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By: Peggy Kirk Hall, Thursday, July 07th, 2016

Governor Kasich has signed legislation to create a new “Ohio Farm Winery Liquor Permit.”  While wine makers in Ohio may currently obtain a general liquor permit to make and sell wine on a farm, the general permit does not distinguish the source of the wine. The new Ohio Farm Winery Permit legally designates the wine as being made from grapes grown on the wine maker’s farm.  Sponsors and supporters of the legislation claim that the special designation will help consumers know a wine’s localized nature, bring recognition to Ohio’s wine growing regions, keep Ohio competitive with other states that designate farm-produced wines, and ensure that farm wineries continue to receive property tax treatment as agricultural operations.  Wineries that qualify for the new permit would "be able to present themselves as true farming operations," according to sponsor Ron Young (R-Leroy Township).

Ohio’s Division of Liquor Control may issue an Ohio Farm Winery Permit only to wine makers who meet two requirements:  the manufacturer produces wine from grapes, fruit or other agricultural products grown on the manufacturer’s property, and the property qualifies as “land devoted exclusively to agricultural use” under Ohio’s Current Agricultural Use Valuation (CAUV) program, which requires that the land be used for commercial agricultural production and be at least 10 acres in size or, if less than 10 acres, generates a minimum average of $2500 in gross income.

Under the new law, an Ohio Farm Winery Permit holder may sell its wine products for consumption on the premises where manufactured, for consumption off the premises in sealed containers, or to a wholesale permit holder. An Ohio Farm Winery Permit holder may also manufacture, purchase and import brandy for fortifying wine and may import and purchase wine for blending purposes, but the total amount of wine used for blending cannot exceed 40% of all wine manufactured by the wine maker.   

H.B. 342, which will be effective in late September, is available here.  

By: Peggy Kirk Hall, Thursday, June 30th, 2016

Update:  For a full explanation of the rule, refer to our new Law Bulletin, The New FAA Rule for Using Drones on the Farm  

Part 1:  Drone Pilots Must Obtain FAA Certification

The Federal Aviation Administration (FAA) yesterday filed its final rule in the Federal Register for the Operation and Certification of Small Unmanned Aircraft Systems (sUAS).  The new rule allows for the non-recreational operation of sUAS less than 55 pounds in the national airspace.  Farmers and professionals planning to use UAS or “drones” for agricultural purposes must comply with the rule beginning on August 29, 2016.  An important first step toward compliance is to obtain the proper license to operate a sUAS, referred to as “remote pilot certification” by the FAA.

The Remote Pilot Certification Requirement

The Remote Pilot in Command (Remote PIC) is the person who is directly responsible for the operation of the sUAS.  The new rule requires the Remote PIC to obtain a remote pilot certificate with a small UAS rating.  To do so, an applicant must meet eligibility requirements, pass a knowledge test and complete the application process. 

1.      Eligibility requirements.   An applicant for a Remote PIC must be at least 16 years old, proficient in the English language, and in a physical and mental condition that would not interfere with safe operation of a sUAS.

2.      Knowledge test.    An applicant must pass the unmanned aircraft general (UAG) knowledge test before applying for the remote pilot certificate.  The knowledge test, which will be available beginning August 29, 2016, will contain 60 multiple choice questions on:

  • Federal regulations for sUAS.
  • Airspace classification and operating requirements.
  • Weather sources and effects of weather on sUAS.
  • Loading and performance of sUAS.
  • Emergency procedures.
  • Crew resource management.
  • Radio communication procedures.
  • Determining performance of sUAS.
  • Effects of drugs and alcohol.
  • Aeronautical decision-making.
  • Airport operations and maintenance.
  • Preflight inspection procedures.

The FAA provides a free online learning course for knowledge test preparation, available through www.faasafety.gov or here.   The FAA also presents a sample exam on its website, available here.   Applicants must take the knowledge test at an FAA-approved Knowledge Testing Center.  A list of Ohio’s 23 test centers is available at www.faa.gov/training_testing/testing/media/test_centers.pdf .   Passing the test requires a score over 70%; an applicant who fails the test may retake the test after 14 days.

