SECTION 3.296. Agriculture, Animal Life, Feed, Seed, Plants, and Fertilizer

(a) Sales tax is not due on the receipts from sales of, and the storage, use or consumption of, the following:

(1) Horses, mules, work animals, and any form of animal life of a kind the products of which ordinarily constitute food for human consumption.

(A) Sales tax is not due on the sale, lease, or rental of horses and mules except when sold, leased, or rented as a part of an amusement service.

(B) The term "work animals" shall include any animal exclusively used in the following:

(i) The production of food for human consumption or other agricultural products held for sale in the regular course of business. Examples: plow animals or sheep dogs.

(ii) The aiding of handicapped individuals or the performance of protective services, providing that the animal has been professionally trained for that specific purpose.

(C) "Work animals" shall not include animals raised, trained, or held as pets or for sport or show.

(D) Exemption certificates are not required on sale of horses, mules, or any form of animal life of a kind, the products of which ordinarily constitute food for human consumption. Sales tax is due on the sale of all other animals unless the purchaser provides a valid and properly completed resale or exemption certificate.

(2) Hay, corn, oats, and any other type of feed normally consumed by farm and ranch animals, animals that are held for sale in the regular course of business, and wildlife.

(A) Included in this section is feed for animals covered by paragraph (1) of this subsection, feed for animals held for breeding purposes whose offspring are held for sale in the regular course of business, and wildlife. Examples of feed purchased for wildlife include deer corn and perishable bait used for commercial, sport and recreational fishing. Feed purchased for an animal that might normally be kept as a pet is taxable. Pets normally include, but are not limited to, dogs, cats, rabbits, hamsters, and tropical fish.

(B) All persons selling the type of feed that is normally consumed by farm and ranch animals or wildlife may sell the feed tax free without an exemption certificate. Persons selling food for an animal that might normally be kept as a pet should collect sales tax or accept a valid and properly completed resale or exemption certificate from the purchaser.

(3) Seeds and annual plants, the products of which ordinarily constitute food for human consumption, are used to produce feed for animals exempted by this section, or are to be sold in the regular course of business. An exemption certificate is not required when purchasing these items.

(4) Fertilizers, fungicides, insecticides, herbicides, defoliants, and desiccants exclusively used or employed on farms or ranches in the production of food for human consumption, feed for any form of animal life, or other agricultural products to be sold in the regular course of business. However, when these particular items are used in commercial storage facilities or other storage facilities that are not operated exclusively by the owner or are not located on the farm or ranch, the exemption is lost and the tax must be remitted on the sales price of the items. Fertilizer is taxable if sold for use on lawns, home gardens, or for any uses other than those listed in this paragraph. See subsection (d) of this section regarding exemption certificates.

(5) Machinery or equipment used or employed on farms or ranches exclusively in:

(A) the production of food for human consumption, production of grass, production of feed for any form of animal life, or other agricultural products to be sold in the regular course of business; and

(B) the building or maintaining of roads and water facilities.

(6) Containers, bins, or cages used exclusively to transport:

(A) fruit or vegetables from the field or place of harvest to a location where the items are processed, packaged, or marketed; or

(B) poultry from a poultry farm to a location where the poultry is processed, packaged, or marketed.

(b) Sales tax is not due on machinery and equipment exclusively used in, and pollution equipment required as a result of, the processing, packing, or marketing of agricultural products by an original producer at a location operated by the original producer exclusively for processing, packing, or marketing the original producer's own products.

(1) "Original producer" means a person who:

(A) brings an agricultural product into being and is the owner of the agricultural product from the time it is brought into being until it is processed, packed, or marketed; or

(B) is the grower of an agricultural product, exercises predominant operational control over the raising of the agricultural product, and bears a risk of loss of investment in the agricultural product.

(2) In order to qualify as an original producer:

(A) 50% or more of the agricultural products processed, packed, or marketed at or from the location must be actually produced by the original producer and not purchased or acquired from others; and

(B) agricultural products belonging to others, in an amount greater than 5.0% of the total agricultural products processed, packed, or marketed by the producer, may not be processed, packed, or marketed for consideration at or from the location.

(3) If a person purchases agricultural products from a grower, processes those products, and subsequently sells the processed products back to the same grower for the purpose of circumventing paragraph (2)(B) of this subsection, the person will not qualify as an original producer.

(4) For purposes of determining if 50% or more of the agricultural products were actually grown by the original producer, the period to be reviewed will be the most recently completed calendar year.

