State & Local Tax Blog

Big Changes with Texas Certificates

Are You A Rancher/Farmer in Texas or Do You Have A Rancher/Farmer Customer?  If so, the Texas Sales Tax Law Has Changed for You.

Do you sell to farmers or ranchers in Texas? Then a new law in Texas applies to you. Starting in January, 2012, you’ll have to collect a new certificate from them with their new Comptroller-issued exemption number.

The Comptroller is currently working on the application for a registration number. A farmer/rancher in Texas enjoys a very broad-ranging exemption and until now, there was no need to register. You just buy an exempt item at Home Depot or Lowes or Tractor Supply and sign a statement that you’re a rancher and no tax is charged. Now, any store who sells to a rancher will need to collect and manage a new certificate.

Certificate Management Just Got Harder

Many of our clients are experiencing increased sales tax audit liabilities because of missing resale and other exemption certificates. This is an area that states are targeting with laser-like focus. Exemption certificates have always been a problem in most sales tax audits, but as long as you had something on file that you “accepted in good faith”, or if you came up with the missing certificate, the auditors would usually give you a pass. If the item was clearly exempt, they were pretty lenient about the certificates. But states are getting very aggressive; focusing on the technicalities to the extreme. The item may clearly be for resale or exempt like these agricultural items, but it you don’t have the right form completely filled out and signed with a valid id number and the right date, they will tax you all day long til the cows come home. It’s easy, low-hanging fruit.

These days you must have a system in place for collecting the right certificate, making sure it’s valid and that it’s renewed on the right cycle. It also needs to be readily available when the auditors come in. It’s amazing how one missing or invalid certificate can have such a large impact on a sample. You can have a manual system or an automated system. Fortunately, automated systems are very economical these days. An automated system will pay for itself many times over if you have, say more than 1000 exempt customers. PJCo can help you with this automated solution.

But Wait, It Gets More Complicated

Ranchers and farmers can still buy certain items tax exempt even without the id number. So it’s not as easy as getting a new certificate from every customer.  Why make it easy on retailers, right? How do you decide what you need and when?

For this particular Texas issue you can read on below. As you do so keep in mind that this is just one of many types of certificates in just one state. Many other states are implementing changes relating to all types of certificates. The question to ask is, what steps are you taking to prevent the auditors from taking your low hanging fruit?

The Comptroller has a release on its website that explains the new Exemption Requirements for Commercial Agriculture. The release is available below or in its entirety on the Texas Comptroller’s website.

Notice: New Exemption Requirement for Commercial Agriculture and Timber Operations, Texas Comptroller of Public Accounts, August 19, 2011. 

Items That Do Not Require Registration Number

A registration number will not be required for purchases of the following agricultural items: (1) horses, mules, and work animals commonly used in agricultural production; (2) animal life, the products of which ordinarily constitute food for human consumption; (3) feed for farm and ranch animals and wildlife; (4) feed for animals held for sale; (5) seeds and annual plants, the products of which are recognized as food for humans or animals or are usually only raised to be sold in the regular course of business; and (6) ice used exclusively by commercial fishing boats in storing aquatic species.

Items That Require Registration Number

A registration number will be required when claiming an exemption for the following goods and services: (1) fertilizers, fungicides, insecticides, herbicides, defoliants, and desiccants used exclusively in the production of timber or on a commercial farm or ranch in the production of food or other agricultural products; (2) machinery and equipment used exclusively in the production of timber or on a commercial farm or ranch in the production of food or other agricultural products or the building or maintaining of roads and water supplies; (3) machinery and equipment used by an original producer for packing and processing agricultural or timber products; (4) machinery and equipment used exclusively in an agricultural aircraft operation (crop dusting); (5) tangible personal property incorporated into a structure used for poultry carcass disposal; (6) components of irrigation systems used in the production of food and other agricultural and timber products; (7) seedlings used in the production of timber; (8) electricity used in agriculture or timber operations; (9) services performed on exempt tangible personal property identified above; and (10) farm, timber, and off-road motor vehicles.

Persons Eligible for Registration Number

Persons, including non-Texas residents, in the following groups are eligible for a registration number: (1) farmers and ranchers who raise agricultural products to sell to others; (2) persons engaged in aquaculture and apiculture; (3) custom harvesters; (4) persons engaged in agricultural aircraft operations (crop dusting); (5) commercial nurseries engaged in fostering growth of plants for sale; and, (6) timber producers, including contract lumberjacks.

Persons not engaged in producing agricultural or timber products for sale are not eligible for a registration number. The release includes a list of activities that do not qualify for exemption, such as home gardening, horse racing, dog breeding, and commercial fishing. 

Registration Number for Use by Multiple Personnel 

The primary owner or operator of a farm, ranch, or timber operation may obtain one registration number that can then be used by any person authorized by the registrant. For example, a large corporate operation that employs multiple personnel may obtain one number that can be used by all authorized employees when making qualifying purchases. The person to whom the registration number is issued is responsible for ensuring that exempt purchases will be used in a qualifying, exempt manner.

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