Are manufactured buildings and their construction materials exempt from Utah sales tax when sold to agricultural producers for farming use, even though the building becomes part of real estate?

Plain-English summary

A frustrated Utah manufacturing firm that sells buildings to agricultural producers wrote in after years of confusion. A Tax Commission representative had told the company that because its buildings become part of real estate once installed, they were subject to sales tax -- so the company charged tax accordingly. Three or four years later, farmers who'd paid that tax between 1993 and 1996 started coming back asking for refunds, leaving the company facing a wave of retroactive refund work it felt could have been avoided with clearer guidance from the start. The company asked the Commission to spell out, in writing, exactly what is and isn't exempt.

The Commission's answer: Utah Code § 59-12-104(21) exempts tangible personal property used or consumed primarily and directly in farming operations -- and, importantly, that exemption applies whether or not the item becomes part of real estate. The earlier guidance the company had received (treating conversion into real estate as automatically taxable) was incomplete. The Commission confirmed it had "long acknowledged" the exemption for manufactured agricultural buildings used for a qualifying purpose, and had recently reaffirmed that the exemption extends even to the building materials used to construct a qualifying agricultural building -- so long as the finished structure serves a qualifying farming purpose.

The exemption has real limits, though: the structure must be used primarily and directly in commercial farming operations. Buildings or materials used for non-farming activities -- office space, sales and distribution, transportation -- don't qualify. The Commission noted that filing a federal Schedule F (Farm Income and Expenses Statement) is evidence of a commercial farming operation.

On process: the seller should obtain a signed exemption certificate from the agricultural producer before treating a sale as exempt (if a contractor is the one buying materials, the seller should get a certificate from the contractor that's been signed by the producer). Accepting that certificate in good faith protects the seller -- if a dispute later arises, the Commission looks to the producer who signed the certificate, not the seller. The exemption certificate itself was revised in June 1996 to remove some limiting language that had appeared on older versions. Finally, taxpayers who overpaid can seek a refund within three years of the overpayment, typically by refunding the customer directly and then taking a corresponding adjustment on the seller's next sales tax return.

What this means for you

Sellers of manufactured or prefabricated agricultural buildings

Don't assume a building becomes taxable just because it's converted into real property upon installation -- the farming-use exemption can still apply, covering both the finished structure and the materials that went into it.

Agricultural producers purchasing farm buildings

Provide your seller with a properly signed exemption certificate up front. That protects both you and the seller, and avoids the retroactive refund headache described in this ruling.

Businesses that received unclear or contradictory guidance from the Commission in the past

If you were told to collect tax that turns out not to have been owed, you (or your affected customers) generally have three years from the overpayment to seek a refund -- confirm current refund procedures with the Commission.

Common questions

Q: Does a manufactured agricultural building lose its sales tax exemption once it's installed and becomes part of real estate?
A: No -- Utah Code § 59-12-104(21) exempts qualifying agricultural property "whether or not the item becomes part of real estate."

Q: Does the exemption cover just the finished building, or also the raw construction materials?
A: Both, as long as the finished structure is used for a qualifying farming purpose.

Q: What disqualifies a farm building from the exemption?
A: Use for non-farming activities -- office space, sales/distribution, or transportation -- rather than primarily and directly in commercial farming operations.

Q: How does a seller protect itself when selling to an agricultural producer without charging tax?
A: Obtain a properly signed exemption certificate from the producer (or from a contractor with the producer's signature) and accept it in good faith.

Q: How long do sellers or their customers have to claim a refund for sales tax mistakenly collected?
A: Three years from the date of the overpayment.

Citations and references

Statutes cited:

• Utah Code Ann. § 59-12-104(21) (agricultural exemption for tangible personal property used primarily and directly in farming operations, including items converted to real property)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-010.pdf

Original ruling text

97-010

Response February 28, 1997

State Tax Commission:

I am writing to express my total frustration in trying to collect proper Sales Tax for the Utah State Tax Commission.

We are a manufacturing firm in Utah. We do a lot of work for agricultural producers. I have honestly tried my best to collect the proper Sales Tax due I have spent many hours on the telephone trying to clarify unclear or gray areas concerning Sales Tax on agricultural buildings. I was basically told that because the buildings were converted to real estate, they are subject to Sales Tax (your 195 form Agricultural Producers #2, line d.). Because of what I was told by a representative of the State Tax Commission I charged Sales Tax Now, three and four years later the farmers are coming to be reimbursed for the sales tax they paid in '93 - 196. The work and the hours that this will require on my part is over whelming and frustrating, as this could have all been avoided if I had been given the proper information in the first place.

Before I refund the Sales Tax to the farmers. I would appreciate a letter from you clarifying exactly what is EXEMPT from Sales Tax and what is NOT EXEMPT.

I would sincerely appreciate any help you could give me concerning this.

Thank You,

NAME

February 28, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Sales of items used in agricultural operations

Dear NAME,

We have received your request for information regarding the application of the agricultural exemption to sales by your company. As we understand your letter, your company sells manufactured buildings to agricultural producers. We offer the following guidance:

Under Utah Code section 59-12-104 (21), sales of tangible personal property used or consumed primarily and directly in farming operations are exempt from sales tax, whether or not the item becomes part of real estate. With regard to manufactured buildings, the Commission has long acknowledged this exemption so long as the building is used for a qualifying purpose. Recently the Commission reviewed its position on building materials used to construct qualifying agricultural buildings. We determined that the plain language of the statute extends the exemption to building materials which are converted to real property so long as the finished structure is used for a qualifying purpose.

To qualify for exemption, the structure must be used primarily and directly in commercial farming operations. Items used in any activities other than farming, such as office equipment and supplies, items used in sales and distribution, or transportation do not qualify for this exemption. A commercial farming operation is evidenced by the filing of a federal Farm Income and Expenses Statement (Schedule F) for federal tax purposes.

An agricultural producer may claim the exemption with a properly filed exemption certificate. If a contractor is purchasing materials for conversion to a qualifying building, we suggest that you require the contractor to obtain and deliver to you an exemption certificate signed by the agricultural producer. So long as you accept the exemption certificate in good faith, you will not be held responsible for collecting sales tax on these kinds of sales. If questions arise concerning a particular sale, we will look to the agricultural producer who signed the certificate. Incidently, the exemption certificate was revised in June of 1996 (copy enclosed). The language of limitation that appeared on older versions of this form has been removed.

As you are probably aware, you may request a refund within three years of the overpayment. Normally, you will refund the tax to your customer, then take an adjustment for the refunded tax on your next sales tax return. If you or your customers have questions or problems concerning specific refund claims, please contact NAME of our Customer Service Division at #####. NAME or any member of her staff will be happy to work with you.

Please let us know if you need further information or clarification.

For the Commission,

Joe B. Pacheco,

Commissioner