• Application of Sales Tax by Retailers
• Machinery/Fuel Sales Tax Exemption for Nurseries

Clarification of Sales Tax Application on Food-Producing Fertilizers and Plants (July 2002)

Many California nursery retailers were prompted to inquire about the law governing the taxability of particular fertilizers and plants after a class action lawsuit was filed in Los Angeles County against several nurseries/garden centers alleging the unlawful charging of sales tax. Let us apologize up front for this rather lengthy and convoluted explanation, but suffice it to say nothing is simple about this issue.

After much research and consultation with attorneys at the State Board of Equalization (BOE), we can offer the following guidance regarding the status of the application of sales tax to fertilizers. We will reference code sections as a resource should you wish to consult your own legal council.

First, there is a presumption by the BOE that "all gross receipts are subject to tax until the contrary is established." (Cal. Rev. and Tax Code § 6091.) Further, it is the burden of the party charged with the sales tax to overcome this presumption. (Honeywell Inc. v. State Board of Equalization (1982) 128 Cal.App. 3rd 739.) It is the retailer that the sales tax is imposed upon and therefore it is the retailer that is required to produce evidence during a BOE audit that a particular sale was exempt from sales tax.

The law provides an exemption for commercial fertilizer, including foliar applications, which is sold to be applied to land growing plants that will produce food for human consumption. The exemption also applies to agricultural minerals1 and manure2. An exemption also exists for sales to people who will use the product in the course of doing business or who will sell the products they are growing. The exemption does not apply to soil amendments3 and auxiliary soil and plant substances4, as defined in Food and Agriculture code sections 14552 and 14513 respectively. The exemption also does not apply to shovels, tomato cages etc. used in growing plants that produce food. (See page 2 for entire definitions.)

Are you required to ask the customer how the fertilizer will be used? No, it is the obligation of the customer to request the exemption from sales tax. What if the customer says they are using the fertilizer on food producing plants but refuses to sign the form? You are then clear to charge the sales tax, as the purchaser has given no proof that the product will be used for an exempt purpose.

There are a couple of other oddities. The law states that the fertilizer portion of products that combine fertilizer and pesticides that will be used for an exempt purpose are exempt from tax, i.e. if the product is 20 percent fertilizer then 20 percent of the cost is tax exempt. Also, if fertilizer is sold that will be applied to a pasture used to graze animals that will then be used for food for human consumption, that fertilizer is also exempt.

"Tax Tips for Retail Feed and Farm Supply Stores" is a useful publication from the BOE. It was created for feed stores and has a section on plants and fertilizers. Pages 7 through 9 contain the explanation of sales tax on plants and fertilizers. Download this publication from the BOE website at www.boe.ca.gov/sutax/staxpubs.htm (Publication 66). You may also request a copy or ask specific questions by calling the BOE information line at (800) 400-7115.

Still confused? We don't blame you. Clearly the law needs to be changed to make this much more understandable and workable for the retail sector of the nursery industry. We will be pursuing a change in the law with this as our goal.