Applicants already holding a pilot certificate, other than a student pilot, must follow a different process that includes completing a two-hour online course.  The course, which includes an exam, is available through www.faasafety.gov or here

3.      Application.  An applicant who passes the UAG knowledge test must complete the application for a remote pilot certificate, FAA Form 8710-13.   The form will be available as a paper application or online through the FAA’s Integrated Airmen Certificate Rating Application System at https://iacra.faa.gov.   The Transportation Security Administration (TSA) will then conduct a background security screening of the applicant to determine if the applicant represents a security threat.  If the screening is successful, an applicant will receive the remote pilot certificate.  An unsuccessful security screening will disqualify the applicant, who would have a right to appeal the security screening decision.  Note that an applicant who uses the online application can obtain a temporary certificate online upon successful completion of the security screening, while an applicant who submits a paper application must wait to receive the permanent remote pilot certificate through U.S. mail.  The FAA has announced that it hopes to issue a temporary remote pilot certificate within 10 business days after submission of an online application.

What Happens After Certification?

A certified Remote PIC may legally fly a sUAS and may also directly supervise persons who do not hold a remote pilot certificate, as long as the Remote PIC maintains the ability to take control of the sUAS.  This provision will allow Remote PICs to teach, demonstrate and train uncertified operators.  The Remote PIC has several responsibilities:

  • Register the sUAS with the FAA.
  • Conduct pre-flight inspections.
  • Abide by operational limitations in the new sUAS rule.
  • Maintain records on the sUAS and its flights.
  • Upon request, make the sUAS and records available to the FAA for inspection or testing.
  • Report any operation that results in injury, loss of consciousness or property damage of at least $500 to the FAA within 10 days of occurrence.

Recurrent knowledge test.  A person who receives the remote pilot certificate must take a recurrent knowledge test within 24 months to retain the certification. 

Part 2 of this Series

In our next post in this series on implications of the new rule for sUAS in agriculture, we’ll explain the operational limitations and requirements for sUAS.  To read the new rule or access up-to-date information on sUAS, go to www.faa.gov/uas.  

By: Peggy Kirk Hall, Tuesday, May 31st, 2016

A landowner may immediately appeal an agency’s determination that property contains “waters of the United States” that is subject to the federal Clean Water Act, according to a decision issued today by the United States Supreme Court.

The court’s holding in Army Corps of Engineers v. Hawkes Co. centered on a decision by the U.S. Army Corps of Engineers (the Corps) that property in Minnesota owned by the Hawkes Company (Hawkes) contained wetlands that were subject to the Clean Water Act.  Hawkes planned to mine peat on the property, and would have to comply with Minnesota regulations.  The Corps decided that Hawkes must also comply with federal Clean Water Act regulations, based on its “jurisdictional determination” that the property contained waters of the United States because its wetlands had a “significant nexus” to the Red River of the North, located 120 miles away.   

Hawkes challenged the Corps’ jurisdictional determination in federal district court.  The Corps requested dismissal of the case, arguing that its jurisdictional determination was not a "final agency action" that Hawkes could appeal in court.  Rather, the Corps asserted that Hawkes should apply for a Clean Water Act permit and challenge the results of the permit request if dissatisfied or should proceed without a permit and challenge the jurisdictional determination in a likely enforcement action.

The federal district court agreed with the Corps and dismissed the case.  Hawkes then appealed to the Eighth Circuit Court of Appeals, which reversed the district court’s decision.  The Corps requested review of the appeal by the United States Supreme Court, which accepted the case.

The Supreme Court concluded that the Corps’ jurisdictional determination is appealable according to the federal Administrative Procedures Act, which allows an aggrieved party to appeal a “final” agency action.  An action is final if it determines legal consequences,“marks the consummation of the agency’s decision making process,” and when there are no adequate alternatives for relief other than judicial review.  All three circumstances existed in the Hawkes case, said the Court, stating that parties should not have to await enforcement proceedings that carry the risk of criminal and civil penalties before challenging a jurisdictional determination or be forced through a lengthy and costly permitting process before being able to challenge the Corps’ jurisdictional determination. 

