The ins and outs of sales tax on the farm
Over the years many clients have called me with questions about paying sales tax. Before I can give them answers, I have to get the whole story, do some research, and maybe even call the state department of revenue.
We all pay sales tax whenever someone asks for it, but not everyone asks for it on the right occasions. Almost every state has a sales tax, and every state’s sales tax laws are slightly different. The rates can differ from city to city, as well, with some rates exceeding 10%. Here’s how it works.
Most states have a destination-based sales tax, which means you pay sales tax at the destination where the ownership changes hands (normally a store). If a business sells and delivers equipment to you across a state line (and it doesn’t have nexus in your state), it is typically not required to collect sales tax. Nexus is just a fancy legal term that means there is a relationship with the state sufficient enough to require sales tax collection. Historically, that meant the seller had a store in the state or at least salespeople.
Legally, you can’t escape sales tax on items you buy out of state. Most states have what is called use tax, which is basically sales tax by another name. If somehow you didn’t pay sales tax on an item, you are supposed to voluntarily report your purchase and pay use tax on it. For many years, folks ordered things online and had them shipped to their homes. When the online retailer didn’t have a location in the state, buyers didn’t get charged sales tax. Normally, that was the end of it because individuals did not voluntarily turn in their use tax forms and payments. However, states love their tax revenue, and they want all of it.
In 2018 South Dakota fought and won a case against Wayfair Inc. The Supreme Court ruled that states can collect sales tax from out-of-state online retailers. Since then, states have been going after online retailers to collect sales tax if that retailer’s sales exceed some threshold in the state. For example, effective January 1, 2019, the State of Iowa considered vendors that make more than $100,000 in sales annually in Iowa to have economic nexus.
To complicate matters, some goods are exempt from the collection of sales tax. In most states, goods and equipment used directly in agricultural production are exempt. This can be tricky though, because some things such as lawn mowers, ATVs, and trailers may be used in agriculture but also for residential use. Thus, the dealer may charge sales tax on the purchase.
You frequently will have to present an exemption certificate to equipment dealers to affirm your status as a farmer involved in ag production. The dealer has to keep your certificate on file to support non-taxed sales. Otherwise, when the state’s department of revenue comes around for an audit, the dealer has a problem.
Titled and licensed vehicles will normally get hit with sales tax, regardless of farm use, but most states won’t tax you on transferring vehicle titles among family members or on gifted vehicles.
Services also typically escape sales tax. If someone repairs your trailer (and no parts are needed), you should not pay sales tax on the service-only invoice. However, if someone fabricates a whole trailer for you, you will likely be charged sales tax on the whole price because the labor is part of the product.
Bottom line, sales tax can be tricky, so do your homework to make sure you are paying the right amount.
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