1. Food and Agriculture Code 14512 "Agricultural Minerals" means any substance with nitrogen, available phosphoric acid, and soluble potash, singly or in combination, in amounts less than 5% which is distributed for farm use, or any substance only containing recognized essential secondary nutrients or micronutrients in amounts equal or greater than minimum amounts specified by the director, by regulation, and distributed in this state as a source of these nutrients for the purpose of promoting plant growth. It shall include gypsum, liming materials, manure, wood fly ash, sewage sludge not qualifying as commercial fertilizer, and captured dilute solutions.
2. Manure means the excreta of any domestic animal or domestic fowl which is not artificially mixed with any material except a material which has been used for bedding, sanitary, or feeding purposes for such animal or fowl or for the preservation of the manure.
3. Food and Agricultural Code 14513 - "Auxiliary soil and plant substances" means any chemical or biological substance or mixture of substances or device distributed in this state to be applied to soil, plants or seeds for soil corrective purposes; or that is intended to improve germination, growth, yield, product quality, reproduction, flavor, or other desirable characteristics of plants; or that is intended to produce any chemical, biochemical, biological, or physical change to the soil; but does not include the following: bacterial inoculants, biotics, lignin or humus, microbial products including genetically engineered microorganisms, soil binding agents, synthetic polyelectrolites, wetting agents to promote water penetration, any similar product intended to be used for influencing soils, plant growth, or crop or plant quality.
4. Food and Agriculture Code 14552 - "Packaged Soil Amendment" means any substance distributed for the purpose of promoting plant growth or improving the quality of crops by conditioning soils solely through physical means. It includes all of the following: hay, straw, peat moss, leaf mold, sand, wood products, any product or mixture of products intended for use as a potting medium, planting mix, or soil-less growing media, manures sold without guarantees for plant nutrients, any other substance or product which is intended for use solely because of its physical properties. Categories of Fertilizers
   Fertilizer products fall into three categories, each having its own set of recommendations:
   
   1. Fertilizer specifically labeled for food plant use only, i.e. tomato and vegetable fertilizer
      This category is the simplest to deal with. Under a BOE opinion letter dated April 25,1980, because there is no other non-exempt use of the product recommended, it is assumed that the fertilizer will be used for an exempt purpose and no further evidence is required to grant an exemption from sales tax. It is not necessary to ask about how they are using it, just don't charge tax.
   2. Fertilizer labeled multi-purpose
      If the customer indicates that this particular product will be used for a tax-exempt application, it is then necessary to obtain some evidence that sales tax does not apply. What the BOE regards as adequate evidence is a signed form by the purchaser that the fertilizer will be used to produce food for human consumption.
   3. Fertilizer specifically labeled for use on non-food plants, i.e. azalea fertilizer
      This category is somewhat strange. You would think that fertilizer that is specifically labeled for non-exempt purposes would not be exempt. Not necessarily true. A customer can claim the exemption on fertilizer labeled for use on azaleas, for example, if they fill out the form indicating that they are actually using it on food producing plants. In this case the same form described above would be used.
   Sample Form for Sales Tax Exemption Verification (may be copied for your use)

   The form must include all of the following information. Purchaser to fill out the following:
   

   Name
   Purchase Date
   Address
   City
   State
   Zip
   Signature of the buyer or agent
   Purchaser's seller's permit number (Check if not applicable)
   Description of purchase
   This product will be used to grow
   

   Must clearly indicate why it is not taxable, i.e. to be used on land used to grow vegetables, etc.

   Class Action Law Suit Filed Against Nurseries (June 2002)
   A class action lawsuit was filed against nurseries and garden centers for charging sales tax on exempt purchases. It has also been reported that people are purposely purchasing fertilizer hoping to be charged sales tax and included in a settlement, if there is one.

   The law states that plants that produce food for human consumption, as well as fertilizer, agricultural minerals and manure used to grow those plants, are exempt from sales tax. This law has been on the books for years but maybe unclear due to the more recent practice of labeling fertilizer for specific uses. Examples include products labeled for use on tomatoes and vegetables or fruit trees. Citrus and avocado specific fertilizers have been around for a longer time.

   There are many questions to be answered in this matter. Does the fact that a product is labeled for use on a food crop make the sale exempt from tax? In the past, it has always been the use that determined the applicability of the exemption, not the marketing of the product. Also the burden to identify the sale as an exempt sale has always been on the buyer not the retailer. Does the labeling change that?

   C.A.N. is consulting with attorneys and has contacted the Board of Equalization (BOE) for clarification on this matter. Unfortunately, the BOE is listed as a defendant in the lawsuit so the normal channels of communication have been compromised. We have been referred to their legal department. Advice to the nursery industry from the BOE dating back 30 years indicates that any exempt sale should be accompanied by a signed testament by the buyer that the product will be used for a purpose that triggers the exemption. Nurseries named in the lawsuit should consult their own legal counsel. Due to differing business practices, other nurseries may consider consulting legal counsel as well. C.A.N. will notify its members as soon as any information that clarifies this situation is made available.

