal definition.
However, more important for our discussion, the agricultural sales tax exemption is an “exemption” from sales tax, not an “exception.” Therefore, this paper focuses on Ohio Revised Code section 5739.02 which provides a list of goods and services that are specifically exempted from the Ohio sales tax.
AGRICULTURAL SALES TAX EXEMPTIONS IN THE OHIO REVISED CODE
ORC section 5739.02(B) provides a list of 53 items that are specifically exempted from the Ohio sales tax. Several items apply to agriculture:
(B)(13) building and construction materials sold to construction contractors for incorporation into a horticulture structure or livestock structure for a person engaged in the business of horticulture or producing livestock. This exemption was later expanded by section (B)(36) to include sales to “persons” in addition to contractors.
(B)(30) land tile
(B)(31) portable grain bins
The subsection that applies most often to agriculture is (B)(17). This subsection states:
(B)(17) Sales to persons engaged in farming, agriculture, horticulture, or floriculture, of tangible personal property for use or consumption primarily in the production by farming, agriculture, horticulture, or floriculture of other tangible personal property for use or consumption for sale by farming, agriculture, horticulture, or floriculture; or material and parts for incorporation into any such tangible personal property for use or consumption in production; and of tangible personal property for such use or consumption in the conditioning or holding of products produced by and for such use, consumption, or sale by persons engaged in farming, agriculture, horticulture, or floriculture, except where such property is incorporated into real property.
In an attempt to better understand this subsection, let’s break it down into its requirements.
- The sale must be made to a person engaged in farming, agriculture, horticulture, or floriculture;
- It must be an item of tangible personal property;
- The item of tangible personal property must be used or consumed primarily (more than 50%) in the production of another item of tangible personal property that will eventually be sold;
- The item can be material or parts incorporated into tangible personal property for use or consumption in farming;
- The item can be for use or consumption in the conditioning or holding of products produced by a person involved in farming, agriculture, horticulture, or floriculture, for further use, consumption, or sale, EXCEPT where such item is incorporated into real property.
THE OHIO ADMINISTRATIVE CODE PROVIDES FURTHER CLARIFICATION
The Ohio Revised Code contains the laws passed by the Ohio General Assembly. In contrast, the Ohio Administrative Code contains the rules that agencies use to implement those laws. The rules in the Ohio Administrative Code are promulgated by the agency that is responsible to administer the program and those rules are then reviewed and approved by another agency called the Joint Committee on Agency Rule Review.
Ohio Administrative Code (OAC) rules have a more direct impact on the agricultural sales tax exemption because they are promulgated by the Ohio Department of Taxation and serve as the guidelines for collecting the sales tax.
OAC section 5703-9-23 expands the agricultural sales tax exemption provided in the Ohio Revised Code. This section first provides the definitions for “farming”, “agriculture”, “horticulture”, and “floriculture.” “Farming” is defined as the occupation of tilling the soil for the production of crops as a business and shall include the raising of farm livestock, bees, or poultry, where the purpose is to sell such livestock, bees, or poultry, or the products thereof as a business. “Agriculture” is defined as the cultivation of the soil for the purpose of producing vegetables and fruits and includes gardening and horticulture, together with the feeding and raising of cattle or stock for sale as a business.
Note that the definitions of “farming” and “agriculture” include tilling the soil and cultivation of the soil. Therefore, taking all of the requirements together, the agricultural sales tax exemption has been allowed only for those items that are used directly and primarily in the tilling or cultivation of the soil, used in the propagation of plants, or the care and raising of livestock. Timber is not included, nor is a utility vehicle or a chain saw if the technical definition is strictly followed.
OAC section 5703-9-23 further expands what “sales” are tax-exempt. Most of those sales are items that are incorporated into, or used or consumed, producing other tangible personal property for sale.
OAC section 5703-9-23 concludes with three very important statements:
- Exemptions do not apply to any article which is incorporated into real property
- The tax or non-tax of a sale is determined by the use of the item sold. An article of tangible personal property that appears to be agricultural in nature must also be used for a non-taxable purpose. For example, a pitch fork used in my barn may be tax-exempt, but taxable if primarily used in my garden.
- Sales of materials such as lumber, nails, glass and similar items to be used in the construction or repair of buildings shall be subject to the tax.
CASE LAW PROVIDES THE FINAL DETERMINATION
Even with the foregoing analysis of the laws and rules, it is impossible to list every item of tangible personal property that is exempt from sales tax. Certain items are clearly used in agriculture and are exempt. On the other hand, some items are clearly not exempt. Some items fall somewhere in the middle and are difficult to tell whether they are tax-exempt, either because the item is used for a personal use a majority of the time or the items could be used for a taxable purpose.
Occasionally, courts are asked to determine the taxability of a particular item. This is most often seen where the resulting sales tax is large enough to warrant spending the money to go to court, such as a manufacturer that is going to produce or purchase mass quantities of that item. Individuals rarely can warrant going to court over a sales tax dispute.
