Taxpayer operates a farm, which includes planting corn and raising cattle. In 2008, Taxpayer purchased a tractor at an auction in Indiana. The Indiana Department of Revenue ("Department") conducted a sales/use tax audit of the auction house. Pursuant to the audit, the Department discovered that Taxpayer did not pay sales tax at the time of the purchase. Subsequently, Taxpayer submitted additional information, including a completed Agricultural Equipment Exemption Usage Questionnaire ("Questionnaire"), claiming that his purchase/use of the tractor qualified for the agricultural exemptions.
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Based on Taxpayer's information, the Department's audit determined that Taxpayer's tractor qualified for nine (9) percent exemption. Thus, the Department assessed Taxpayer sales/use tax on the remaining ninety-one (91) percent purchase/use of the tractor. Taxpayer, to the contrary, claimed that all his usage of the tractor should be exempt.
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At the hearing, Taxpayer's representative asserted that all the above mentioned uses of the tractor qualified for the agricultural exemptions pursuant to Section I.B., examples 1, 2 and 4 of the Department's Sales Tax Information Bulletin 9 (July 2012), 20120725 Ind. Reg. 045120427NRA.
Taxpayer also submitted several photos and two excerpts of articles discussing "Causes of Pinkeye" and "Management Tips for Round Bale Hay Harvesting, Moving, and Storage" to support his protest. Taxpayer's representative asserted that "[f]eeding of round bales directly to the cattle in the winter should be exempt." Taxpayer's representative further argued that "[u]se of the tractor with a bushhog attached should be exempt" because "[t]his usage of the bushhog is to mow the pasture field to prevent the exempt animals from contracting pinkeye or other eye infections caused by tall stems. It should not be considered general farm maintenance and does not pertain to mowing right of ways and the like." Additionally, Taxpayer's representative maintained that "[m]oving round bales from the field to the barn should also be exempt. The storage of the hay out of the weather is the last step in the process of harvesting hay."
Upon reviewing Taxpayer's supporting documentation, the Department must respectfully disagree. Pursuant to the above mentioned statutes and regulations, all purchases of tangible personal property by persons engaged in the direct production, extraction, harvesting, or processing of agricultural commodities are taxable, unless the use of the tangible personal property satisfies the "double-direct" test; the equipment at issue must be involved in the direct production of the agricultural commodity and must have a direct effect upon that commodity. Taxpayer's documentation demonstrates that he used the tractor for hauling feed to livestock (round bales in winter) before actually feeding the cattle and, thus, his use of the tractor, at best, was pre-production. Taxpayer's use of the tractor to check on cattle was not production. Similarly, Taxpayer's use of the tractor for moving round bales was not production because Taxpayer did not sell the bales.
Finally, Taxpayer may argue that he needed the tractor with an attached bushhog to maintain the pasture (or farm) to prevent the cattle from eye irritation caused by tall weeds and grasses, which may cause "pinkeye" disease. However, Taxpayer's use of the tractor in this manner did not have an immediate effect on the cattle. Thus, Taxpayer did not directly use the tractor with an attached bushhog for mowing in the direct production. The fact that the tractor was purchased for use on the farm does not necessarily make it exempt from sales tax. 45 IAC 2.2-5-4(e).
In short, Taxpayer's documentation failed to demonstrate that his use of the tractor – for (1) hauling feed to livestock to be sold ("Round Bales"), (2) checking on livestock, (3) "Moving Round Bales," and (4) "Mowing with Bushog" – were directly used in his direct production. Thus, the Department's audit properly allowed Taxpayer nine (9) percent of exemption on his purchase of the tractor.
