Indiana Updates Sales Tax Guidance for Agricultural Producers

Effective May 2012, the Indiana Department of Revenue (Department) provided new taxpayer guidance to clarify existing exemptions from Indiana sales and use tax for agricultural production. The Department also reversed two of its previous policies involving the tax treatment of fertilization and crop protection applicators and the procedure for claiming the exemption for utility purchases. This legal update highlights the Department's clarifications and policy reversals as presented in its updated Sales Tax Information Bulletin #9.

Treatment of Agricultural-Use Property

Generally, Indiana's sales and use tax exemptions apply to persons, companies and partnerships occupationally engaged in the production of food or commodities sold for human or animal consumption, or for further use in food or commodity production.

To qualify for exemption, the purchased property must be directly used in direct production of food or agricultural commodities and must have an immediate effect on the commodity being produced. The Department now explains that exempt items include those used: (1) to directly feed exempt animals; (2) to plant, fertilize and protect crops; (3) to move crops from field to temporary storage in advance of further processing; and (4) to move exempt products (e.g., seeds, fungicides) from temporary storage to a location for exempt use. Safety clothing and equipment is also exempt if it is required to prevent injury or contamination.

One major change affects businesses that sell fertilizer and crop protection products to farmers. In a complete reversal of past Department policy, such businesses are no longer entitled to an exemption for applicators used to spread the products on their customer's fields. This change, which reflects the Department's position that the seller of the products is not involved in agricultural production, may result in a substantially higher tax burden for those businesses.

The Department also notes that the exemption does not apply to items used for general farm maintenance, transportation to the farm or transportation from farm to market, among other things, as the Department takes the position that such items are not directly used in direct agricultural production.

New Examples of Direct Use in Direct Agricultural Production

The Department and taxpayers have often disagreed as to whether certain property is directly used in direct agricultural production. The revised bulletin provides several new examples of uses that are exempt or taxable, most of which are based on recent Department decisions. These examples are fact-specific, but provide useful guidance to taxpayers in a variety of circumstances, including:

Livestock and Dairy

• Confinement buildings and their component parts, such as heat exchangers, fans, thermostats and heat pumps, are exempt from sales tax.
• Fencing used to confine exempt animals during breeding, gestation, farrowing, calving, nursing, growing, feeding and finishing is exempt, as is fencing used to segregate animals for medical treatment and transport. Fences between adjoining landowners, fences meant to keep wildlife and trespassers from entering land, and fences used to confine non-agricultural animals are taxable.
• Needles, syringes and vaccine pumps used to vaccinate livestock are exempt.
• Front-end loaders used to remove manure from buildings are exempt.
• Feed bins that are connected to the feed system and automatically dispense feed into the system are exempt, but bins storing feed in advance of the feeding process are taxable.
• Refrigerated display counters for on-farm sales of meat and dairy products are taxable.

Crop Production

• Computers, GPS units, software and yield monitors used to achieve precision crop production are exempt. Computers and software that are used for farm management are taxable.
• The building materials used to build a grain-drying silo are exempt, but the materials used to build a silo for storage of already-dried grain are taxable, unless the owner of the silo also operates a mill where the grain is ground. Tools used to build any kind of silo are taxable.
• Fertilizer and seed tenders are exempt because they are specially outfitted vehicles and are used to move fertilizer and seed from temporary storage to the fields.
• Shuttle tanks and pumps for crop protection products are exempt, but the trucks carrying them are usually taxable unless they are used solely in production.
• Loaders, scales, conveyors, pumps, temporary tankage and other equipment used to blend and load fertilizer and crop protection products are exempt to the extent that they are dedicated to that use.
• Vehicles used to transport exempt items are exempt to the extent that they are used to move items from temporary storage to production. However, vehicles are taxable when they are used for general farm maintenance, including soil sampling and moving rocks and debris.

Clarification on Claiming the Exemption for Retail Sales

In order to purchase exempt agricultural-use property, a purchaser should use Form ST-105 (the Indiana general sales tax exemption certificate) or Form F0003 (for certain nonresident purchasers). In the revised bulletin, the Department explains that purchasers need not complete a separate certificate for each item purchased in a transaction, but must complete a certificate for each purchase, unless the purchaser has sought a "blanket exemption," which allows a retail merchant to reuse the blanket form for future transactions.

New Procedure for Claiming the Exemption for Utility Purchases

Like other agricultural-use property, utilities may also be purchased tax exempt when directly used in direct production. To purchase utilities tax exempt, a taxpayer must file a Form ST-200 Utility Sales Tax Exemption Application with the Department. Historically, the Department has sent an approved exemption certificate directly to the utility provider(s), but under the revised bulletin, the Department will send the certificate to the applicant-taxpayer, shifting the burden to the taxpayer to submit the form to its utility provider(s).

If you have any questions about the impact of this updated sales tax guidance on your business, please contact Ben Blair, Ryann Ricchio or another member of Faegre Baker Daniels' tax advocacy group.

The information contained herein is general in nature, and is not intended and should not be construed as legal or tax advice or opinion provided by Faegre Baker Daniels to the reader.