Could a fertilizer company buy replacement tires for free-loan fertilizer applicators under Texas's agricultural exemption?

Plain-English summary

A fertilizer company sold liquid fertilizer to farmers and let them use its applicators without charge. Texas said the company could issue an exemption certificate for the applicators, tires, and other replacement parts only if the applicators were used exclusively on a farm or ranch for the qualifying production listed in the letter. Otherwise, the company had to pay tax.

The tire seller did not have to collect tax when it accepted a signed and completed exemption certificate in good faith. It had to collect tax if the certificate was incomplete, unsigned, or known to be invalid when the tires were sold.

What this means for you

The exemption turned on exclusive qualifying agricultural use and proper documentation, not simply on ownership by a fertilizer business. STAR also warns that 2011 legislation added a Comptroller registration-number requirement for certain agricultural and timber exemptions effective January 1, 2012.

Common questions

Did lending the applicators to fertilizer customers prevent exemption? Not by itself. The stated test was their exclusive qualifying farm or ranch use.

What uses qualified under the letter? Production of food for human consumption, grass, animal feed, or other agricultural products sold in the regular course of business.

When was the tire seller protected by the certificate? When it accepted a signed, completed certificate in good faith and did not know the claimed exemption was invalid.

Citations and references

• 34 Tex. Admin. Code Rule 3.296(a)(5)(A) — the agricultural machinery-and-equipment provision cited in the letter.
• STAR alert — H.B. 268, 82nd Regular Legislative Session (2011), effective January 1, 2012 for the registration-number requirement described in the alert.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9103L1095F08

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller March 28, 1991

Dear ****:

Thank you for your recent letter. As I understand it, your customer, XXX
Fertilizer Co., sells liquid fertilizer to farmers. XXX lets farmers use its
fertilizer applicators free of charge to apply fertilizer purchased from XXX.
You ask if XXX may purchase new tires for the applicators tax free from you.

XXX may issue an exemption certificate instead of paying tax on the
applicators, tires, and other replacement parts, only if the applicators will
be used exclusively on a farm or ranch, in the production of food for human
consumption, production of grass, production of feed for any form of animal
life, or other agricultural products to be sold in the regular course of
business. See enclosed Rule 3.296 (a)(5)(A). Otherwise, XXX must pay tax.

If you accept, in good faith, a signed and completed exemption
certificate from the purchaser, then you do not have to charge tax on the
tires. If the certificate is not complete, not signed, or if you know at the
time of the sale that the claimed exemption is invalid, you must collect tax.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions, feel
free to write or call
1-800-252-5555. My direct extension is 3-3889.

Sincerely,
John Christian
Tax Administration