As of Jan. 1, 2012, a person claiming exemption from sales tax on purchases of certain items used in the production of agriculture and timber products must provide a Texas Agriculture and Timber Registration Number (Ag/Timber Number) issued by the Comptroller of Public Accounts on the exemption certificate issued to the retailer.
The law* did not change the list of items that qualify for the agricultural or timber exemptions; it simply changed the process a purchaser must follow in order to claim the exemptions on certain items.
*House Bill 268, 82nd Regular Legislative Session (2011)
Farmers and ranchers must have an Ag/Timber Number to make exempt purchases of qualifying items on or after Jan.1, 2012. The law did not change any of the items that qualify for exemption. But, to make purchases of these items exempt from sales tax, the purchaser must now give the seller a new completed exemption certificate with an Ag/Timber Number on it. If a customer does not have an Ag/Timber Number, retailers must charge sales tax on the sale. If the customer later applies for an Ag/Timber Number, they may be able to apply to the Comptroller for a refund of the sales taxes paid.
The primary owner or operator of the farm, ranch or timber operation may obtain an Ag/Timber Number. The number can be used by any person authorized by the registrant. For example, if three family members operate a farm, one member can apply for one Ag/Timber Number for the farm that all three can then use when making qualifying purchases. Similarly, a large corporate agricultural or timber operation that employs multiple personnel may obtain one number that can be used by all authorized employees when making qualifying purchases. Ag/Timber Numbers must be renewed every four years.
Upon registration, the Comptroller will provide cards confirming the registration that can be copied and given to the employees who make purchases in the name of the registrant. These cards are for the customer’s convenience only. The retailer is not required to view or copy the registration card. The retailer’s documentation is the completed exemption certificate containing the Ag/Timber Number.
Retailers may verify Ag/Timber Numbers through the Comptroller’s online system but verification is not necessary for the retailer accepts an exemption certificate with an Ag/Timber Number.
As of Jan. 1, 2012, a purchaser claiming an agricultural or timber exemption on qualifying items must provide to the retailer the appropriate new exemption certificate with the purchaser’s Ag/Timber Number:
The purchaser is not required to list the items being purchased or to describe how the items will be used on the new exemption certificates. Retailers do not need to determine whether the planned use of an item by a purchaser qualifies for exemption as long as the item is of a type or quantity that would ordinarily or reasonably be used in the production of timber products or on a farm or ranch in the production of agricultural products.
When a retailer makes the first sale of items that qualify for exemption on or after Jan. 1, 2012, the retailer may obtain the new exemption certificate with the Ag/Timber Number included at the time of purchase and keep that certificate or letter on file. Retailers may consider the new certificates as blanket certificates covering purchases of qualifying items made by purchasers with the Ag/Timber Number. When subsequent exempt purchases are made, the retailer can simply stamp the invoice with a statement, as is currently done, indicating the items purchased on the invoice will be used in a qualifying exempt manner. The stamped invoice must also include the purchaser’s Ag/Timber Number and signature of the customer.
Although retailers may keep a blanket exemption certificate on file for purchasers, the certificate will only be valid for items purchased that are of a type or quantity that would ordinarily or reasonably be used in the production of timber products or on a farm or ranch in the production of agricultural products.
For example, assume a rancher purchases lumber, hand tools and a decorative bathroom mirror at his local lumberyard. The lumberyard may accept an exemption certificate with the purchaser’s Ag/Timber Number for the lumber and hand tools since the rancher could reasonably use the lumber and tools to build a cattle feeder, water trough, fence or other exempt piece of equipment ordinarily used exclusively on a farm or ranch in the production of agricultural products.
The lumberyard should not accept a claim for exemption on the decorative bathroom mirror since it is not an item ordinarily used in the production of agricultural products.
Recommended language from the Comptroller for invoices used in connection with blanket exemption certificates.
"I certify the items on this invoice are for exclusive use on a farm or ranch in the production of agricultural products for sale. I understand that if these items are not used exclusively in this manner, I will be liable for the tax, penalty and interest.
Ag/Timber Number (required) "
"I certify the items on this invoice are for exclusive use in the production of timber products for sale. I understand that if these items are not used exclusively in this manner, I will be liable for the tax, penalty and interest.
