Revenue Finds Gravel Used as Base for Hay Bale Feeders Not Entitled to Exemption

Taxpayer is a farmer who raises calves for food consumption. Taxpayer also produces hay on his property to feed his calves. Taxpayer purchased gravel on six separate occasions in 2010. Taxpayer used the gravel as a base for round hay bale feeders, which are used in the feeding process for Taxpayer's calves. Taxpayer did not pay sales tax at the time of purchase because Taxpayer claimed an exemption. The Indiana Department of Revenue ("Department") assessed Indiana use tax on these items pursuant to a "Doubtful Purchase" investigation. Taxpayer timely protested the assessment of use tax and provided additional documentation to support his protest.
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Generally, all purchases of tangible personal property by persons engaged in the direct production, extraction, harvesting, or processing of agricultural commodities are taxable. 45 IAC 2.2-5-6(a). An exemption from use tax is granted for transactions where the gross retail tax ("sales tax") was paid at the time of purchase pursuant to IC § 6-2.5-3-4. There are also additional exemptions from sales tax and use tax. A statute which provides a tax exemption, however, is strictly construed against the taxpayer. Indiana Dep't of State Revenue v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974).

IC § 6-2.5-5-1 states:
 

Transactions involving animals, feed, seed, plants, fertilizer, insecticides, fungicides, and other tangible personal property are exempt from the state gross retail tax if:

(1) the person acquiring the property acquires it for his direct use in the direct production of food and food ingredients or commodities for sale or for further use in the production of food and food ingredients or commodities for sale; and

(2) the person acquiring the property is occupationally engaged in the production of food and food ingredients or commodities which he sells for human or animal consumption or uses for further food and food ingredient or commodity production. (Emphasis added).
 

45 IAC 2.2-5-1(a) further provides:
 

Definitions. "Farmers" means only those persons occupationally engaged in producing food or agricultural commodities for sale or for further use in producing food or such commodities for sale. These terms are limited to those persons, partnerships, or corporations regularly engaged in the commercial production for sale of vegetables, fruits, crops, livestock, poultry, and other food or agricultural products. Only those persons, partnerships, or corporations whose intention it is to produce such food or commodities at a profit and not those persons who intend to engage in such production for pleasure or as a hobby qualify within this definition.

"Farming" means engaging in the commercial production of food or agricultural commodities as a farmer.

"To be directly used by the farmer in the direct production of food or agricultural commodities" requires that the property in question must have an immediate effect on the article being produced. Property has an immediate effect on the article being produced if it is an essential and integral part of an integrated process which produces food or an agricultural commodity. (Emphasis added).

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There is no question that Taxpayer is a farmer engaged in the direct production of food or agricultural commodities and is entitled to claim the exemption for tangible personal property purchased to be directly involved in the direct production of Taxpayer's agricultural product. The issue is whether the gravel is directly used in the direct production of Taxpayer's calves, meaning that the gravel has an immediate effect on the calves being produced. In this case, gravel does not have an immediate effect on the raising of cattle. Taxpayer may argue that he needed the gravel to protect the hay from moisture and mud and to keep the tractor from getting stuck. However, Taxpayer's use of the gravel in this manner did not have an immediate effect on the cattle. It is merely tangential. Therefore, the gravel is not exempt from sales tax.

 

http://www.in.gov/legislative/iac/20130925-IR-045130439NRA.xml.html