As agriculture modernizes at break-neck speeds, Treasury’s perception of farming hasn’t kept pace. It’s why farmers need House Bill 4561 and 4564 ‑ to bring the state department up to speed.
Without the bills, officials who haven’t kept pace will continue enforcing nebulous guidance on farmers, according to Rebecca Park, state legislative counsel with Michigan Farm Bureau.
If the bills don’t become law, farmers will pay more taxes.
As the Michigan Department of Treasury performs farm audits, its disconnection has become apparent, Park said.
“Treasury is not looking at the process, but at each individual action and how each piece of equipment is used,” she said.
For example, if a skid steer is used to scrape manure in a barn, it is considered a part of the agriculture business, and is exempt from sales and use tax. But then, if that same skid steer is used to load the manure onto a spreader to fertilize a field, it might be considered transportation, and sales and use taxes would have to be paid.
That interpretation seems contrary to the long-standing law which exempts businesses from paying sales and use taxes on equipment used for tilling, planting, caring, draining of soil and taking care of livestock or poultry.
“The exemption speaks to the purpose of the equipment, not the type of equipment,” Park said. “Farmers know that the skid steer is used for caring for the soil and caring for the livestock, but Treasury doesn’t seem to see it that way.”
Another example, Park said, was an audit she’d seen on a vegetable operation.
“It involved a flash cooler and a standard cooler,” she said. “The auditor said the flash cooler is considered agriculture because it’s used to quickly cool the crop. But the farm’s standard walk-in cooler was viewed as maintaining the crop, and that, apparently, is not an agricultural use.”
With such confusion, and a potential $293 million additional tax burden on farm families, the law needs clarification, Park said.
“The law says the exemption is for stuff sold to persons ‘engaged in a business enterprise,’” she said. “That’s important. The law doesn’t say farm or agricultural business. Whether you’re a large-animal veterinarian or a custom harvester, you should be able to take the sales and use tax exemption.”
What prompted Farm Bureau to support the legislation was not only to clarify what activities qualify for as agriculture within the exemption, but also to make distinctions between real and personal property.
That’s important too, Park said, because real property – things that are permanent and fixed such as houses, barns and property – are taxed differently than personal property, which are things that can be moved or carried and are not part of the real property.
Farmers who have greenhouses have been the canary in the coal mine for potential tax liability at this point, Park said.
“Historically, greenhouses have been interpreted as personal property and didn’t have to pay the use tax,” she said. “They didn’t have to pay taxes on watering systems as an example, but Treasury is now considering it all real property, all the way down to the nuts and bolts that hold everything together. How much of a stretch is it to think they’ll go into dairy barns next and ask if the farmer paid sales tax on pipelines and milking equipment.”
Under the bills, which are strongly supported by Farm Bureau, equipment and technology are exempt, and the exemption will be retroactive six years.
To Treasury’s credit, Park said, it originally asked for the bills to help create some clarification and logical framework for both Treasury and taxpayers.
Overall, the bills amend existing law by codifying current practices and clarifying if, “a person engaged in a business enterprise that uses or consumes the tangible personal property for either the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil or the breeding, raising, or caring for livestock, poultry, or horticultural products, including the transfers of livestock, poultry or horticultural products for further growth” they are eligible to receive the agriculture exemption from sales and use tax.
The new language brings back the intent of the legislature when the law was passed in 1933, Park said.
“Our job now is to increase lawmakers’ understanding of today’s agricultural practices,” she said.
The crux of the bills, Park said, is to keep the tax code simple.
“These bills do that, and we appreciate the support from our legislative sponsors, Rep. Dan Lauwers, Tom Barrett and even active farmer and Representative Roger Victory, who took an interest in the issue after hearing from a local farmer being audited by Treasury.” Park said. “Several members testified in support of the legislation at the Senate Agriculture Committee hearing where they advocated for allowing farmers to reinvest in their farm, not pay more in taxes. The bills await a vote by the full Senate, where we look forward to swift passage and encourage the Governor to sign the bills quickly when they arrive at his desk.”