Ag/Timber Number (required) "
Retailers who currently have on file blanket exemption certificates using the Exemption Certificate (Form 01-339) must obtain from their customer one of the new exemption certificates (either Form 01-924 or 01-925) with the customer’s Ag/Timber Number.
The updated exemption certificate will be good until the customer revokes the certificate in writing to the retailer or the retailer is notified that the Ag/Timber Number associated with the exemption certificate has expired, been canceled or suspended.
A person who has been issued the Ag/Timber Number has certified to the Comptroller he/she is engaged in the production of agriculture or timber products for sale. By issuing a retailer one of the new exemption certificates with a valid Ag/Timber Number, a purchaser is certifying the purchases will be used in an exempt manner. The retailer may accept an exemption certificate with an Ag/Timber Number in good faith, provided the item is of a type or quantity that would ordinarily be used in the production of timber products or on a farm or ranch in the production of agricultural products. The properly completed exemption certificate containing a purchaser’s Ag/Timber Number is the retailer’s documentation that a tax-exempt sale was made in good faith.
A retailer must be familiar with the agriculture and timber exemptions available for the items sold by the retailer. A retailer may not claim good faith acceptance of a certificate for purchases of items that clearly do not qualify for the exemption. For example, a retailer should never accept an agricultural or timber exemption certificate for jewelry or furniture because those types of items clearly would not be used in the production of timber products or on a farm or ranch in the production of agricultural products.
A retailer accepting an exemption certificate in good faith must keep records of the sale. A retailer must be able to match the stamped invoices to the purchaser’s exemption certificate. This may be accomplished by the retailer entering the customer’s Ag/Timber Number on each customer-signed invoice.
A retailer is required to charge sales tax if the person claiming an agricultural or timber exemption does not have an Ag/Timber Number on purchases made on or after Jan. 1, 2012.
In determining how to handle refund requests, the retailer will need to know if the purchaser had a valid Ag/Timber Number at the time the item was purchased. To make this determination, retailers should use the Comptroller’s online verification system.
If the purchaser did not have a valid Ag/Timber Number at the time the purchase was made, the retailer should not refund the sales tax or assign the right to refund to the purchaser. The purchaser should, instead, apply for an Ag/Timber Number and, on receipt of the number, submit a refund claim directly to the Comptroller.
If the purchaser did have a valid Ag/Timber Number at the time the purchase was made, the retailer may refund the sales tax or give the purchaser an Assignment of Right to Refund if the purchaser provides the Ag/Timber Number to the retailer when making that request.
If the number is invalid or was not active on the date of the sale, the retailer should direct the purchaser to file the refund claim directly with the Comptroller’s office. An Assignment of Right to Refund is not required in this situation.
Agriculture and timber exemptions are "use" based exemptions. That means that an item that is normally taxable will qualify for exemption if it is used in an exempt manner. For most agricultural exemptions to apply, the purchased item must be used exclusively on a farm or ranch in the production of an agricultural product for sale. Items qualifying for the timber exemption must be used exclusively to produce timber products for sale. The exemption is lost if the item is not used exclusively in a qualifying manner.
The law does not change the exempt status or exempt uses of items purchased by persons who produce agricultural products for sale in the ordinary course of business. Just as before, the items listed below only qualify for the agricultural or timber exemption based upon their use.
It is the responsibility of the purchaser to use the items purchased in an exempt manner, and the purchaser is responsible for the tax, penalty and interest if the items are not used in an exempt manner. The retailer can accept an exemption certificate with an Ag/Timber Number, in good faith, when selling the following items:
Sales of some agricultural items are always exempt. It doesn’t matter who is buying the item or how it will be used. The retailer does not need to obtain an exemption certificate when selling:
*Note, the purchaser must either provide the retailer a written prescription or allow the retailer to receive the prescription directly from the veterinarian. The seller must keep a copy of the prescription on file to document the exemption.
Animals, "the products of which are ordinarily food", include only those animals subject to mandatory inspection by the USDA’s Food Safety Inspection Service (FSIS) when sold for food - cattle, sheep, goats, swine, and poultry. "Poultry" means chickens, turkeys, ducks, geese, guineas, ratites, or squabs. Ratites are ostriches, emus and rheas. Squabs are young pigeons from one to about thirty days of age.
