Does sales tax apply to a commercial greenhouse and laboratory used to grow, propagate, and sell orchids from seed?

Subject

Greenhouse — Commercial — Original Producer Of Agricultural Products

Plain-English summary

A taxpayer grows, propagates, and sells orchids, using a greenhouse and laboratory to raise them from seed to blooming size -- a process the taxpayer said takes five to seven years. The taxpayer asked the Comptroller whether sales tax applies to that greenhouse and laboratory.

The Comptroller said no tax is due. Under Rule 3.296(b) and (g)(9)(C), machinery and equipment used exclusively for processing, packing, or marketing agricultural products by the original producer -- at a location the producer operates exclusively for that purpose -- is exempt from sales tax. A building or structure can itself qualify as "machinery or equipment" for this purpose if it's necessary for agricultural production, is designed for that specific use, and can't be economically used for anything else. The letter also confirms that having a restroom in the structure, for the taxpayer's own use, doesn't cause the exemption to be lost.

Original producer status. Based on the facts described -- growing, propagating, and selling the orchids the taxpayer itself raises from seed -- the Comptroller stated it appears the taxpayer qualifies as the "original producer" of all the orchids sold, pointing to the definition and exceptions in Rule 3.296(b)(1) and (b)(2).

The letter closes with the Comptroller's standard caveat: the opinion is based on the facts presented, and different or additional facts could change the result.

What this means for you

Greenhouse or nursery operators growing their own plants from seed

If you grow, propagate, and sell your own agricultural products (such as orchids grown from seed) at a facility you operate exclusively for that purpose, the structure itself -- not just the equipment inside it -- can qualify for the sales tax exemption as agricultural machinery/equipment, provided it's necessary for production, designed for that use, and not economically adaptable to other uses.

Growers worried a restroom or similar amenity will disqualify their building

A restroom for your own use, within an otherwise qualifying structure, does not defeat the exemption.

Anyone unsure if they count as an "original producer"

The ruling points to Rule 3.296(b)(1) and (b)(2) for the definition and exceptions -- check those subsections against your specific situation, since the Comptroller's conclusion here was based on the particular facts the taxpayer described.

Common questions

Q: Is sales tax due on a greenhouse and laboratory used to grow and sell orchids?
A: No -- based on the facts presented, the Comptroller found the structure could qualify as exempt agricultural machinery/equipment under Rule 3.296(b) and (g)(9)(C).

Q: Can a building or structure itself qualify for the agricultural machinery/equipment exemption, not just the equipment inside it?
A: Yes, if it's necessary for agricultural production, designed for that use, and can't be economically used for any other purpose.

Q: Does having a restroom in the greenhouse/laboratory disqualify it from the exemption?
A: No, the letter specifically says the exemption is not lost because the structure has a restroom for the taxpayer's use.

Q: Did the taxpayer qualify as an "original producer" of the orchids?
A: Based on the facts in the letter -- growing, propagating, and selling orchids the taxpayer raised from seed -- the Comptroller said it appears the taxpayer qualifies, citing Rule 3.296(b)(1) and (b)(2) for the definition and exceptions.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.296(b) and (g)(9)(C) (agricultural machinery/equipment exemption, including qualifying buildings/structures)
• 34 Tex. Admin. Code Rule 3.296(b)(1) and (b)(2) (definition and exceptions to "original producer")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701203L

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.

January 15, 1997

Dear ***:

Thank you for your letter of January 2, 1997. You asked that we address the
taxability of a greenhouse and laboratory used in your orchid business.

As I understand it, you grow, propagate, and sell orchids in the greenhouse and
laboratory. You will grow the orchids from seed. Orchids take five to seven
years to grow from seed to blooming size.

Sales tax is not due on machinery and equipment exclusively used in the
processing, packing, or marketing of agricultural products by an original
producer at a location operated by the original producer exclusively for
processing, packing, or marketing the original producer's own products. A
building or structure can qualify as a machinery or equipment if it is
necessary for agricultural production and is designed for such use and cannot
be economically used for any other purpose. You will not lose the exemption if
your structure has a restroom for your use. Please refer to subsections (b)
and (g)(9)(C) of Rule 3.296.

It appears from your letter that you qualify as the original producer of all
the orchids you sell. Please refer to subsection (b)(1) and (b)(2) of Rule
3.296 for the definition and exceptions to the term "original producer."

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,
Lindey Osborne
Sales Tax Policy Division