[Author: Will Rogers, 01.17 | Keywords: Dealer Advocacy, Governmental Affairs, Sales Tax]
One topic dealers consistently ask me about is Iowa sales tax exemptions related to agricultural production. While many of you are familiar with how this law works, a quick review may prove useful when dealing with a customer who wants to purchase a piece of equipment and claim an exemption from state sales tax.
As Iowa sales tax laws provide, exempt status is granted for the sale of equipment that is primarily and directly used in agricultural production. In order to understand how this exemption works, we first need to know what is – and just as importantly what isn’t – considered agricultural production.
Agricultural production is described as the tillage of ground being prepared for planting, spraying or injecting fertilizer or other ag chemicals on to a field, mowing and bailing hay or other feedstocks, combining and harvesting other marketable commodities, and moving products such as corn and beans from field to farm, or farm to elevator, in a non-registrable vehicle such as with a tractor and grain cart. In addition, equipment may qualify for an exemption if it is used to feed and care for livestock such as cows, hogs and chickens being raised for consumption.
The state of Iowa has determined that agricultural production does not apply to mowing or taking care of waterways, terraces or ditches. Moving dirt, removing trees, caring for CRP ground, rock picking, fencing and permanent structures such as grain bins and outbuildings are also considered taxable under Iowa law. In addition, equipment used by elevators (such as tractors) rarely qualifies as exempt.
Equipment must pass two tests to determine it if qualifies for exemption. First, it must be primarily used for agricultural production 51% or more of the total time it is used. Second, it must be directly used in agricultural production.
One piece of equipment that often causes confusion is a skid steer loader. Due to its versatility, a skid steer cannot only be used for many on farm functions, but in forestry, lawn care, construction and mining as well. A skid steer used in caring for livestock (such as moving feed or manure) likely qualifies for the ag exemption. However, when a skid steer is used for cutting and removing trees, drilling fence posts or picking rocks, it is not engaged in an exempt activity.
I’m sure that many of you have faced a situation where a customer wants to claim the agricultural exemption on a questionable piece of equipment, such as a skid steer. Sometimes, against your better judgement, you may have allowed the customer to make a purchase without paying sales tax in fear of losing the sale to your competition. However, if this is later discovered in a sales tax audit, you may end up owing the sales tax, plus penalty and interest to the state.
In order to protect yourself and your business, my recommendation when faced with a questionable sales tax situation: Charge your customer the sales tax and remit the money to the Iowa Department of Revenue. Then, help your customer fill out Iowa Form 843 – Claim for Refund and send it to the Iowa Department of Revenue. If they are entitled to the exemption, the state of Iowa will refund the sales tax. If the customer is not entitled to the exemption, they will send a letter detailing why it did not qualify. While this may cause some heartburn for your customer, it is better than losing a sale or you having to pay the tax years later.
About the Author
For more than nine years, Will has advocated for our members on both the state and national legislative fronts and has led I-NEDA’s educational efforts. In his free time, Will enjoys “dabbling” in politics, gardening, spending time with his wife and daughter, and managing his ever-growing collections (U.S. postage stamps, beer cans, comic books…).