Is Direct Use Dead? Clarifying Ohio's Ag Sales Tax Exemption After Claugus

Determining whether a farm purchase is exempt from Ohio sales tax can be confusing and, at times, frustrating. This blog post breaks down Ohio’s agricultural sales tax exemption by explaining what qualifies, what doesn’t, who can claim the exemption, and why the rules often seem unclear. 

The Starting Point
In Ohio, the starting point in determining what qualifies for the agricultural sales tax exemption is simple: everything you buy at retail is taxable unless the law says otherwise. Ohio does have a special sales tax exemption for certain purchases connected to farming, but that exemption is limited. Just because something is commonly used on a farm does not automatically mean it qualifies for the agricultural sales tax exemption. 

Put another way, Ohio’s agricultural sales tax exemption is narrow and fact specific. You cannot assume something is exempt simply because it is farm related. The question is usually the same: Is the item/property being purchased used primarily to produce an agricultural product that will be sold? If the answer is no, the exemption generally does not apply. 

Overview of Ohio’s Agricultural Sales Tax Exemption
Both the Ohio Revised Code (ORC) and the Ohio Administrative Code (OAC) include provisions that exempt certain agricultural purchases from Ohio’s sales tax. The exemption most commonly relied on by farmers is found in R.C. § 5739.02(B)(17) and explained further in OAC 5703-9-23(B) and 5703-9-23(C).

Under those provisions, certain tangible personal property may qualify for Ohio’s agricultural sales tax exemption if it used in one of the following ways: 

1. Property used primarily in farming, agriculture, horticulture, or floriculture to produce products for sale. 
2. Property purchased for incorporation into tangible personal property produced for sale. 
3. Property used primarily in producing tangible personal property that will be used to produce products for sale. 
4. Property used primarily in conditioning or holding products produced for sale. 

** For brevity, we refer to the four categories (farming, agriculture, horticulture, and floriculture) all under the terms “agriculture” or “agricultural.” 

Some other more specialized code sections that provide a sales tax exemption to agricultural producers include: 

• Materials for horticulture and livestock structures – R.C. 5739.02(B)(13) and R.C. 5739.02(B)(36)
• Agricultural land tile – R.C. 5739.02(B)(30)
• Grain Bins – R.C. 5739.02(B)(31)
• Preparation of eggs for sale – R.C. 5739.02(B)(24)

What Qualifies? 
Beyond the language found directly in the statutes and regulations, it’s important to look at other legal guidance to understand how the sales tax exemption works in practice. Below are several key points about Ohio’s agricultural sales tax exemption that farmers should keep in mind when deciding whether a purchase qualifies. 

1. Farming, Agriculture, Horticulture, and Floriculture
   Before claiming the agricultural sales tax exemption, a producer must determine whether their activity qualifies as “agriculture” under Ohio tax law. Ohio uses the following four definitions to determine what counts as agriculture for the purposes of the exemption: 
   
   Farming – occupation of tilling soil to produce crops as a business and includes raising livestock, bees, or poultry, if the purpose is to sell such livestock, bees, or poultry, or the products thereof as a business.
   
   Agriculture – cultivation of the soil for the purpose or producing vegetables and fruits and includes gardening or horticulture, together with the raising and feeding of cattle or livestock for sale as a business.
   
   Horticulture – the growing, cultivation, and production of flowers, fruits, herbs, vegetables, sod, mushrooms, and nursery stock for sale as a business and includes the operation of commercial vegetable greenhouses or nurseries.
   
   Floriculture – the production of flowers and plants for sale as a business, either in the field or greenhouse.
    
2. Primary Use
   To qualify for Ohio’s agricultural sales tax exemption, an item must be used primarily in agricultural production. Problems often arise when farmers purchase items like all-terrain vehicles (ATVs) or other utility vehicles that serve multiple purposes on the farm.
   
   Last year, the Supreme Court of Ohio issued a decision that helped clarify how courts should evaluate whether a purchase qualifies for the agricultural sales tax exemption. In Claugus Family Farm, L.P. v. Harris, the Court challenged some long-held assumptions about which types of purchases can qualify for the exemption.
   