All other animals are taxable. However, an exemption can be claimed on taxable animals such as rabbits, deer, llamas and bison that are raised to sell their products or as food.
Animals used exclusively in one of the following work activities qualify for exemption:
Work animals do not include animals raised, trained or held as pets or breeding stock; for sport (i.e., hunting dogs) or for show. For example, tax is due on deer and other animals purchased by a hunting operation for game, exotic animals purchased by a zoo or circus, and hunting dogs.
The term "show animals" as used in this context does not include animals raised and shown by students in 4H, FFA and similar vocational educational groups. Taxable animals such as rabbits that are raised for show and sale by such students qualify for exemption.
Purchasers should issue an exemption certificate when buying work animals. The exemption certificate should indicate what type of work the animal will perform.
Feed for a work animal is exempt. The exemption certificate provided by the purchaser should indicate the type of work performed by the animal(s) to be fed. For example, "dog food for a service dog."
Feed for animals being held for sale in the regular course of business, including dogs, cats, rabbits and exotic animals also qualifies for exemption. The exemption certificate must state that the feed will be fed to animals being held for sale in the regular course of business or for animals used as breeding stock for animals that will be held for sale. Sellers of cats, dogs, exotic animals and other animals that are not ordinarily considered either food sources for humans or farm or ranch animals are required to hold a sales tax permit and to collect tax on sales of such animals.
Pet food also qualifies for exemption when sold or dispensed under a veterinarian’s prescription, and an exemption certificate is not required. The purchaser must either provide the retailer a written prescription or allow the retailer to receive the prescription directly from the veterinarian. The seller must keep a copy of the prescription on file to document the exemption.
Ice exclusively used by commercial fishing boats in storing aquatic species, including but not limited to shrimp, other crustaceans, finfish, mollusks and similar creatures is exempt. The exemption certificate should state that the ice will be used for the storage of fish or other aquatic species. Ice purchased for consumption in drinks or for storage of food, beverages or other items is taxable.
A retailer may accept a properly completed exemption certificate in lieu of collecting tax on an exempt transaction; the law does not require a retailer to accept an exemption certificate. If a retailer chooses not to accept an exemption certificate from a purchaser on a qualifying exempt purchase, a purchaser may request a refund of the tax paid from the Comptroller. See "Sales Tax Refunds" for more information.
When a retailer ships or delivers items to an outof-state location, and the customer does not take possession of the items in Texas, Texas sales tax does not apply. The retailer should simply keep copies of the shipping documents in his records as verification that the items were sent directly out of state.
If a resident from another state or country purchases taxable items in Texas and receives the items here, Texas tax is due. If the purchaser claims an agricultural or timber exemption, the purchaser must provide the appropriate exemption certificate with a valid Ag/Timber Number. Anyone engaged in the production of agricultural or timber products for sale, including non-Texas residents, can apply for a Ag/Timber Number. If the out-of-state customer does not have a Ag/Timber Number, the retailer should collect the sales tax.
A retailer may continue to accept a properly completed resale certificate from a customer buying items for resale. Retailers may also continue to accept a properly completed "general" exemption certificate, Form 01-339, without an Ag/Timber number from qualified exempt organizations such as Texas public schools and universities, churches, federal and Texas state and local government agencies, and nonprofit organizations buying items for their own use. These types of transactions are not affected by the new law.
Although the law went into effect Sept. 1, 2011, the requirement to obtain the new exemption certificate with a Ag/Timber Number did not become effective until Jan. 1, 2012. Customers claiming the agriculture or timber exemptions must issue an exemption certificate,either Form 01-924 (agriculture) or Form 01-925 (timber) and provide their Ag/Timber Number on the appropriate exemption certificate. The registration must be renewed every four years. Retailers must collect sales tax on items that require an agriculture or timber exemption certificate if the purchaser cannot provide an Ag/Timber Number.
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Retailers should alert their staff about these requirements, review the exemptions available for the items the business sells and distinguish the items the business sells that do not require an exemption certificate from the customer to document the tax-exempt sale.
Direct Customers to the Agricultural and Timber Exemptions and Texas Taxes web page on the Comptroller’s website.