Read the decision in Army Corps of Engineers v. Hawkes Co. here.

By: Peggy Kirk Hall, Monday, May 09th, 2016

An agritourism bill first introduced over a year ago has finally received approval from the Ohio General Assembly. The Senate passed SB 75 last November, but the bill did not pass the House of Representatives until May 4, 2016. The House had passed a similar bill last May, but the Senate failed to act on that bill. If signed by Governor Kasich, SB 75 will be in effect in time for the fall agritourism season. (Update: Governor Kasich signed the bill, which becomes effective 8/16/16).

The legislation addresses civil liability risk, property taxation and local zoning authority for “farms” that provide “agritourism” activities. It’s important to understand several definitions in the law:

  • A "farm" is land that is devoted to commercial agricultural production, either at least 10 acres in size or grossing an average income of $2500 from such production.
  • "Agricultural production" means commercial aquaculture, algaculture, apiculture, animal husbandry, poultry husbandry; the production for a commercial purpose of timber, field crops, tobacco, fruits, vegetables, nursery stock, ornamental shrubs, ornamental trees, flowers, or sod; the growth of timber for a noncommercial purpose if the land on which the timber is grown is contiguous to or part of a parcel of land under common ownership that is otherwise devoted exclusively to agricultural use; or any combination of such husbandry, production, or growth; and includes the processing, drying, storage, and marketing of agricultural products when those activities are conducted in conjunction with such husbandry, production, or growth.
  • "Agritourism" is an agriculturally related educational, entertainment, historical, cultural, or recreational activity, including you-pick operations or farm markets, conducted on a farm that allows or invites members of the general public to observe, participate in, or enjoy that activity.
  • An "agritourism provider" is anyone who owns, operates, provides, or sponsors an agritourism activity, whether or not for a fee, including employees at agritourism activities. 

For agritourism providers on farms, the legislation offers the following protections:

Civil liability immunity.   The new law protects an agritourism provider from liability for injuries to agritourism participants in certain situations. The law states that a provider does not have a legal duty to remove risks that are “inherent” in agritourism activities and will not be liable for any harm a participant suffers because of such risks. “Inherent risks” are dangers or conditions that are an integral part of an agritourism activity, including surface and subsurface conditions of land; ordinary dangers of structures or equipment ordinarily used in farming; behavior or actions of domestic or wild animals , except for vicious or dangerous dogs; the possibility of contracting illness from physical contact with animals, animal feed, animal waste, or surfaces contaminated by animal waste; and a participant’s failure to follow instructions or exercise reasonable caution while engaging in the agritourism activity.

Warning sign requirement. An agritourism provider must post and maintain warning signs on the farm to receive the law’s civil liability protection, and a provider who fails to post or maintain these signs can be liable for a participant’s harm. At or near each entrance to the agritourism location or at each agritourism activity, a provider must post and maintain a sign that states: "WARNING: Under Ohio law, there is no liability for an injury to or death of a participant in an agritourism activity conducted at this agritourism location if that injury or death results from the inherent risks of that agritourism activity. Inherent risks of agritourism activities include, but are not limited to, the risk of injury inherent to land, equipment, and animals as well as the potential for you as a participant to act in a negligent manner that may contribute to your injury or death. You are assuming the risk of participating in this agritourism activity." This warning must be printed in black letters that are at least one inch in height.

Exceptions to immunity.  An agritourism provider will not be immune for harm caused by the provider’s willful or wanton disregard for a participant’s safety; if the provider purposefully caused harm to the participant; if the provider's actions or inactions constituted criminal conduct and caused harm to the participant; or if the provider had or should have had actual knowledge of an existing dangerous condition that is not an inherent risk and the provider did not make the dangerous condition known to the participant.

