Is the construction of a livestock lagoon for a dairy farm exempt from Kansas sales tax as farm machinery and equipment?

Plain-English summary

A representative asked, for a dairy-farmer client, whether building a new livestock lagoon is exempt from Kansas sales tax. The construction company was unsure whether to charge tax, and the Department of Revenue itself had told the requester it was "unclear." The Department ruled the lagoon construction is not exempt.

The exemption is for farm machinery and equipment. Kansas retailers' sales tax is imposed by K.S.A. 79-3603, and exemptions are in K.S.A. 79-3606. Subsection (t) exempts "all sales of farm machinery and equipment or aquaculture machinery and equipment," their repair and replacement parts, and services to repair and maintain that machinery and equipment — with a written-certification requirement that the equipment will be used only in farming, ranching, or aquaculture production.

A lagoon is a real-property improvement, not equipment. The Department's opinion is that a livestock lagoon is an improvement to real property. As such, it cannot qualify for exemption as farm equipment. Therefore, the construction of a livestock lagoon does not qualify for exemption from Kansas retailers' sales tax as farm machinery or equipment.

Bottom line: the 79-3606(t) exemption covers farm machinery and equipment, not real-estate improvements — so building a dairy livestock lagoon is taxable and does not qualify as exempt farm equipment.

What this means for you

Farmers and ranchers

The farm machinery and equipment exemption (79-3606(t)) applies to equipment used in farming, ranching, or aquaculture — not to improvements to your real property. A lagoon, building, or similar permanent improvement becomes part of the real estate and falls outside the equipment exemption.

Contractors doing farm improvements

Constructing a livestock lagoon (or other real-property improvement) for a farm is not exempt as farm equipment. Do not treat a real-property construction job as an exempt farm-equipment sale on the strength of the customer's agricultural use.

The equipment/real-property line is decisive

The result turned on the lagoon being an improvement to real property. Movable farm machinery and equipment used in production can qualify under 79-3606(t) with proper certification; things that become part of the real estate do not.

Common questions

Q: Is building a livestock lagoon for a dairy exempt from Kansas sales tax?
A: No. The Department ruled a livestock lagoon is an improvement to real property, so it does not qualify for the farm-machinery-and-equipment exemption.

Q: What does the 79-3606(t) exemption actually cover?
A: Sales of farm and aquaculture machinery and equipment, their repair and replacement parts, and repair/maintenance services on that equipment — with a written certification of qualifying use.

Q: Why doesn't the farm's agricultural use make the lagoon exempt?
A: Because the exemption is keyed to farm machinery and equipment, not to real-property improvements. A lagoon becomes part of the real estate, so it is outside the exemption regardless of agricultural use.

Citations and references

• K.S.A. 79-3606(t) — exempts sales of farm and aquaculture machinery and equipment, repair and replacement parts, and repair/maintenance services, with a written qualifying-use certification; the Department held a livestock lagoon is a real-property improvement outside this exemption.
• K.S.A. 79-3603 — imposes the Kansas retailers' sales tax; the general imposing statute referenced as the source of the tax from which 79-3606 provides exemptions.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-063

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 22, 2001

XXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX

The purpose of this letter is to respond to your letter dated May 31, 2001. In it, you ask if the construction of a lagoon for a dairy farmer is exempt from Kansas retailers’ sales tax.

In your letter you stated:

This correspondence is requesting a private letter ruling for one of our clients. XXXXXXX operate a dairy farm and have recently had a new livestock lagoon built. The construction company was not sure whether to charge sales tax on this or not. As a result, XXXXXX asked our office to check if this should have sales tax added to the cost of building the lagoon or not. After calling the Kansas Department of Revenue, I was told that it was unclear if this is taxable and that I should request a private letter ruling.

In addition, XXXXXXXXX are in the process of filing a claim with the ASCS office to get a refund for building the new lagoon. As a result, they have a deadline to meet for claiming the refund and would appreciate a timely response. The private letter ruling may be sent to our office or to XXXXXXXXXXXXXXXXXXXXXXXXXX.

The Kansas retailers’ sales tax is imposed by K.S.A. 79-3603. Exemptions are found in K.S.A. 79-3606. Subsection (t) of the statute provides an exemption for:

all sales of farm machinery and equipment or aquaculture machinery and equipment, repair and replacement parts therefor and services performed in the repair and maintenance of such machinery and equipment. For the purposes of this subsection, “farm machinery and equipment or aquaculture machinery and equipment” shall include machinery and equipment used in the operation of Christmas tree farming but shall not include any passenger vehicle, truck, truck tractor, trailer, semitrailer of pole trailer, other than a farm trailer, as such terms are defined by K.S.A. 8-126, and amendments thereto. Each purchaser of farm machinery and equipment or aquaculture machinery and equipment exempted herein must certify in writing on the copy of the invoice or sales ticket to be retained by the seller that the farm machinery and equipment or aquaculture machinery and equipment purchased will be used only in farming, ranching or aquaculture production. Farming and ranching shall include the operation of a feedlot and farm and ranch work for hire and the operation of a nursery;

It is the opinion of the Kansas Department of Revenue that a livestock lagoon is an improvement to real property. As such, the lagoon cannot qualify for exemption as farm equipment. Therefore, the construction of a livestock lagoon does not qualify for exemption from Kansas retailers’ sales, as farm machinery or equipment.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 06/26/2001 Date Modified: 10/11/2001

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