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Kentucky Sales and Use Tax

The Kentucky CPA Journal / Issue 5 2010Tax in the BluegrassSeptember 2010

Exemptions for farmers 

When I was young, I used to visit my relatives, who I was told, “lived in the country.” Some of them grew tobacco and soybeans. Others raised cattle and chickens, and others raised pigs. I always left with an appreciation of not only how hard they worked on their farms, but also a sense of how much satisfaction they must have gotten out of that work. 

Given my own experiences with my farmer relatives, I am not surprised that agriculture, in all of its various forms, plays an important role in the Bluegrass State’s economy. The Commonwealth’s farms are well-known for producing horses, chickens, cattle, tobacco, soybeans, and corn among other things. No wonder Kentucky sales and use tax laws include various agricultural and equine exemptions. 

When dealing with agricultural issues, it is helpful to draw on one’s own experience with farms and farming. It is also helpful to remember that farms come in many different types and sizes - from those growing vegetables and fruits to sell at the local farmers’ market to those raising large herds of cattle or horses on hundreds and hundreds of acres. 

Farming as a business 

One commonality among many of the various Kentucky sales and use tax exemptions directed to farmers under KRS 139.480 is that they generally apply only to a farm operated as a business, though there are exceptions. Examples of such farming operations include, “the occupation of tilling the soil for the production of crops as a business” or “the occupation of raising and feeding livestock or poultry or of producing milk for sale” which are prerequisites for the farm machinery exemption provided by KRS 139.480(11). These bring to mind operations in which the farmer intends to sell their agricultural products rather than keeping them for their own use or giving them away - like a backyard garden. In contrast, there is no similar statutory prerequisite for the exemption provided by KRS 139.480(9) for livestock and poultry feed. 

Farm production expenses 

As noted above, many exemptions apply to a farmer’s expenses that are necessary to produce crops or livestock. In this regard, seeds and commercial fertilizer are exempt, provided that their products ordinarily constitute food for human consumption (e.g., soybeans) or are to be sold (e.g., tobacco, timber, etc.). See KRS 139.480(7); 103 KAR 30:091 § 1(2). Likewise, a farmer can purchase exempt from tax: livestock (the products of which people eat as food, such as cattle or pigs) for breeding and dairy purposes; embryos and semen used in the reproduction of livestock; and, poultry for breeding or egg production. See KRS 138.480(4),(5), (25). 

Insecticides, fungicides, herbicides, rodenticides, and other farm chemicals are also exempt. See KRS 139.480(8). Observe that these farm chemicals can be used for either raising crops or livestock, etc. - for example, herbicides for crops and antiseptic wipes to clean cow udders. See 103 KAR 30:091 § 4. As one might expect, feed (including pre-mixes and additives) for livestock and poultry and water (for, among other things, raising crops and livestock) are also exempt. See KRS 139.480(9)&(28). Examples include salt blocks, mineral blocks, and protein blocks. See 103 KAR 30:091 § 5. But, not all feed is exempt; feed for work stock animals, for instance, is subject to tax. See 103 KAR 30:091 § 10(3)(o). 

Although their feed is not exempt, a farmer’s purchase of a work stock animal used in farm operations is exempt under KRS 139.480(6). Work stock animals include guard and herd dogs as well as donkeys, draft horses, and mules. See 103 KAR 30:091 § 8. While a guard dog on a farm is probably just as commonplace today as back in the 1960’s when Kentucky’s sales tax was enacted, it would seem rather quaint to a city dweller to see a farmer plowing a field with a draft horse and plow. 

When one thinks about a farm, one often thinks about farm gates and fences. Exemptions are also provided for certain “on-farm facilities” (i.e., those used exclusively for grain or soybean storing, drying, processing, or handling and those used exclusively for raising poultry or livestock) provided the statutory requirements are met. See KRS 139.480(14)&(15). A list of examples can be found in Section 6 of the Kentucky Department of Revenue’s Administrative Regulation, 103 KAR 30:091, which pertains to “Sales to farmers.” Some examples include: farm gates, fencing materials, gravel, etc. 

And what farm would be complete without a tractor? Yes. There is an exemption for farm machinery used exclusively by farmers raising crops and livestock. See KRS 139.480(11). Examples include: seeding equipment, all terrain vehicles, farm wagons, chain saws, etc. See 103 KAR 30:091 § 3. Farm machinery can include not only machinery but also attachments (like a hitch, for example) and replacements as well as repair and replacement parts necessary to farm machinery’s operation. See KRS 139.480(11); 103 KAR 30:091 § 9. Moreover, gasoline, special fuels liquefied petroleum gas, and natural gas used exclusively and directly to operate farm machinery and on-farm facilities are exempt too. See KRS 139.480(16). 
What about more exotic farm animals like ratite birds and cervid? 