Property taxation. The new legislation ensures that agritourism parcels are eligible for Ohio’s Current Agricultural Use Valuation (CAUV) program, which provides reduced property taxation on qualifying agricultural lands. According to the new law, the existence of agritourism on a tract, lot, or parcel of land does not disqualify land that otherwise qualifies for the CAUV program.

Local zoning authority. The new legislation expands Ohio’s “agricultural exemption” from local zoning to include agritourism activities. The “agricultural exemption” limits the ability of townships and counties to use zoning to prohibit or regulate certain agricultural land uses in any zoning district. Under the new law, agritourism becomes part of the agricultural exemption and is an agricultural land use that zoning officials cannot prohibit by way of zoning.

The legislation does allow townships and counties to regulate some factors related to agritourism land uses if the regulations are necessary to protect public health and safety, however. These factors include the size of structures used primarily for agritourism and setback lines for such structures, egress or ingress into a parcel, and the size of parking areas. This limited authority does not include the power to require improvements such as drainage or paving for agritourism parking areas.

The legislation also clarifies that county and township zoning may not prohibit the use or construction of structures for vinting and selling wine if located on land where grapes are grown.

Implications of the new legislation

  1. Not everyone who engages in agritourism will benefit from the new law.  The law is designed to address agritourism activities that diversify an existing farm—where the activities occur on land that is otherwise engaged in agricultural production. For example, a person who purchases 10 acres of vacant land with the intent of creating a corn maze and petting farm will not benefit from the law because there is no agricultural production already taking place on the land. If the land is first involved in agricultural production, added agritourism activities will fall under the new law.
  2. Visitors to agritourism operations must take more responsibility for their own safety.  The law recognizes that there are inherent dangers on farms that can be beyond the control of agritourism providers. Visitors who wish to participate in an agritourism experience must be aware of these dangers and be prepared to protect themselves by following directions, paying attention to surface conditions, being cautious around animals and equipment, supervising their children and generally exercising reasonable care while on the farm.
  3. Agritourism providers must be prepared to meet the law’s signage requirements.  When the law becomes effective, agritourism operators should have proper warning signs posted. Providers who fail to post the right sign in the right place will lose the law’s immunity protections.
  4. Local officials must treat free and fee-based agritourism activities equally.  Unlike some agricultural laws, there is no distinction in the new law between commercial agritourism businesses and free agritourism activities like educational farm tours; the law applies in the same way regardless of whether the activity is fee-based or free, as long as it’s conducted on a “farm.”
  5. Counties and townships must identify public health and safety issues and develop appropriate zoning standards. Counties and townships must be prepared to recognize agritourism situations that pose health and safety concerns due to the size and location of a structure, ingress and egress on the property or the size of a parking area. If a public health or safety issue is identified and the county or township wants to regulate the issue, it must have enacted zoning standards that address the issue.

Read SB 75 on the Ohio General Assembly’s website here.

Post Script:  Governor Kasich signed this legislation on May 17, 2016; the new law becomes effective on August 16, 2016.

By: Peggy Kirk Hall, Wednesday, April 27th, 2016

A legislative proposal to address manure infrastructure costs introduced by Rep. Brian Hill (R-Zanesville) is moving once again, receiving its third hearing before the House Ways and Means Committee on Tuesday, April 26.  The bill proposes a refundable personal income tax credit for livestock owners in Ohio who invest in facilities or equipment for manure storage, treatment, application, handling or transportation.  Rep. Hill introduced the measure last August, but it has not been on the committee's agenda since its second hearing in February.  Here are the details of the proposed legislation:

