Did farm exemption certificates protect sales of rodenticides, horse feed, and supplies, and were auction donations taxable livestock purchases?

Subject

Farm certificates and no-transfer auction records removed disputed audit items

Plain-English summary

Virginia removed the disputed farm-supply sales and livestock-auction entries. The cooperative had accepted completed Form ST-18 certificates from farmers stating that rodenticides, horse feed, and related supplies would be used in agricultural production. The audit had already removed the contested fencing.

Dealers must review certificates for completeness and ensure the sold class of items fits their wording, but they are not required to police the customer's later use. These certificates supported the exemption.

For the auction entries, additional records showed donations to 4-H and Future Farmers of America rather than acquisition of livestock. With no transfer of title or possession, there was no taxable sale.

What this means for you

• Good-faith acceptance requires a complete certificate that actually covers the goods sold.
• Agricultural supplies can qualify when sold to farmers for production for market.
• An invoice description does not control when records show no property transfer occurred.

Common questions

Were the farm-supply certificates accepted?

Yes. The completed certificates covered the rodenticides, horse feed, and related supplies.

Why were auction items removed?

The cooperative documented donations and no receipt of livestock.

Citations and references

• Va. Code §§ 58.1-623, 58.1-609.2(1), and 58.1-602.
• 23 VAC 10-210-280.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-120

Original ruling text

August 7, 2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period October 2003 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a retail farm cooperative. As a result of the Department's audit of the Taxpayer's locations, the auditor assessed tax on untaxed sales of rodenticides, fencing, horse feed, and related agricultural supplies. In addition, the auditor assessed tax on purchases of livestock at an auction.

The Taxpayer contests the audit results, stating the identified sales are not taxable because it accepted exemption certificates in good faith. In addition, the Taxpayer contests the tax assessed on the contested purchases of livestock. The Taxpayer claims the transactions are donations to the 4-H Club and Future Farmers of America, and it did not receive any livestock. Accordingly, the Taxpayer seeks an abatement of the Department's assessment with respect to these items.

DETERMINATION

Certificates of Exemption

Virginia Code § 58.1-623 states that all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale or lease of tangible personal property is not taxable is upon the dealer, unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating the property is exempt under the law. This requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-280, which provides that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.

The regulation further states, "Reasonable care and judgment must be exercised by all concerned to prevent the giving and receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." Reasonable care and judgment requires that the Taxpayer review the exemption certificate presented and compare the language of such certificate to the items sold on the invoices. The Taxpayer is not expected to "police" its customers' use of exemption certificates. However, the Taxpayer is expected to review the certificates for completeness, and to have an understanding that the class of items being sold falls within the scope of the wording of the exemption certificate.

Agricultural Exemption

Virginia Code § 58.1-609.2 1 provides an exemption from the retail sales and use tax for:

Commercial feeds, seeds, plants, fertilizers, liming materials, breeding and other livestock, semen, breeding fees, baby chicks, turkey poults, rabbits, quail, llamas, bees, agricultural chemicals, fuel for drying or curing crops, baler twine, containers for fruit and vegetables, farm machinery, tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor, and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural productions, which also includes beekeeping and fish, quail, rabbit, and worm farming for market.

In this instance, the Taxpayer accepted completed certificates of exemption (Form ST-18) from farmers indicating the rodenticides, horse feed and related supplies would be used in agricultural production. Therefore, I will agree to remove the sales of these items from the audit. It is my understanding the audit has been adjusted to remove the tax assessed on the contested fencing.

Livestock

Virginia Code § 58.1-602 defines a "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property . . . ."

In this case, the auditor assessed the tax because the invoice listed livestock. The Taxpayer provided additional documentation that supports its claim that there was no transfer of livestock in connection with the contested purchases. Because the contested purchases involve no transfer of tangible personal property, they are not subject to the tax. Accordingly, the contested purchases will be removed from the audit.

CONCLUSION

The audit will be returned to the audit staff to be revised in accordance with this determination. The Taxpayer will receive a revised audit report, and, the Department will abate contested bill *. The Department's records indicate that a payment of has been applied to the bill. I also note that there remains an outstanding balance of on uncontested bill ***. Therefore, the overpayment will be applied to the outstanding balance owed on bill and the remaining overpayment will be refunded to the Taxpayer.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2409266767.T