[2013 | Keywords: Iowa Legislation, Sales Tax, Good Faith]
We receive many phone calls from dealers regarding Iowa sales tax on ag equipment so I thought I would revisit a few areas of the law and/or Iowa Department of Revenue’s interpretation over the next few months. I’ll start with Good Faith (Iowa Code 422.47 (3) b & d).
The sales tax liability for all sales of tangible personal property and all services is upon the seller and purchaser unless the seller takes in “good faith” from the purchaser a valid exemption certificate stating under penalties of perjury that the purchase is for resale or for production of agricultural products (Iowa Code 422.45). If the tangible personal property or services are purchased tax-free pursuant to a valid exemption certificate which is taken in good faith by seller, and the tangible personal property or services are used or disposed of by the purchaser in a nonexempt manner, the purchaser is solely liable for the taxes and shall remit the taxes directly to the department.
A valid exemption certificate is taken in “good faith” by the seller, when the seller has exercised that caution and diligence which honest persons of ordinary prudence would exercise in handling their own business affairs, and includes an honesty of intention and freedom from knowledge of circumstances which ought to put one upon inquiry as to the facts. In order for a seller to take a valid exemption certificate in good faith, the seller must exercise reasonable prudence to determine the facts supporting the valid exemption certificate, and if any facts upon such certificate would lead a reasonable person to further inquiry, then such inquiry must be made with an honest intent to discover the facts.
Comment: If dealer knowingly accepts exemption certificate (status) for items not used directly and primarily in the production of agriculture, the dealer becomes liable along with the customer for the sales tax. When in doubt, collect tax and have customer file for refund.
Example 1: A farmer does not want to pay sales tax on a lawn mower that he says is used for production of agriculture. He claims it is used to mow waterways, around farm buildings, and fence rows. The dealer accepts an exemption certificate and does not charge sales tax. The dealer and customer are both liable. The dealer becomes liable because they accepted the exemption certificate on a taxable item. The Revenue Department will collect unpaid taxes, interest, and penalty from the dealer. The dealer may try to collect unpaid taxes from the customer. (Lawn mowers are taxable. The only exception is if the customer is a sod farmer)
Example 2: A farmer purchases an ATV or “Gator” from dealer and claims it is being used in the production of agriculture. To accept exemption certificate from the farmer, the dealer needs to exercise reasonable prudence to determine the facts to support the valid exemption certificate. If the farmer states actual purpose of use to the dealer and the dealer honestly believes it is being used in agriculture production, the dealer can accept exemption certificate and reduce their liability. (It is advised that dealers collect the tax and have the farmer file for refund or write in detail the exempt purpose of use on the retail order and have customer sign it.)
Example 3: Customer purchases skid loader for livestock production and dealer in “good faith” takes valid exemption certificate knowing that skid loaders are used in the production of agriculture. Customer, however, does not use skid loader in livestock operation but uses it for landscaping business. Customer is solely liable. However, if dealer knows skid loader is not going to be used for production of agriculture, following the good faith rule, the dealer cannot accept exemption certificate. If dealer accepts exemption certificate they become liable along with customer.
On all multi-use items, it is advised to document use on retail order.