Most leases, rentals and sales of personal property are subject to sales tax unless there is an exemption. In agriculture, it's assumed that anything farm related will qualify for a farm exemption. Unfortunately, that isn't always the case.
Many states do not exempt items that farmers would naturally assume would be exempt. For example, in Minnesota, the following are not exempt: repair/replacement parts, shop equipment, grain bins, fencing material, certain motor vehicles and tiling. I'm sure several of you started laughing when you read Minnesota doesn't consider a grain bin as farm personal property.
Although it might be funny that certain states don't understand agriculture, it's not funny when they come after you for failure to pay or remit sales tax.
You might be asking: How are farmers affected? Many farmers have "stuff" they have collected over time and sell to other people. For example, I had a client who had some large cinder blocks in the yard. Someone passed by and asked to buy them. I believe the total sales price was $200. By a stroke of bad luck, that person got audited, and my client was contacted for failure to remit sales tax on the cinder blocks. Three months later and a few dollars of tax due, the sales tax audit was closed. How many of you have sold an old truck, farm supplies, tools/equipment or other things that did not qualify for an exemption and didn't collect sales tax? I bet most of you.
Another way sales tax can affect farmers is when they set up a leasing or rental entity. One example would be when a farmer/farming entity transfers assets (equipment and building site) to a new partnership and leases the equipment and building site as part of a sale/transition plan. You typically see this when selling assets would result in substantial recapture gains, and leasing would result in a tax benefit. Depending on your state and percent that is considered nonexempt, the lease payment may be subject to sales tax.
As you can see, this is a gotcha for many farmers. Each state has a different definition of what is exempt farm personal property and how much nonexempt personal property can be part of a lease/rent before the transaction is subject to sales tax.
Before you assume you don't need to collect sales tax, talk to your tax adviser. If you were required to collect sales tax and didn't put that in your agreement, you might end up paying it on behalf of the lessee.
DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…. You may email Rod at firstname.lastname@example.org.
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