   In that case, a timber farm purchased a Mercedes-Benz Geländewagen and claimed the vehicle was used to transport people, chemicals, and equipment necessary to manage and maintain its forest. The Tax Commissioner and the Ohio Board of Tax Appeals (BTA) both concluded that the vehicle did not qualify the agricultural sales tax exemption. The Court, however, disagreed and ruled in favor of the taxpayer. 
   
   In Claugus, the tax commissioner argued that the timber farm had not shown that the Mercedes was used primarily for farming because the farm did not keep detailed use or mileage logs for the vehicle. In her opinion, the mere transportation of people and equipment to complete projects around the farm do not count as “primary use” under the tax exemption. The Court rejected that approach, explaining that the statute does not require taxpayers to maintain mileage or use logs. Instead, the Court held that the farm manager’s testimony, stating that approximately 95 percent of the vehicle’s use was related to farming activities, was sufficient to establish that the vehicle was primarily used for farming. 
   
   Key Takeaway: Use or mileage logs may be useful evidence when showing that an item is primarily used in agricultural production, but Ohio law does not require taxpayers to maintain written records to meet the primary-use standard.
    
3. The Business Component
   To claim Ohio’s agricultural sales tax exemption, it is not enough that an item is primarily used for an agricultural purpose. The purchaser of the item/property in question must also be engaged in the business of agriculture. Ohio law defines a “business” broadly as “any activity carried on with the goal of gain, benefit, or advantage, whether direct or indirect.” R.C. 5739.01(F).
   
   The Supreme Court of Ohio also addressed this business-requirement in Claugus. One argument that the tax commissioner put forth to prove that the Claugus farm was not eligible for the agricultural sales tax exemption was that the farm was not an active business due to its lack of sales, income, and labor expenses. The Court rejected this argument and again ruled in favor of the taxpayer.
   
   The Court made clear that a lack of profit does not prevent a taxpayer from being considered a business under Ohio law. While profits and sales can strengthen a taxpayer’s position, neither is required to meet the statutory definition of a business.
   
   One practical way to support a claim that a taxpayer is engaged in an agricultural business is by filing Schedule F with a federal tax return. That said, Ohio courts and the ODT have also recognized that new and beginning farmers may still qualify for the exemption even if they have not yet filed a Schedule F, so long as they intend to do so in a subsequent year.
   
   Key Takeaway: To qualify for Ohio’s agricultural sales tax exemption, a producer must be actively engaged in an agricultural business. Actual profits and sales are not required under Ohio law, but they can be strong evidence that the operation is a legitimate, profit-driven enterprise. 

Common Examples of Items that Qualify under § 5739.02(B)(17)

1. Property used Primarily in farming, agriculture, horticulture, or floriculture
   1. Row-crop and livestock production equipment: Tractors, planters, combines, sprayers, balers, milking equipment. 
   2. ATVs and other utility vehicles: ATVs used to distribute seed or fertilizer, repair fences for livestock operations, or access timber plots for harvest planning may qualify – provided their primary use is farming, not recreation.

2. Property Purchased for Incorporation into Tangible Personal Property Produced for Sale. 
   1. Feed, seed, and livestock inputs: These products physically become part of the final agricultural product. 
   2. Fertilizer, pesticides, and soil amendments: These products are incorporated into the production process and materially contribute to the resulting product. 
   3. Packing incorporated in marketable products: Containers and packaging material that become part of the product sold (e.g., plant trays sold with nursery stock). 

3. Property Used Primarily in Producing Tangible Personal Property That will be Used to Produce Products for Sale. 
   1. Equipment used to make production inputs: Examples include machinery used to prepare items such as feed mixes, compost, or bedding that will later be used in agricultural production can qualify. 
   2. Other “intermediary agricultural production equipment”: We will discuss later how the Claugus decision significantly changed the analysis for this category. For now, it is enough to note that Ohio law no longer requires a qualifying item to be directly used on an agricultural product in order to qualify for the sales tax exemption. 