  • The tax credit would apply only to taxpayers who own livestock in Ohio on the bill’s effective date and for the entire taxable year in which claiming the credit.  The credit would not apply to former livestock owners, those who obtain livestock after the effective date or those who do not own livestock for the entire year in which claiming the credit.
  • Eligible investments would include those made between January 1, 2005 and January 1, 2020 for any costs incurred to:
  • Acquire manure handling or transportation equipment, which means any machinery, device, equipment, tool, motor vehicle, system or infrastructure improvement used primarily to move manure to or from a manure storage or treatment facility or other location, or to clean or decontaminate land or surfaces on or in which manure is deposited or stored.
  • Acquire manure application equipment, which includes any machinery, device, equipment, motor vehicle or system used to apply or inject manure into or onto soil for agricultural purposes;
  • Plan, design, excavate, construct or install a manure storage or treatment facility anywhere in Ohio, which includes any excavated, diked or walled structure or combination of structures designed to stabilize, hold or store manure.
  • The investments made must assist the taxpayer in complying with NRCS Nutrient Management Code 590 regarding manure application anywhere in the state or complying with state laws regarding the application of manure in Lake Erie’s western basin.   
  • The amount of the tax credit would be 50% of the total eligible investment, and the taxpayer would be required to spread the credit amount equally over a five year period.
  • If the taxpayer’s credit would exceed the income tax due, the taxpayer would be entitled to a refund of the excess amount.
  • The tax commissioner would be responsible for adopting rules for the tax credit, which could require the taxpayer to substantiate the amount of the investment, identify the location of the livestock or describe how the investment helps the taxpayer comply with laws regarding manure storage and application.

Several dairy farmers, the Ohio Soybean Association and the Ohio Farm Bureau testified at the April 26 committee hearing in support of the bill, highlighting the financial strains on livestock operators who install new manure storage and separation equipment.   Committee members expressed several concerns with the proposal, including the retroactivity to investments made since 2005, its application to owners of Confined Animal Feeding Operations and the Legislative Service Commission’s projected loss of tens of millions of dollars per year in state revenue due to the credit.   

Read and follow HB 297 on the Ohio General Assembly website, here.

Posted In: Animals, Environmental, Tax
Tags: manure, tax credit, livestock
Comments: 0
By: Peggy Kirk Hall, Monday, March 07th, 2016

Legislation proposing changes to Ohio’s current agricultural use valuation (CAUV) program has remained on hold in the General Assembly since last fall. Senator Cliff Hite (R-Findlay) and Representative Brian Hill (R-Zanesville) introduced the companion bills on November 18, 2015. The Senate referred its bill, SB 246, to the Senate Ways and Means Committee on December 9, 2015 and House Bill 398 was referred to the House Government Accountability and Oversight Committee on January 20, 2016. Neither committee has acted on its bill.

Taking up Ohio Farm Bureau’s recommendations, the bill sponsors target two aspects of the CAUV program—the formula used to determine CAUV values and the valuation of land used for conservation practices or programs. To create more accurate valuations, the legislation proposes several changes to the CAUV formula:

• States additional factors to include in the rules that prescribe CAUV calculation methods. Currently, the rules must consider the productivity of the soil under normal management practices, the average price patterns of the crops and products produced to determine the income potential to be capitalized and the market value of the land for agricultural use. The proposed legislation adds two new factors: typical cropping and land use patterns and typical production costs.

• Clarifies that when determining the capitalization rate used in the CAUV formula, the tax commissioner cannot use a method that includes the buildup of equity or appreciation.

• Requires the tax commissioner to add a tax additur to the overall capitalization rate, and that the sum of the capitalization rate and tax additur “shall represent as nearly as possible the rate of return a prudent investor would expect from an average or typical farm in this state considering only agricultural factors.”

• Requires the commissioner to annually determine the overall capitalization rate, tax additur, agricultural land capitalization rate and the individual components used in computing those amounts and to publish the amounts with the annual publication of the per-acre agricultural use values for each soil type.

To remove disincentives for landowners who engage in conservation practices yet pay CAUV taxes at the same rate as if the land was in production, the proposed legislation:

• Requires that the land in conservation practices or devoted to a land retirement or conservation program as of the first day of a tax year be valued at the lowest valued of all soil types listed in the tax commissioner’s annual publication of per-acre agricultural use values for each soil type in the state.

• Provides for recalculation of the CAUV rate if the land ceases to be used for conservation within three years of its original certification for the reduced rate, and requires the auditor to levy a charge for the difference on the landowner who ceased the conservation practice or participation in the conservation program.

