Commentary: How to comply with state sales and use tax rules


Issue Date: September 23, 2015
By John Gamper
John Gamper
State sales and use tax provisions for farm equipment or machinery apply only to sales or purchases that meet specific conditions.
Photo/Dave Kranz

State law provides partial relief from sales and use taxes for farm equipment, machinery, diesel fuel used in farming and food processing, off-road timber harvesting equipment and machinery, and race horse breeding stock. The law, adopted in 2001, also provides a full sales and use tax exemption for residential and agricultural uses of liquefied petroleum gas or propane.

This sales and use tax relief on most farm inputs helps farmers and ranchers be more competitive with producers in other states, because farmers in 38 other states pay no sales tax on farm equipment. This provision also allows California producers to keep their unit costs down, affording consumers more food at lower cost.

But farmers and ranchers must understand that they play a crucial role in complying with this law that is so important to their bottom line. There has been an increase recently in business audits by the state Board of Equalization with respect to the partial relief on farm equipment and machinery, so knowledge of the law is crucial to both you and your vendors. Interest and penalties can add up very quickly on expensive vehicles, and the liability can revert to the purchaser.

The board just updated the required partial-exemption certificate on farm equipment and machinery, which is available at www.boe.ca.gov/pdf/boe230d.pdf. That provides a good opportunity to remind Farm Bureau members that the provision applies only to a sale or purchase of equipment or machinery that meets all three of the following conditions:

  • It is sold to a qualified person.
  • It is used primarily or exclusively in producing and harvesting agricultural products.
  • It meets the definition of farm equipment and machinery.

If any of these conditions are not met, the full sales and use tax rates apply.

The definition of a qualified person is straightforward: A person knows very well if he or she is a farmer or rancher.

"Primarily used" in the production and harvesting of agricultural products means at least 51 percent of the time. There are important exceptions to the 51 percent test. All-terrain vehicles must be used exclusively in production and harvesting of agricultural commodities, and a "farm trailer" must be used exclusively to transport agricultural products on the highway to the point of first handling and return.

There is understandable confusion when it comes to the definition of farm equipment and machinery, and of the parts needed to keep the machinery running. This is due, in part, to the fact that it is an ever-expanding list. There is also a long list of equipment, including trailers and obscure vehicles that are defined in Division 16 of the California Vehicle Code as "implements of husbandry"; everything on that list qualifies for the agricultural tax provisions.

The law is very clear on one point, however: Any vehicle with an existing design primarily for the transportation of persons or property on the highway does not qualify for the agricultural provisions. That means automobiles, pickup trucks and flatbed trucks, and the parts and tires for those vehicles, do not qualify.

Because trailers and semi-trailers are designed primarily to carry property on the highway, they generally do not qualify for the agricultural provisions either, unless they meet the strict definition of a farm trailer or implement of husbandry in the Vehicle Code. A one- or two-mile operating limitation on roadways also sometimes limits the applicability of the agricultural provisions on some types of trailers.

To be certain what trailers qualify as implements of husbandry, it may be necessary to consult the Vehicle Code or Appendix A of Board of Equalization Regulation 1533.1. Each is available online, at www.dmv.ca.gov/portal/dmv/detail/pubs/vctop/vc/d16/c1 for the Vehicle Code or www.boe.ca.gov/lawguides/business/current/btlg/vol1/sutr/1533-1.html for the board regulation.

There are certain parts or supply items that have also been problematic in recent business audits. For example, supply items not used in producing or harvesting agricultural products—such as shop towels, cleaning agents, hand cleaners, chemicals and articles of clothing—do not qualify, except for clothing designed primarily to protect a commodity or to apply agricultural chemicals.

The definition of parts for farm equipment and machinery also excludes items that are consumed (that is, they are burned, evaporate, dissolve or dissipate) through the regular use of the farm equipment and machinery—examples would include gasoline, cleaning agents, solutions and chemicals—which are ordinarily considered to be supplies. Engine oil that is not consumed as part of fuel for a two-stroke engine is considered to be a component part.

Finally, farm tools such as rakes and hoes qualify as farm equipment, but tools used to repair farm machinery or equipment do not qualify.

I hope this short primer on the definition of farm equipment and machinery that qualifies for the partial sales and use tax relief will help you to utilize it more accurately—both for your sake and that of your vendors.

(John Gamper is director of taxation and land use for the California Farm Bureau Federation. He may be reached at jgamper@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.