4. Property Used Primarily in Conditioning or Holding Products Produced for Sale
   1. Portable grain bins: Ohio law recognizes that portable grain bins used to store harvested grain prior to sale as a necessary step in bringing products to market. 
   2. Cooling, washing, and sorting equipment: Equipment used to wash, cool, grade, or otherwise condition produce prior to sale qualifies when it preserves or prepares the product for market rather than processing it into a new product. 
   3. Livestock handling and holding equipment: Chutes, pens, and temporary holding equipment used to manage livestock before sale may also qualify. 

So Why All the Confusion? 

1. The Direct Connection.
   For many years, Ohio law required that an item be used directly on an agricultural product produced for sale in order to qualify for the agricultural sales tax exemption. That is no longer the case.
   
   The Supreme Court of Ohio’s decision in Claugus clearly explains why this “direct use” requirement no longer applies. In the Claugus case, the tax commissioner argued that the timber farm’s purchase of the Mercedes-Benz vehicle did not qualify for the exemption because the vehicle was not used directly on the timber itself. Instead, the vehicle was used to transport people, supplies, and equipment around the farm – what we will categorize as an “intermediate use.”
   
   The Court rejected that argument. It noted that earlier versions of Ohio’s sales tax statute expressly required that property be used “directly” in agricultural production, but that the General Assembly deliberately removed that word when it amended the statute through House Bill 153 (effective Sept. 29, 2011). The Court explained that when the legislature removes specific language from a statue, that change reflects an intentional shift in meaning.
   
   As a result, the Court held that property may qualify as being used in farming even if it is used to perform intermediate steps in the process of producing agricultural products for sale. 
   
   This decision marks a significant departure from past interpretations. Agricultural equipment no longer has to be used directly on crop or livestock to qualify for the sales tax exemption. Instead, equipment may qualify so long as its primary use is agricultural in nature, even if that use is an “intermediate use.” 

2. Other Statutory Schemes
   Another common source of confusion for agricultural producers is that Ohio law does not use a single, consistent definition of agricultural equipment, farm machinery, or agriculture itself. Instead, different areas of Ohio law use different definitions, depending on the purpose of the statute.
   
   For example, Ohio’s motor vehicle statutes define “farm machinery” very broadly. Under R.C. 4501.01(U), farm machinery includes “all machines and tools that are used in the production, harvesting, and care of farm products, and includes trailers that are used to transport agricultural produce or agricultural production materials between a local place of storage or supply and the farm, agricultural tractors, threshing machinery, hay-baling machinery, corn shellers, hammermills, and machinery used in the production of horticultural, agricultural, and vegetable products.”
   
   This definition matters because Ohio law also provides that “farm machinery” is not a motor vehicle for purposes of Ohio’s motor vehicle laws. As a result, the license-plate requirement in R.C. 4503.21, which applies to motor vehicles, does not apply to farm machinery. In practical terms, equipment that qualifies as farm machinery may legally operate without a license plate under Ohio vehicle law. 
   
   This inconsistency adds to the confusion when producers try to determine whether an item qualifies for Ohio’s agricultural sales tax exemption. The sales tax exemption uses a far narrower and more use-specific analysis than Ohio’s motor vehicle laws. While motor vehicle statutes focus on road safety and traffic regulation, the sales tax exemption focuses on how property is used in agricultural production. Because the goals of these laws differ, the terms used in each statutory scheme also differ. 

The Ag Sales Tax Equation
In conclusion, Ohio’s agricultural sales tax exemption is narrow, fact-specific, and heavily dependent on how an item is actually used. 

To qualify a taxpayer must prove the following equation: 

Business Component + Primary Use (or Intermediate Use) = Agricultural Sales Tax Exemption

Put simply, a purchase qualifies for the agricultural sales tax exemption when the buyer is engaged in an agricultural business and the item being purchased is primarily used in agricultural (or in an accepted intermediate step along the way). 

As clarified by the Supreme Court of Ohio in Claugus, the exemption no longer requires that property be used directly on crop or livestock, but that the primary use must still be agricultural in nature. The Claugus decision can be found by following this link.

At the same time, producers must be mindful that Ohio law applies different definitions of “agriculture” depending on the legal context, and classifications that apply under one section of law do not automatically carry over to sales tax. 

Understanding these distinctions can help producers avoid confusion, minimize audit risk, and correctly apply Ohio’s agricultural sales tax exemption.