[Author: Mark Othmer, Nebraska Field Director, 2014 | Keywords: Nebraska Legislation, Ag Exemption, Parts]
On October 1, 2014 the ag sales tax exemption for repair and replacement parts in Nebraska went into effect. While I had hoped that we would receive some guidance from the Nebraska Department of Revenue before this tax change took effect, unfortunately it did not happen. Any time there is change a great deal of apprehension and confusion generally comes up during the early stages. The new sales tax exemption is no exception.
I have received a steady stream of phone calls and e-mails from members asking very relevant questions concerning the implementation and administration of the new exemption. While I don’t always have an immediate answer, I generally can get one in a short amount of time. Following is a summary of some of the questions I have received and my attempt to make the process of figuring out what documentation procedures need to be followed and how to determine qualification of a repair or replacement part for the ag sales tax exemption.
What documentation do you need to support allowing the ag repair and replacement parts tax exemption to a customer?
Each tax exempt sale of ag repair and replacement parts must be supported by a properly completed and signed Form 13 by the customer receiving the exemption. Form 13 may be used as a blanket certificate and be in force until the customer revokes it in writing. Form 13 was revised in October 2014 (see facing page for an example) and the Nebraska Department of Revenue encourages merchants to obtain a current Form 13 from all of their parts customers. (Note: if you already have a properly completed and signed Form 13 on hand that was used to document previous tax exempt ag equipment purchases it may now be used to document ag repair and replacement parts purchases.) However, the Nebraska Department of Revenue still encourages merchants to obtain a properly completed and signed revised Form 13 at some point in the future. The Department of Revenue has stipulated that the purchaser must complete Form 13 and the merchant should only fill out the name and address of the seller portion. (It is extremely important that Form 13 is correctly filled out.)
How do I determine if the part I am selling qualifies for the ag repair and replacement parts exemption?
Many dealers have asked this question and most initially felt this was going to be a tremendous burden on their parts personnel. While I agree it may not be easy at first, I do believe that practice makes perfect. As time goes by I’m sure it will become second nature for parts department personnel to determine what is and is not taxable.
Let’s start with some accepted rules that the Nebraska Department of Revenue currently uses when determining the tax exempt status of agricultural equipment used in production agriculture. First and foremost – FAMERS ARE NOT TAX EXEMPT! I am sure that almost every dealer has heard a customer say, “I’m a farmer, I don’t pay sales tax.” While this statement is often true, the reason he doesn’t pay sales tax is not because he’s a farmer. He doesn’t pay sales tax on the purchase of ag equipment used in production agriculture because THE SALE of such product (not the product itself) has been exempted from sales tax law. While I recognize that this concept runs most minds in a bit of a circle (it does mine), it is an important distinction to make when determining tax exempt status of machinery that may or may not be used in production agriculture.
So, the first step in determining whether a repair part qualifies for an exemption is to figure out if the machine the repair and replacement part is being installed on qualified for the ag sales tax exemption. If the machine qualified, the repair and replacement part qualifies, too. I verified with the Nebraska Department of Revenue that all oils, greases, lubricants and filters replaced on equipment used in production agriculture will qualify for the sales tax exemption as well.
At this point it appears that determining tax exempt status of a repair part is pretty cut and dry. If it fits on a machine that qualifies for the exemption, so does the part. However, confusion arises when the machine you or your customer is repairing may or may not be used in production agriculture. A classic example of this is a skid steer loader. When a skid steer loader is sold for use in a cattle or hog feeding operation and is used to clean pens or carry and deliver feed to the animals, it qualifies for the ag sales tax exemption. If the skid steer loader is used by a contractor to move dirt around houses or even on farms, it does not qualify for the ag sales tax exemption. The exemption for ag repair and replacement parts on a skid steer follows the same rule.
How do I record a sale of both taxable and non-taxable repair parts?
Unfortunately I can’t answer this question with any degree of confidence. The process each dealer uses to record these types of sales will depend on how the computer point of sale system works. Generally, I encourage dealers to set up their customers as taxable or non-taxable, depending on which type of parts sales generate the biggest volume for each customer. Then on the occasion when the customer buys a part in the other category there is a way to override that line item. An example would be if a farmer bought multiple items used to repair their combine (items that would be tax exempt) and then he a clothing item from the merchandising section of the parts department and it is entered on the same invoice. The clothing item obviously is taxable. Most computer systems have a provision where you can override the customer record of non-taxable to make that line item taxable. Since nearly every other state in the U.S. has been encountering this situation for years, I’m sure your business system supplier will be able to better answer this question.
While these are some of the general rules for the ag repair and replacement parts sales tax exemption, I’m sure there will be more questions as time goes by. As always, I encourage you to call me if you are uncertain about any of the changes this new exemption creates. Please keep in mind that we spent over 15 years obtaining the repair and replacement part sales tax exemption. A few months of pain in implementation will be well worth the reward.
Click on the following link for the Nebraska Resale or Exempt Sale Certificate