To access the bills and follow their status in the Ohio legislature, visit HB 398 here  and SB 246 here

For an explanation of the CAUV formula, see our Tax Bulletin "Why did my CAUV values increase so much?" available here.

By: Peggy Kirk Hall, Tuesday, February 23rd, 2016

Update:  On April 21, 2016, the Sixth Circuit Court of Appeals denied a request for en banc (full court) review of this decision made by agricultural groups and several states.

In a case successfully argued by Ohio’s Solicitor Eric Murphy, the Sixth Circuit Court of Appeals based in Cincinnati has determined that it has jurisdiction to hear challenges to the Clean Water Rule (WOTUS Rule) proposed by the U.S. EPA and Army Corps of Engineers.  The Rule expands the geographic extent of the “waters of the United States” (WOTUS) that are subject to the Clean Water Act. 

A brief background

When the agencies published the final WOTUS Rule last summer, dozens of parties and 31 states, including Ohio, filed challenges in nine federal district courts and eight federal courts of appeal.  The filings raised an immediate uncertainty about whether federal district courts or federal courts of appeal have jurisdiction to review the Rule.  Despite this uncertainty, the U.S. District Court for the District of North Dakota issued a temporary injunction that prevented the Rule’s application in the 13 states that were involved in that district’s litigation.  Other district courts in West Virginia and Georgia declined to issue injunctions and instead ruled that they did not have jurisdiction to review the Rule.  A federal panel consolidated the cases filed before the Sixth Circuit Court of Appeals, which includes the challenge by the State of Ohio.  The Sixth Circuit first issued a nationwide stay of the WOTUS Rule last October before turning to the jurisdictional challenges raised by the EPA and Army Corps.

The Sixth Circuit’s fractured opinion

The decision on jurisdiction issued by the Sixth Circuit’s three judge panel is not harmonious.  Judge McKeague wrote the court’s opinion and based jurisdiction on two of seven provisions in the Clean Water Act that grant appellate court jurisdiction to review EPA actions:  subsection 1369 (b)(1)(E) for actions “approving or promulgating any effluent limitation or other limitation” under certain sections of the Act and subsection 1369(b)(1)(F), for actions issuing or denying National Pollutant Discharge Elimination System (NPDES) permits.  Judge McKeague relies on a U.S. Supreme Court decision that interprets the “other limitations” language in 1369 (b)(1)(E) to include limitations that “indirectly” produce limitations on point source operators and permit issuing authorities.  He also cites the Sixth Circuit’s earlier decision in National Cotton Council v. U.S. EPA to conclude that agency actions “issuing or denying” an NPDES permit under 1369(b)(1)(F) include actions creating “regulations governing the issues of permits” and “rules that regulate NPDES permitting procedures,” such as the WOTUS Rule.

A concurring opinion written by Judge Griffin agrees only with the requirement to follow the Sixth Circuit’s previous decision in National Cotton Council.  Judge Griffin clarifies that he is bound by but does not agree with the court’s reasoning in that case, and would not otherwise accept jurisdiction under subsections 1369(b)(1)(E) or (F).  In a dissenting opinion, Judge Keith agrees with the concurring opinion that neither subsection 1369(b)(1)(E) or (F) grants an appeals court jurisdiction in regards to the WOTUS Rule.  Judge Keith also argues that Judge McKeague mistakenly relies upon and overly broadens the National Cotton Council decision, which he believes does not apply to the WOTUS Rule.

Implications

Despite the disagreements between the Sixth Circuit Court judges, the decision means that the nationwide stay of the WOTUS Rule remains in effect and the court will proceed to hear the circuit’s consolidated cases that challenge the WOTUS Rule.  The court’s decision on jurisdiction applies only to the states within the Sixth Circuit—Ohio, Michigan, Kentucky and Tennessee.  Given the range of reasoning in the Sixth Circuit’s decision, other federal courts could reach differing decisions on the question of which court has jurisdiction over the cases.  If so, we can expect a request for the United States Supreme Court to review the jurisdictional issue.  As we expected, the WOTUS Rule challenges will be with us for quite some time. 

