Farmers and the Indiana Sales Tax
George F. Patrick, Professor and Extension Economist
Tax increases, like the recent increase in the Indiana sales/use tax from 6% to 7%, attract the attention of many individuals. According to the Indiana Code, the person who acquires tangible personal property in a retail transaction is liable for the tax on the transaction and shall pay the tax to the retail merchant as a separate, added dollar amount. The retail merchant shall collect the tax as agent for the state. Thus, an Indiana farmer may encounter the Indiana sales/use tax in two ways:
1.) As a purchaser of property subject to tax.
2.) As an individual making sales of property subject to tax.
Only retail sales of tangible personal property are subject to tax. Intangibles, services, and real estate are not subject to tax. Certain foods and medicines are also not subject to tax. Furthermore, there are a number of exemptions, some specific for farmers and agricultural production, which can be confusing to both buyers and sellers.
The general rule for the application of sales or use tax is that a purchase of tangible personal property to be used in Indiana is subject to tax unless a specific exemption is available. Sales tax applies to purchases in Indiana, while the use tax applies to Indiana sales where sales tax was not charged at the time of purchase or out-of-state purchases which were not subject to sales tax or which were subject to a lower rate of sales tax than in Indiana. For example, an Indiana use tax of 2% would be due on an out-of-state purchase on or after April 1, 2008 which had been taxed at a sales tax rate of 5% by another state. Individuals report these purchases on the Form IT-40 and pay the tax due with their Indiana income tax return.
Sales Tax Information Bulletin #9 says there are “several exemptions from sales and use tax relating to agricultural production. The exemptions are limited to purchases of animals, feed, seed, plants, fertilizers, insecticides, fungicides, and other tangible personal property; and agricultural machinery, tools, and equipment directly used in direct production of food or commodities that are sold for human consumption or for further food or commodity production.” (emphasis added) Property purchased must be integral and essential to the production process of food or commodities. In addition to directly using the property in direct production (“the double direct test”), the person acquiring the property must be a farmer. A “farmer” is one who is occupationally engaged in the commercial production of food or agricultural commodities for sale or further use in producing food or commodities for sale. Persons who do not intend to operate at a profit or who produce food and agricultural commodities as a hobby are not occupationally engaged in farming and their purchases are subject to tax.
Operations similar to pony farms, riding stables, or the production and raising of dogs and pets are not classified as farms for sales tax purposes. Information Bulletin #9 gives an example of an operation which raises animals to be used in laboratory research. Because the animals are not intended for nor are sold for human consumption, the operation cannot purchase animal feed exempt from tax. A second example involves the purchase of horses to be used as riding animals. Such a purchase would be taxable because the animals are not directly used in the direct production of food or agricultural commodities. Purchase of animals used for sporting purposes (e.g., racing and gaming horses) and their feed and other inputs are not exempt from sales tax under the agricultural exemptions.
There are a number of items which, although used in agriculture, are not directly used in direct production and do not qualify for the agricultural exemption. Wearing appeal, appliances, hand and power tools, lawn or garden equipment and any motor vehicle required to be licensed for highway use are some examples. Fencing materials and building materials are gray areas. Fencing materials are taxable if the fence is used only as partition fence between adjoining landowners or to keep wildlife, stray animals, or trespassers from entering cropland or farm premise. However, fencing materials are exempt if used to confine livestock during breeding, gestation, farrowing, calving, nursing, or finishing. Building materials are taxable if used in the construction or repair of non-exempt buildings. Confinement livestock buildings which serve a breeding, gestation, farrowing, nursing, or finishing function are generally exempt.
Utilities, like electricity and gas used to dry grains and forages or power equipment (e.g., egg incubator and milking machines) are considered to be directly used in direct production and would be exempt from sales tax. If exempt use of electricity is the predominant use (more than 50%) of electricity on a meter, the purchase of electricity is exempt. If the use of electricity is not predominantly exempt (50% or less), the sales tax is paid to the utility and a claim for refund for the percentage of exempt use is filed with the Indiana Department of Revenue. The taxpayer must file Form ST-200 and submit it to the Department, and the Department then issues either an exemption letter if exempt use is 50% or less to file a claim for refund or a Form ST-109 if exempt use is over 50%.
Questions have been raised whether the seed, fertilizer, pesticides and other inputs directly used in the direct production of corn to be used for the production of ethanol would qualify as being nontaxable under the agricultural exemptions. Clearly ethanol is a product of agricultural origin, but it is not intended for human consumption as food. However, production of ethanol from corn involves a joint product, distiller’s dried grains (DDGS), which is used for as an animal feed. Thus, that portion of inputs which went into the production of DDGS would be exempt under the agricultural exemption. Although the portion of inputs going the production of ethanol may not qualify for the agricultural exemption, the purchase of tangible personal property for its direct consumption in direct production would be exempt under the “manufacturing” exemption of 45 IAC 2.2-4-4. This is discussed in more detail in the next section.