THE PRACTICAL ASPECTS OF THE AGRICULTURAL SALES TAX EXEMPTION
Armed with the best legal information, a farmer may firmly believe that the item he is purchasing should be tax-exempt. However, the cash register rings up that the sale as taxable. Does he have to pay the sales tax? Yes, from a practical standpoint. There are two ways to look at each situation – the legal way and the practical way. From a practical point of view, the farmer may still have to pay the sales tax at the cash register even though he feels that the item is tax-exempt. However, if the farmer is erroneously required to pay the sales tax, he/she must file an application for a refund (ST-AR form) with the Ohio Department of Taxation.
Let’s take a closer look at the collection process. Both ORC section 5739.02(C) and OAC section 5703-9-03 state that all sales are presumed to be taxable until the contrary is established. Each vendor is required to collect from the consumer, as a trustee of the State, the full and exact amount of the tax payable on each taxable sale. To be tax-exempt, the farmer must provide to the vendor a fully completed exemption certificate. The vendor is required to keep this exemption certificate on file.
In discussions with some local retailers, I discovered that one large agricultural retailer receives a list of taxable and non-taxable items from its corporate office and the local store is required to collect the sales tax according to the list, notwithstanding the identity of the purchaser. Conversely, the local tractor store determines in-house which items are taxable or non-taxable and for items that may go either way, the store gives the exemption if the purchaser has a tax-exempt form on file. For other large retailers without an agricultural base, they do not recognize the agricultural sales tax exemption.Exemption forms are available on the Ohio Department of Taxation’s website and may be reproduced. The farmer should use form STEC-U for a unit exemption or STEC-B for a blanket exemption if he is going to purchase numerous items from that vendor. If the farmer wants a refund of sales tax that he feels is erroneously paid, he should file form STAR with the Ohio Department of Taxation. Rather than receiving a cash refund of the sales tax erroneously paid, the farmer may apply the refund to any indebtedness that he owes the State, for example, income tax.
As previously mentioned, exemption forms may be obtained from the Ohio Department of Taxation website. OAC section 5703-9-03(D) states that: “An exemption certificate is fully completed if it contains the following data elements:
- The purchaser’s name and business address,
- A tax identification (e.g. vendor’s license or consumer’s use tax account) for the purchaser issued by this state, if any,
- The purchaser’s type of business or organization,
- The reason for the claimed exemption, and
- If the certificate is in hard copy, the signature of the purchaser.
If any of these elements is missing the exemption certificate is invalid.”
There has been some confusion recently caused by some agriculture retailers advising farmers that if they want the sales tax exemption, the farmer needs to go to the county courthouse and obtain a vendor’s license. This is not correct. The retailer is trying to comply with the requirement found in subsection (D)(2) above where it states that the exemption certificate requires a tax identification number. However, the retailer’s advice ignores the last two words of that section – “if any.” Farmers are not required to obtain a vendor’s license because they do not sell at retail. I recommend that the farmer write “none required” or “not applicable” on the exemption form where it requests a tax identification number. Of course, then the farmer is burdened with explaining to the cash register attendee that a vendor’s license number is not required. Good luck with that.
ULTIMATE LIABILITY FOR SALES TAX
Many farmers believe that if they give a tax exemption form to the retailer, the farmer should not be ultimately responsible for the sales tax. However, both the purchaser and the vendor may ultimately be liable for the tax. Initially, the purchaser is responsible to pay the sales tax to the vendor. If the purchaser claims that the sale is non-taxable, he/she must provide an exemption certificate to the vendor specifying the reason that the sale is non-taxable (ORC 5739.03(A)).A vendor that obtains a fully completed exemption certificate from a purchaser is initially relieved of liability for collecting and remitting tax on any sale covered by that certificate. If it is later determined that the exemption was improperly claimed, ORC section 5739.03(B)(1)(b) makes the purchaser liable for any tax due on that sale.
If a vendor improperly fails to collect the sales tax, another section of the ORC makes either the purchaser OR the vendor personally liable for the sales tax. ORC section 5739.13 says that the tax commissioner may make an assessment against either the vendor or the purchaser as the facts require. An assessment against a vendor when the tax has not been collected shall not discharge the purchaser’s liability to reimburse the vendor for the tax. From a practical standpoint, the vendor would have to take steps to collect the unpaid tax from the purchaser.
To put additional pressure on a vendor to collect and remit the sales tax, ORC section 5739.33 states that if any vendor required to file (sales tax) returns for any reason fails to file the return or remit payment, any employee having control or supervision over the filing of returns and making payments, or any officer, member, manager, or trustee who is responsible for the vendor’s fiscal responsibilities shall be personally responsible. The amount due may be assessed against that person.
Because of this liability exposure, from both a corporate and personal standpoint, it is my opinion that the vendor is going to err on the side of collecting the sales tax if it is not clear that the item is non-taxable.
CONCLUSIONEven though it may appear from a legal standpoint that the purchase of an item should be tax-exempt, without a complete list of what items are taxable and non-taxable from the Ohio Department of Taxation, there is still room for confusion. The vendor initially determines whether the item is non-taxable at the cash register. The purchaser needs to provide a tax-exemption certificate to the vendor to receive the sales tax exemption. If the vendor collects sales tax on an item that the farmer feels is tax-exempt, the farmer should file a request for a refund with the Ohio Department of Taxation.