In addition to the above exemptions for what many think of as traditional farming operations, i.e., growing crops and raising livestock, similar exemptions for more exotic farming operations have been added over the years. For example, there are agricultural exemptions for ratite birds, which are (in case you were wondering) a class of flightless birds that includes ostriches. See KRS 139.480(24). There are also exemptions for cervid, which are (a drum roll please!) hoofed mammals of the genus Cervidae, which includes deer and elk. See KRS 139.480(31). 

Exemptions exist for other nontraditional farming operations including: llamas and alpacas [KRS 139.480(26)]; buffalos [KRS 139.480(29)]; and, aquatic organisms [KRS 139.480(30)]. Note that the farming exemptions discussed above as well as the exemption for twine and bailing wire for the bailing of hay and straw [KRS 139.480(27)] are scattered throughout KRS 139.480 amongst other non-farming exemptions. So, when reviewing issues in this area, one should analyze many statutory provisions. 

Raising horses versus livestock and other farm animals 

Up until now, horses have not been mentioned. This is why - horses are not considered to be “livestock” for purposes of the exemptions provided by KRS 139.480 because, as eloquently put by the Kentucky Court of Appeals, “we Kentuckians do not customarily consume horseflesh at the dinner table ...” Shadowlawn Farm v. Revenue Cabinet, 779 S.W.2d 232 (Ky. App. 1989). 

To one unfamiliar with these exemptions, this might be surprising. Given the importance of horses to the Bluegrass State, one might expect all of the above described exemptions to likewise apply to horse farming, but they generally do not. Thus, the Department of Revenue’s regulation states: “Items sold or purchased for use in raising, feeding, showing, exhibiting, or breeding of horses except water as provided in KRS 139.470(14)…” 103 KAR 30:091 § 10(4). So, one often must be cognizant of the use of an item in determining whether or not it qualifies for a farming exemption when it could be used in an equine farming operation. 

Horse farming 

As stated, horse farming is treated differently from livestock farming; given this, it is unsurprising that specific exemptions are provided specifically for horses that do not apply to livestock. See 139.531. However, before discussing exemptions, it should be highlighted that certain transactions involving horses are specifically subject to sales and use tax: fees paid for breeding a stallion to a mare, non-exempt sales of horses, and a sale of a horse claimed at a race meeting in Kentucky. See KRS 139.531(1). 

That said, similar to the exemption provided for livestock, the sale of a horse (or interests or shares in a horse) for breeding purposes is exempt. See KRS 139.531(2)(a). The use of a stallion for breeding purposes by the owner is also exempt. See KRS 139.531(2)(b). And, the trading of stallion services is exempt. See KRS 139.531(2)(c). In this same vein, the sale of a less than two year old horse to a nonresident of Kentucky is exempt. See KRS 139.531(2)(d). Collectively, these exemptions provide incentives to breed horses in Kentucky and to export them. 

Other considerations 

Although there are many exemptions, not all agricultural items are considered by the Department to be exempt. The Department’s Regulation lists many examples of items that the Department considers to be generally taxable. See 103 KAR 30:091 § 10. Examples listed in the Regulation include hand tools (like axes, brooms, hoes, ladders, pitch forks) and accessories not essential to the operation of farm machinery (like cigarette lighters and radios). 

When a farmer purchases exempt items, an exemption certificate should be completed for the vendor. See 103 KAR 30:091 § 11. Even when this is done, issues can still arise.See, e.g., Tractor Supply Co. v. Dep’t of Revenue, File No. K08-R-21, Order No. K-20813 (KBTA 2010), appeal filed, Nos. 10-CI-00980 and 10-CI-00985 (Franklin Cir. Ct.). [Editor’s Note: The author’s law firm represents Tractor Supply in this case.] 

“Let me tell you about the farm ...” Hank Williams Jr. in Farm Song (2009) 

Learning about “the farm” is the first step in analyzing a farm exemption issue. So, listen to what the farmer has to say about their farm, the items they purchase and how they are used. All of this information is very helpful in determining whether or not a farming exemption applies to a particular item. 

About the author: Mark A Loyd, Esq., CPA, is a member of Greenebaum Doll & McDonald in Louisville and chairs its State and Local Tax Team. He is a former member of the KyCPA board of directors; chair of the editorial board; member of the industry task force; and former chair of the taxation committee. He can reached at mal@gdm.com; 502.587.3552. 

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