Read the Sixth Circuit’s opinion for In re: U.S. Dep’t of Defense & U.S. Envtl. Protection Agency Final Rule: Clean Water Rule at http://www.ca6.uscourts.gov/opinions.pdf/16a0045p-06.pdf.  

By: Peggy Kirk Hall, Tuesday, February 16th, 2016

The Ohio Department of Agriculture (ODA) has revised regulations that implement Ohio’s Cottage Food Law, which addresses the production and sale of certain “non-potentially hazardous” foods. An operation producing a “cottage food” may do so without licensing and inspection by ODA, but must follow labeling requirements and is subject to potential food sampling by ODA.

Changes to Ohio’s cottage food regulations include the following:

New cottage food products

Several new food items have joined the list of cottage food products that an operator may produce without licensing or inspection by ODA:

  1. Flavored honey produced by a beekeeper, if a minimum of 75% of the honey is from the beekeeper’s own hives;
  2. Fruit chutneys;
  3. Maple sugar produced by a maple syrup processor, if at least 75% of the sap used to make the maple syrup is collected directly from trees by the processor;
  4. Waffle cones dipped in candy;
  5. Dry soup mixes containing commercially dried vegetables, beans, grains, and seasonings.

Foods that are not cottage food products

Two revisions clarify foods that do not fall under the cottage food law:

  1. Fresh fruit that is dipped, covered, or otherwise incorporated with candy;
  2. Popping corn.

Fruit in granola products

If adding fruit to granola, granola bars, or granola bars dipped in candy, which are all cottage food products, the fruit must be commercially dried.

The new regulations became effective January 22, 2016. View the cottage food regulations at http://codes.ohio.gov/oac/901%3A3-20.  Read our other posts on Ohio’s Cottage Food Law at https://farmoffice.osu.edu/blog-categories/food.

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.

  1. The sale must be made to a person engaged in farming, agriculture, horticulture, or floriculture;
  2. It must be an item of tangible personal property;
  3. 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;
  4. The item can be material or parts incorporated into tangible personal property for use or consumption in farming;
  5. 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:

  1. Exemptions do not apply to any article which is incorporated into real property
  2. 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.
  3. 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.

EXEMPTION CERTIFICATES

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:

  1. The purchaser’s name and business address,
  2. A tax identification (e.g. vendor’s license or consumer’s use tax account) for the purchaser issued by this state, if any,
  3. The purchaser’s type of business or organization,
  4. The reason for the claimed exemption, and
  5. 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.

CONCLUSION

Even 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.

 

By Larry Gearhardt, OSU Extension Tax School Director

On December 18, 2015, Congress passed and the President signed into law an agreement on tax extenders and numerous other tax provisions in the “Protecting Americans from Tax Hikes (PATH) of 2015” (the Act). Tax extenders are the 50+ tax provisions that are routinely extended by Congress on a one- or two-year basis. The Act makes permanent many of the individual and business extenders. Some of the more pertinent provisions are as follows:

Section 179 Expense Deduction

Under Sec. 179 of the Internal Revenue Code, a taxpayer may elect to deduct as an expense, rather than to depreciate over time, up to a specified amount, the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. In this case, “taxpayer” does not include an estate, trust, or certain non-corporate lessors. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling.

The old law provided that, for 2015, the maximum expensing limit was $25,000 and the investment ceiling was $200,000. Pursuant to the new law, the expensing limit was increased to $500,000 and the investment ceiling was increased to $2,000,000 before the phase-out begins. These amounts were made retroactive to the beginning of 2015 and they were made permanent for future use. In addition, for any tax year beginning after December 31, 2015, both the $500,000 and the $2,000,000 are indexed for inflation.

