When ranchers upgrade a privately owned power line and then transfer it to a city, is sales tax owed on the upgrade materials -- either because the operation is agricultural or because the line ends up city-owned?

Plain-English summary

Several ranchers and farmers privately owned and maintained an electric power line serving their farms. They reached an agreement with a city: if the farmers brought the line "up to code," the city would take over ownership and future maintenance. The farmers bought the upgrade materials themselves (from the city, which charged sales tax on the sale), and a representative asked the Commission to confirm in writing whether that sales tax was properly charged -- some had argued it shouldn't be, either because the underlying operation was agricultural, or because the line was ending up in city (i.e., tax-exempt political-subdivision) ownership.

The Commission rejected both arguments:

The eventual city ownership doesn't exempt the farmers' purchase. A city, as a political subdivision of the state, can buy tangible personal property tax free -- but that tax-exempt status belongs to the city and can't be extended backward to a private landowner's own purchases, even where the property is destined to become city-owned. Since the materials were purchased by the farmers (not the city) before the transfer, the farmers' purchase doesn't inherit the city's exemption.

The agricultural exemption doesn't cover power lines that serve mixed uses. A farmer can buy tangible personal property tax free if it's used or consumed primarily and directly in farming operations. Electricity itself, when used in agricultural operations, can qualify for exemption -- but the lines that transmit the electricity are a different matter. Because these lines served non-agricultural activities on the property in addition to agricultural ones, the Commission treated them as merely incidental to farming rather than "primarily and directly" used in it, which took them outside the exemption.

Bottom line: the city was right to charge sales tax on the materials sold to the farmers for the upgrade.

What this means for you

Farmers or ranchers upgrading shared infrastructure before transferring it to a government entity

Don't assume a future transfer to a tax-exempt government body retroactively exempts your own purchase of the materials. The exemption belongs to whoever legally owns the property at the time of purchase.

Agricultural producers buying equipment or infrastructure with mixed farm/non-farm uses

The "primarily and directly" standard is strict -- if a purchased item (like a shared power line) also serves non-agricultural purposes, it may not qualify for the agricultural exemption even though your farming operation benefits from it.

Municipalities and utilities structuring infrastructure-transfer agreements with private landowners

If a private party is footing the bill for an upgrade before you take ownership, that purchase is generally taxable to the private party -- structure agreements and cost allocations with that in mind.

Common questions

Q: If property is going to end up owned by a tax-exempt city, is the private party's purchase of materials for it also exempt?
A: No -- the exemption applies to purchases made by the exempt entity itself, not to a private party's earlier purchase, even if the property is later transferred.

Q: Are power lines serving a farm automatically covered by the agricultural sales tax exemption?
A: Not necessarily. The exemption requires the item be used primarily and directly in farming operations; lines that also serve non-agricultural uses are treated as only incidental to farming.

Q: Does exempt electricity use extend to the physical lines that carry it?
A: Not automatically -- the ruling distinguishes between electricity used in agricultural operations (which may qualify) and the transmission lines themselves (which may not, if they serve mixed uses).

Q: Can another group of farmers rely on this ruling for a similar infrastructure transfer?
A: No -- it binds the Commission only for the facts described here. A different mix of agricultural versus non-agricultural use could change the outcome, so confirm your own situation with the Commission or a Utah tax professional.

Citations and references

No specific Utah Code sections or administrative rules were cited by number in this ruling; the Commission's analysis rests on Utah's general political-subdivision purchase exemption and agricultural producer exemption for tangible personal property used primarily and directly in farming operations.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-124.pdf

Original ruling text

96-124

Response August 23, 1996

Request

August 1, 1996

Utah Tax Commission

Attn:XXXXX

10 North 1950 West

Salt Lake City, UT 84134

Dear XXXXX

This letter is to request an advisory opinion from the Utah State Tax Commission.

The matter on which the opinion is requested involves several individual ranchers/farmers who prior to last year owned and maintained an electric power line to their farms located outside of XXXXX and XXXXX who provided power through these lines and who now has ownership of these electric power lines.

The various ranchers/farmers and XXXXX agree that if the ranchers/farmers would bring the lines "up to code" that XXXXX would then accept ownership and maintenance responsibility for these lines in the future.

The materials for the upgrade of the line was purchased by the ranchers/farmers from XXXXX and XXXXX charged sales tax on the materials.

A representative of the ranchers/farmers contacted the State Tax Commission and then provided information noting that sales tax should not be charged to the individuals who paid for the upgrade based on (1) the operation was agricultural in nature and/or (2) the line is now in the ownership of XXXXX.

In a previous conversation with the State Tax Commission XXXXX was advised that the sales tax was chargeable in this case and we are requesting a written statement from the State Tax Commission as to whether or not we should be charging sales tax as we want this transaction to be correct and fair to all parties.

Thank you in advance for your cooperation in this matter.

Sincerely,

XXXXX

August 23, 1996

XXXXX

Advisory Opinion - Application of sales tax on materials purchased to upgrade electrical lines.

Dear XXXXX

We have received your request for an opinion as to the application of sales tax on purchases of materials to upgrade electrical power lines that supply power to farms in your area.

As we understand the situation, XXXXX entered into an agreement with some farm owners to transfer ownership of an electrical power line system from the farm owners to the city on condition that the farm owners would upgrade the system. We assume that the materials were purchased by the farm owners before the city accepted ownership of the line.

Although the city, as a political subdivision of the state, is entitled to purchase items of tangible personal property tax free, it has no authority to grant or extend its tax exempt status to a private landowner. The fact that the line is now owned by the city does not confer an exempt status on the farm owners who purchased the materials for the upgrade. The farm owners must pay sales tax on their purchases from the city unless the their purchases fall under some other exemption.

A farmer may purchased tangible personal property tax free if the item is used or consumed primarily and directly in farming operations. Although electricity purchased for use in agricultural operations may qualify for exemption, the lines over which the electricity is transmitted are only incidental to the farming operations. In fact, the lines serve non-agricultural activities on the property as well as agricultural operations. Therefore, purchase of materials to upgrade the lines are not exempt under the agricultural exemption.

Under the facts presented, we conclude that the city was correct to collect sales tax on sales of materials to the farm owners. If you have additional questions, please let us know.

For the Commission,

Alice Shearer,

Commissioner