Is an alarm/paging unit attached to an incubator used to hatch emu eggs exempt from Texas sales tax as farm equipment?

Subject

Incubator Alarm Unit — Used In Hatching Emu Eggs — Agricultural Exemption Scope

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1274A12

Plain-English Summary

An emu farmer was buying a communication device that pages a personal pager over a phone line whenever an alarm is triggered on one of the farm's three egg incubators. The taxpayer, who was quoting the price of this equipment to the farmer, asked the Comptroller whether the device was tax exempt, noting that ordinary communication equipment used off-farm (like cellular phones) is not exempt.

The Comptroller answered under Tax Code Section 151.316, which exempts machinery and equipment exclusively used or employed on a farm or ranch to produce agricultural products for sale. Because the alarm unit is placed in each incubator and used exclusively there to help produce emus for sale, the person raising the emus may give the equipment supplier an exemption certificate in lieu of paying tax on the alarm unit itself.

That exemption, however, does not automatically extend to everything connected to the alarm system:

• The paging unit is not automatically exempt. If the paging device can be carried off the farm, or can receive pages from third parties (not just the farm alarm), it does not qualify for the agricultural exemption.
• Off-farm page charges are taxable. Charges for pages transmitted from non-farm locations don't qualify for the exemption either.
• Bundled charges are fully taxable. If the seller bills a single combined charge covering the exempt alarm unit together with the non-exempt paging device or non-exempt paging service, the Comptroller said the entire charge becomes subject to sales tax — the exemption doesn't apply proportionally to a lump-sum bill.

The letter also notes it is based on the specific facts submitted and that other, similar facts could produce a different result.

ALERT — timeline note

The stub carries an ALERT banner stating this document may be affected by changes to the Tax Code made by H.B. 268 (82nd Regular Legislative Session, 2011), which required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and receive a Comptroller-issued registration number, effective January 1, 2012. This 1993 letter predates that requirement by roughly 18 years. The letter's core legal conclusion — that farm/ranch equipment used exclusively in agricultural production can be purchased tax-free with an exemption certificate under Section 151.316 — is not itself contradicted by the 2012 change. But as of January 1, 2012, a Texas taxpayer claiming this exemption may also need to hold (and provide) an ag/timber registration number as part of using an exemption certificate, a requirement that did not exist when this letter was issued. The letter's discussion of what equipment does and does not qualify (the alarm unit vs. the off-farm-capable pager vs. bundled billing) is unaffected by that registration requirement, but the mechanics of claiming the exemption may have changed.

What This Means For You

If you sell or buy alarm/monitoring equipment for farm use: Under this letter's reasoning, equipment that is exclusively used on the farm in producing agricultural products for sale can be exempt, even if it's a communication-type device (here, an incubator alarm unit), as long as it stays tied to that on-farm production use.

If the device also functions off the farm: This letter draws a firm line at portability and third-party use. A paging unit that "may be carried off the farm" or "may receive pages from third parties" loses the exemption, even if it's the same physical system that also triggers on farm alarms.

If you're billing for a combined system: Don't lump an exempt farm-use component together with a non-exempt component (like general paging service) on a single charge. This letter states that doing so makes the whole charge taxable — splitting the exempt and non-exempt charges out separately is what preserves the exemption for the qualifying portion.

Given the 2012 registration-number change: Anyone relying on this letter's Section 151.316 exemption today should confirm whether they also need an ag/timber registration number to use an exemption certificate, since that requirement postdates this 1993 letter.

Q&A

Q: Does an alarm unit placed inside a farm incubator qualify for the Texas agricultural exemption?
A: Yes, according to this letter. Under Tax Code Section 151.316, machinery and equipment exclusively used on a farm or ranch to produce agricultural products for sale is exempt, and the letter says a person raising emus for sale may give an exemption certificate for the alarm unit placed in each incubator.

Q: Does the exemption also cover the personal pager that receives the alarm signal?
A: Not automatically. The letter states that paging units which may be carried off the farm, or which may receive pages from third parties, do not qualify for the agricultural exemption.

Q: What if the pager receives a page from somewhere other than the farm?
A: The letter says charges for pages transmitted from non-farm locations do not qualify for the agricultural exemption.

Q: What happens if the seller charges one combined price for the alarm unit and the paging device/service?
A: The letter states that if a single charge is made for the alarm and any combination of the paging device or non-exempt service, the total charge is subject to sales tax.

Q: Is this letter still current given the ALERT about H.B. 268?
A: The ALERT flags that, effective January 1, 2012, Texas began requiring an ag/timber registration number to claim this type of exemption via exemption certificate — a requirement that did not exist when this 1993 letter was issued. The letter's substantive analysis of what equipment qualifies is not itself overridden by that change, but the procedural requirement to obtain and provide a registration number is an added step this letter does not address.

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.

December 13, 1993

Dear **:

Thank you for your recent letter which is restated in part with
response below.

Recently I have quoted the price of a communication device that will
page a personal pager via a phone line. I would like to know if such
an item is tax exempt. I know that communication equipment used for
non-agricultural situations (cellular phones) are not tax exempt. This
device, however pages a personal pager (taxable) only when an alarm is
set in an incubator that is used to hatch emu eggs. My customer has an
emu farm and owns three such incubators. Each unit will have alarm
outputs that trigger the paging unit. The device is a ** ,
manufactured by **** in Schaumburd, IL.

Response: Tax Code Section 151.316 exempts from tax machinery and
equipment exclusively used or employed on a farm or ranch in the
production of agricultural products to be sold in the regular course
of business. Accordingly, an individual raising emus for sale may give
his supplier an exemption certificate in lieu of tax for the purchase
of the alarm unit that is placed in each incubator. Paging units that
may be carried off the farm or may receive pages from third parties do
not qualify for the agricultural exemption. Charges for pages
transmitted from non-farm locations do not qualify for the
agricultural exemption. If a single charge is made for the alarm and
any combination of the paging device or non-exempt service, the total
charge is subject to sales tax.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800) 531-5441 (ext. 34680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900. You may write to me in care of Tax Administration
Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9311122L.3 and/or 9311122L