Sales Tax and Ag Products – Avoid a painful and potentially costly lesson

The other day I got a call about a farmer being audited by the Virginia Department of Taxation, the caller was asking me about the “agricultural exemption” for the sales and use tax. It wasn’t an unfamiliar call; I usually get at least one or two a year about the tax and the production of farm products. That’s why I pulled together a handout we house on the Virginia Farm Bureau Resource page to help educate folks about it to help in running their operation. Virginia Cooperative Extension also updated their publication on the tax for the industry, theirs a link to it on our page as well. To some it’s confusing, but once you have a better understanding it makes a lot more sense.

In Virginia, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. Many think if you are a farmer you are exempt from paying the tax when buying products, but that is how the tax works.

When a farmer is buying something, items they buy used in the “producing an agricultural product for market” should qualify for the exemption, they buyer would file a Form ST-18 from the Virginia Department of Taxation with the retailer claiming the purchase met the exemption. The retailer would maintain the form on file. The same goes for farmers that sell products directly to consumers. If the farmer is selling to another farmer something that would be used in the production of an agricultural product for sale, then the buyer farmer would make sure he has completed and given the seller farmer Form ST-18 for him to maintain in their files in case they were audited.

Think it like this, the end user of a product pays the tax. When you buy a television, you pay the sales tax as you are the one buying the item for your use at home. In the case of a gallon of milk, every thing purchased to go into the production of that milk should qualify for a sales tax exemption (think input), and then when that milk is sold at the store to the consumer, they are the one that pays the tax.

Often when a farmer is audited and their records are reviewed the state representatives will have a list of sales or purchases, they will question. For example, if they bought an ATV, if they use the ATV 100% on the farm which many do, to check fence lines or feed calves for example, that purchase would qualify for the exemption, the retailer would keep that ST-18 form on file. But if they bought that ATV for pure recreational use, then they would be required to pay the sales tax (make sure you keep your receipts by the way). Another example I use in an area that often gets confused is when a farmer sells something like hay or straw. If the seller farmer sells hay to a cattle farmer that is producing the cattle to sell at the market, then yes that sale is exempt from the tax. But if the same hay is sold to someone feeding an animal kept for recreation or a pet, then the purchaser would pay the tax since the buyer isn’t producing an “agricultural product for sale”. Its important to remember, its not who is buying or selling, its what the qualifying item is going to be used for that is the determining factor for whether or not the tax must be collected.

Our farm started selling hay and straw in the early 1990’s, the second year of production we got one of those notices that we were going to be audited. We got lucky, since we were first starting up our hay sales most of our customers that first year were exempt, the tax department gave us time to go to each customer and collect the required form showing their purchase was exempt. Yes, we did have some sales that weren’t exempt, as well as some items we had purchased that didn’t qualify such as lumber for barns we built. So, we had a bill to pay to make things right. I say we were lucky because we had that “lovely” visit early in our direct sales business so the bill, while big enough, could have been worse – I have heard some horror stories. It was lucky in a bigger way, it helped us learn early that we as a seller needed to start keeping those forms on hand and to collect the sales tax from those customers that did not qualify. Then we paid the amount to the state monthly (or quarterly) depending on the amount of sales we were doing at the time.

If you are farmer think about what the item you are buying is used for when you make that claim of the exemption, if you are a farmer selling directly to a consumer remember to ask if their purchase qualifies and maintain those tax forms for those that claim the exemption. I encourage you to check out § 58.1-609.2. of the Virginia Code that shows what qualifies for the agricultural exemptions. Also check out our handout Sales and Use Tax and Farmers – Direct Sales and Purchases that gives a number of scenario examples. In addition, read the Virginia Cooperative Extension publication on Virginia Retail Sales and Use Tax Regulations to help you avoid a tremendous headache and potentially painful mistake.

As the main character on the television show “Monk” always said, you’ll thank me later!

Check out the resources mentioned in this article and others at the Virginia Farm Bureau Federation Resource page

Andrew W. Smith, Associate Director

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