...
The Department found that Taxpayer purchased horses at Indiana racetracks by means of "claiming" transactions. Claiming races are a method of determining the price of a horse, with the successful claimant taking title to the horse "at the time the horse leaves the starting gate and is declared an official starter." Taxpayer was the claimant of horses that were raced in claiming races. The Department assessed tax based upon the claiming amounts paid by Taxpayer for the horses. See also 71 IAC 6.5-1-1 ; 71 IAC 6.5-1-2 ; and 71 IAC 6.5-1-4 (referencing "claiming" transactions).
...
...
The purchase of a horse is subject to Indiana's sales/use tax, since horses are tangible personal property. IC § 6-2.5-1-27. An exemption from use tax is granted for transactions where the 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. IC § 6-2.5-5 et seq.
The Department found that Taxpayer had acquired the horses at issue without paying sales tax at the time they were "claimed," and assessed use tax on the transactions.
Taxpayer does not, in this protest, contest the taxability of the acquisition of horses in "claiming" transactions. Taxpayer, however, does argue that there is a reason the acquisition of the horses should be exempt from sales and use tax. Specifically, Taxpayer states that the horses he acquired in "claiming" transactions are an integral part of his corn and soy farming operation and therefore qualify for the agricultural exemption. Taxpayer argues that the horses he acquired in the "claiming" transactions are integral and essential to his farming operation because the manure generated by the horses is used to fertilize the crops in Taxpayer's farming operation. Taxpayer further explains that the horses are stabled at his farm and only leave the farm to race at Hoosier Park and Indiana Downs. Taxpayer states that the fertilizer is harvested several times a week and manually spread on the land.
When a taxpayer claims it is entitled to a tax exemption, it bears the burden of proving that the terms of the exemption have been met. Indiana Dep't. of Revenue v. Interstate Warehousing, 783 N.E.2d 248, 250 (Ind. 2003). The Department will strictly construe the exemption statutes against the taxpayer claiming the exemption. Id.
IC § 6-2.5-5-1, an exemption statute, 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.
This statute applies a "double direct" test in which a purchase for agricultural use is exempt only when the property is directly used in the direct production of food and food ingredients or commodities referenced above. This means that the purchase must be directly used by the farmer in the direct production of agricultural products. The property in question must have an immediate effect on the article being produced.
Taxpayer provided documentation demonstrating that he is in the corn and soy farming business and that horses are stabled on his farm and their manure is used on the farm as fertilizer. However, the horses at issue are one step removed from Taxpayer's direct agricultural process. The horses produce the manure which is then used to fertilize the farm's crops. The horses are not directly acting on the direct production of food and food ingredients.
Also of relevance is 45 IAC 2.2-5-4 , which ... excludes the subject horses from exemption because they are not used as draft animals in the production of agricultural products.
Additionally, 45 IAC 2.2-5-5 notes:
(a) The raising of saddle horses, harness horses, ponies, donkeys, or any other similar animals not used directly in direct agricultural production does not qualify as agricultural production for "human consumption" under the gross retail sales and use tax act. Consequently, the purchase of supplies, food, materials, and equipment used in raising or maintaining such animals are subject to the sales tax unless the items are directly used or consumed in the production of such animals for resale in the regular course of the purchaser's business.
(b) The purchase of any of the above animals is subject to the sales tax unless the purchaser is a registered retail merchant and is buying such animal for resale in the regular course of his business.
(Emphasis added).
Taxpayer is not purchasing these horses for resale in the regular course of his agricultural business.
The horses at issue were acquired in "claiming" transactions at the race tracks as race horses. The use of the horses' biological byproduct – manure – though perhaps important to Taxpayer's agricultural production process, does not meet the requirement that the horses be used directly in the direct agricultural process required by Indiana law and is furthermore incidental to the purchase of the horses as race horses. Thus the subject horses do not come within the scope of the sales and use tax exemption found at IC § 6-2.5-5-1.