   Machinery/Fuel Sales Tax Exemption for Nurseries

   Ag Sales Tax Exemptions Finalized (August 2002)
   The Office of Administrative Law (OAL) has approved the regulations dealing with the Ag Tax Package approved by the legislature in last year's budget deal. The partial sales tax exemptions on agricultural machinery and diesel and the full exemption on propane were approved in July by OAL.

   The sales tax relief however was effective as of September 1, 2001, but some suppliers refused to grant the exemptions until the regulations were finalized. In these cases, customers of those suppliers are due a refund. Nursery owners seeking a refund should start the process as soon as possible as there are time limits for seeking a refund. The actual deadlines are a bit fuzzy, but it appears that on propane and farm equipment it is September 7 and October 2 for diesel.

   The supplier is the one that is obligated to pay the tax to the state, so any refund will have to go through the supplier and not from the state to the nursery directly. This is accomplished by requesting the refund from the supplier, who in turn submits the request to the Board of Equalization for the actual funds. Exemption forms can be found at the BOE website at www.boe.ca.gov/sutax/pdf/partlpgcert.pdf (propane) and www.boe.ca.gov/sutax/pdf/partdieselcert.pdf (partial exemptions on machinery and diesel). This process can be very lengthy, as the supplier may not refund the sales tax until they get the funds from the state.

   Tax Exemptions Revised (April 2002)
   In the heat of the final budget negotiations last year the agriculture tax package was amended and promises were made at a blistering pace in order to get the 2/3 vote necessary to pass the budget. One of the amendments added was to include food processing in the agricultural exemption. With deals being cut and agreed to at such a fevered pitch there was obviously not the usual analysis done to determine the effect of the changes.

   In order for the tax exemptions to take effect the Board of Equalization (BOE) has had to implement regulations to carry out the intent of the legislation. Part of this task has fallen on the Business Tax Committee (BTC) of the BOE.

   The original BTC language allowed a food processor to transport processed food products one stop beyond the processor. This interpretation resulted in a revenue loss to the Public Transportation Account (PTA) of nearly $50 million. The PTA is funded by 4 3/4 of the sales tax on on-highway diesel and is used by local transit agencies to purchase buses and pay bus drivers. This language resulted in the introduction of two pieces of legislation that sought to narrow the diesel exemption. This was problematic as this legislation could be used to undo other provisions of the tax relief package especially in this year of deficit. We worked with the transit agencies to develop a compromise that was fair to all interested. Our compromise was adopted by the BOE. As a result, the legislation will be stopped.

   The compromise language allows agricultural products to be delivered to the food processor with exempt diesel but stops the exemption at the processor. The transportation of the unprocessed agricultural products is exempt to retail. This change minimizes the hit to the PTA, provides a bright line for BOE to implement the food processing exemptions, and ensures equity throughout the industry.

   Mil Tax Suspended for 2002 (January 2002)
   A year of tax savings for agriculture will be enhanced by Governor Davis' suspension of the California Department of Food and Agriculture's (CDFA) portion of the pesticide mil tax for 2002. The tax, which raises approximately $1 million a year for CDFA's Office of Pesticide Consultation and Analysis's prudent management of existing funds.

   "This is another example of how we're investing in farmers and ranchers to keep California number one in agriculture," Governor Davis said. "We're committed to doing everything we can to assist the industry in these highly competitive times."

   Added CDFA Secretary William (Bill) J. Lyons, Jr.: "Even though California has the safest and highest quality food supply in the world, a profitable bottom line is still a huge challenge for agriculture. Governor Davis recognizes this and continues to look closely for opportunities to assist the industry."

   CDFA is entitled to three-quarters of a tenth of a cent for every dollar in the wholesale market spent on agricultural pesticides. The agency will be waiving that in the coming year. The tax rollback will have no impact on the mil assessment imposed by the California Department of Pesticide Regulation.