In general, the sales tax applies only to retail sales. Many of the sales made by farmers are “wholesale sales” rather than retail sales, and thus are not subject to sales tax. Wholesale sales, according to Sales Tax Information Bulletin #52 (September 1994), include sales of:
1.) Tangible personal property, other than capital assets and depreciable property, to a person who purchases the property for the purpose of reselling it without changing its form. Sales of grain to grain merchandisers or sales of hay, other forages and some market livestock to dealers would be in this purchase for resale category of wholesale sales.
2.) Tangible personal property for direct consumption as a material in the direct production of other tangible personal property produced by the buyer in their business of manufacturing, processing, refining, repairing, mining, agriculture, or horticulture. Sales of corn, soybeans, and other grains and livestock to processers (including ethanol producers), would qualify. Sales of grains and forages as feed to a qualifying farmer, would be other examples of this type of wholesale sale.
3.) Tangible personal property to a person who purchases the property for incorporation as a material or integral part of tangible personal property produced by the buyer in their business of manufacturing, assembling, constructing, refining, or processing is also a wholesale sale. This would include sales of some livestock and other agricultural products for processing.
Farmers making exempt sales are not required to register as Retail Merchants under the Indiana Department of Revenue’s current policy. Although sales of corn to an ethanol producer do not qualify for an agricultural exemption from sales tax, such sales are exempt from sales tax under the manufacturing/processing exemption. The Department does not require farmers to register as Retail Merchants, if the only reason for doing so is because of corn sales to an ethanol producer.
If an Indiana farmer does make retail sales to purchasers who are not qualified for the agricultural exemption or the other exemptions discussed above, that farmer is required to collect and remit the sales tax to the Indiana Department of Revenue. These farmers are considered to be Indiana Retail Merchants and must register with the Indiana Department of Revenue. Registration requires completion of Form BT-1 and an initial application fee of $25. Registration must be renewed every two years, but the new certificate is generated automatically if no tax is due and no returns are missing. For further information, go to https://secure.in.gov/apps/dor/bt1/.
All retail sales of tangible personal property for delivery in Indiana are presumed to be subject to sales tax unless proven otherwise. The burden of proof is on the buyer and also on the seller, unless the seller receives an exemption certificate (45 IAC 2.2-8-12). Typically a buyer qualifying for the agricultural exemption would provide Form ST-105, General Sales Tax Exemption Certificate, with the appropriate box checked to the seller. (Farmers are allowed to use their Social Security number in lieu of an Indiana number for the sales tax exemption.)
The seller is required to collect and remit sales tax unless the seller has received a properly completed exemption certificate or is able to prove that the purchaser actually used the item for an exempt purpose. Failure to comply may lead to penalties and interest charges for the producer. For further information on complying with the sales tax collection, reporting, and deposit requirements go to https://www.intax.in.gov/Web/ or contact the Indiana Department of Revenue at 317-233-4015.
Many of the inputs and machinery purchased by Indiana farmers are exempt from sales tax if two conditions are met. First, the tangible personal property must be directly used in direct production of food or commodities or commodities which are sold for human consumption or for further food or commodity production. Second, the producer must be occupationally engaged in the production. Individuals who do not intend to operate at a profit or produce as a hobby are not eligible for the agricultural exemptions from sales tax.
Sales by Indiana farmers are often wholesale sales which are not subject to sales tax. Other sales may qualify for the agricultural exemption and the seller should receive an exemption certificate, Form ST-105, from the purchaser. However, some sales may be made to purchasers who fail to meet the conditions for the agricultural exemptions discussed above. Such sales are subject to sales tax and it is the seller’s responsibility to collect the tax from the purchaser and remit it to the Indiana Department of Revenue. Failure to comply with Indiana sales tax law can cause serious difficulties for producers.
This article draws heavily on the Indiana Department of Revenue Information Bulletin #9, Sales Tax, “Agricultural Production Exemptions,” January 2003, which is available at http://www.in.gov/dor/reference/files/sib52.pdf; Sales Tax Information Bulletin #52, “Wholesalers,” September 1994, http://www.in.gov/dor/reference/files/sib09.pdf, and Chapter 45 of the Indiana Administrative Code, http://www.in.gov/legislative/iac/iac_title?iact=45. Appreciation is expressed to Alan Miller for helpful comments on earlier versions.
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