The amount eligible to be expensed in a tax year cannot exceed the taxable income derived from the taxpayer’s active conduct of a trade or business. The amount deducted under Code Sec. 179 can offset the taxpayer’s income, but it cannot be used to create a loss. However, any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

“Eligible property” for Code Sec. 179 purposes is any tangible property that is Code Sec. 1245 property (generally machinery and equipment) depreciated under the MACRS rules of Code Sec. 168, regardless of its depreciation recovery period. In short, if you can depreciate it, the property would qualify for Sec. 179 treatment. “Eligible property” includes machinery and equipment; property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment; livestock, including horses, cattle, hogs, sheep, goats, mink and other fur bearing animals; grain bins; single purpose livestock and horticultural structures; and agricultural fences and drainage tile. Both new and used property qualifies.

The Code Sec. 179 deduction applies to the tax year when the eligible property is “placed in service.” This may be different than the date of purchase. Property is “placed in service” when it is ready and available for a specific use, even if the item is not being currently used. Warning: writing a check on the last day of the year to purchase new machinery or equipment does not automatically qualify that item to be deducted in that tax year. In addition to writing the check, the machinery or equipment must be ready and available to use in that tax year. This may be extremely important when taking on a long-term project, such as constructing a building.

A Code Sec. 179 deduction is taken on tax form 4562. The taxpayer may elect to deduct the entire cost of the property (within limitations), none of the cost, or a portion of the cost of the item. Even though Code Sec. 179 provides for a “deduction,” taking the deduction reduces the basis in the property the same as if it was depreciated. A “recapture” of the deduction may be triggered if the item is later sold for more than its basis.

Bonus First-Year Depreciation Extended Through 2019

There was no Accelerated First-Year Depreciation (AFYD) for 2015 under the old law. Under the new law, Congress provided some future stability by providing for AFYD through 2019, albeit on a decreasing scale. Eligible taxpayers will be able to claim:

  1. A 50% bonus depreciation allowance for qualified property placed in service in 2015, 2016, and 2017;
  2. A 40% bonus depreciation allowance for qualified property placed in service in 2018; and
  3. A 30% bonus depreciation allowance for property placed in service in 2019.

In general, property qualifies for the bonus depreciation allowance if it is property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less. This includes virtually all of the items used in agriculture. Unlike the Code Sec. 179 expense deduction, which applies to both new and used property, the bonus depreciation allowance applies to only new property. Its original use must commence with the taxpayer.

The bonus depreciation allowance is also taken on tax form 4562. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property (as opposed to an individual item) for any tax year.

New Rule for Plants With Long Production Periods

The Act contains a special new rule for plants planted or grafted after December 31, 2015 and before January 1, 2020. Bonus depreciation is allowed for certain trees, vines, and plants bearing fruit or nuts when planted or grafted rather than when the plant reaches income-producing stage. Under the old law, for depreciation purposes, fruit-bearing or nut-bearing plants were deemed “placed in service” when they reached an income-producing stage. The “placed in service” rule was relaxed in the Act so that a fruit-bearing or nut-bearing plant is deemed “placed in service” when planted or grafted. Therefore, plants with a long pre-production period can qualify for the bonus depreciation allowance under the new law.

A “specified plant” that qualifies is a plant, planted or grafted in the United States, that is: (1) any tree, vine, or plant that bears fruit or nuts; or (2) any other plant that will have more than one yield of fruits or nuts and generally has a pre-productive period of more than two years from the time of planting or grafting to the time that the plant bears fruit or nuts.

Other Extended Provisions Worth Noting

In addition to the foregoing provisions, the PATH Act extended the following provisions, among others:

  • A permanent extension of the general state and local sales tax deduction.
  • A permanent extension of the $250 educator expense deduction.
  • A permanent extension of the Credit for Increasing Research Activities (research credit).
  • A permanent extension of the 15-year recovery period for qualified leasehold improvements, qualified restaurant property and qualified retail improvements.
  • An extension of the tuition and fees deduction through 2016.
  • An extension of the nonbusiness energy credit through 2016.
  • An extension of mortgage insurance premiums paid or accrued as an itemized deduction through 2016.
  • An extension of the qualified principal residence indebtedness exclusion for debt discharge income through 2016.
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