(A) A producer will be liable for sales tax based on the fair market rental value of machinery and equipment purchased tax free if the producer grew less than 50% of the agricultural products it processed, packed, or marketed. The period of assessment shall be the entire one-year period following the calendar year in which the producer did not meet the 50% criteria, and the assessment will be on the fair market rental value of machinery and equipment used during the period of assessment. The fair market rental value is the amount that a purchaser would pay on the open market to rent the item for use. If the item has no fair market rental value, sales tax is due based upon the purchase price.

(B) At any time the producer may stop paying tax on the fair market rental value of the machinery and equipment and instead pay sales tax on the original purchase price. When the person elects to pay sales tax on the original purchase price, credit will not be allowed for taxes previously paid on the fair market rental value.

(5) Two or more corporations that operate agricultural activities on the same tract or adjacent tracts of land and that are entirely owned by an individual or a combination of the individual, the individual's spouse, and the individual's children may qualify as an original producer for the purposes of paragraph (1) of this subsection.

(6) Machinery and equipment exclusively used in the processing, packing, or marketing of agricultural products by an agricultural cooperative organized under the Agriculture Code, Chapter 52, are not exempt unless the comptroller determines that:

(A) the cooperative itself is the original producer of all the agricultural products being processed, packed, or marketed; and

(B) the processing, packing, or marketing is being accomplished at a location operated by the cooperative.

(c) Persons purchasing trees, shrubs, and ornamental plants for resale are presumed to be marketing these products rather than fostering their growth. The presumption may be overcome by showing that actions were taken that did more than maintain the products prior to sale. An example would be replanting a shrub in a bigger container to encourage growth. Machinery, equipment, and other tangible personal property purchased to maintain the plants prior to sale are taxable.

(d) All persons engaged in the business of selling items that are exempt from the sales tax must obtain an exemption certificate from their customers as provided in the Tax Code, §151.155 and §3.287 of this title (relating to Exemption Certificates). The certificate may be a blanket certificate covering all purchases only when the items being sold are of a type or quantity that would not generally be used except on a farm or ranch. An example is farm machinery or fertilizer purchased in bulk. When a seller sells taxable items and items that may qualify for exemption under this section, the seller may either obtain an exemption certificate for each item that qualifies for exemption or obtain a certificate at the time the customer makes an exempt purchase initially and keep that certificate on file. When subsequent exempt purchases are made, the invoice must be stamped with the words, "Exempt agricultural purposes" and the customer must sign the invoice.

(e) All medications, tonics, restoratives, or other therapeutic preparations for farm and ranch animals that are used exclusively on a farm or a ranch are exempt from sales and use tax. See subsection (d) of this section regarding exemption certificates.

(f) A farm or ranch is defined as one or more tracts of land used, either wholly or in part, in the production of crops, livestock, and/or other agricultural products held for sale in the regular course of business. This includes feed lots, dairy farms, poultry farms, commercial orchards, commercial nurseries, and similar commercial agricultural operations. Farm or ranch does not include home gardens or timber operations.

(g) The terms machinery or equipment include:

(1) expendable supplies, such as hand tools, baling wire and binders twine;

(2) lubricants for farm machinery and for motor vehicles not licensed for highway use;

(3) nuts, bolts, washers, and other hardware. It also includes materials used on or in buildings, structures, or structural components that are classified as machinery or equipment;

(4) repair or replacement parts used exclusively on farm or ranch machinery or equipment. This includes tractor tires, tires used on motor vehicles not licensed for highway use, and tires specifically designated by the manufacturer for farm use or off-highway use only;

(5) machinery and equipment used exclusively to maintain equipment that qualifies for exemption under this section;

(6) those items specifically designed to be assembled into a machine, such as parts of a pumping system or portable irrigation systems;

(7) tangible personal property sold for use as a component of an underground irrigation system;

(8) fenceposts, cattleguards, gates, and chutes. However, fenceposts, gates and cattleguards used to enclose private driveways, home lawns, gardens, pools, etc., do not qualify for exemption from tax. These items purchased by persons operating commercial nurseries and greenhouses and similar commercial operations for the purpose of preventing trespassing by the public do not qualify for exemption from tax; and

(9) the following items and the materials used to build, construct, or fabricate these items (these items are classified as equipment and are therefore exempt), provided they meet the qualifications set out in this section and have not been previously excluded:

(A) fences, pens, gates, cattleguards, and chutes used in connection with raising livestock or production of agricultural products;

(B) storage facilities specifically designed for and that can be used only to store bulk fungible commodities regardless of whether the facilities are of a portable or fixed nature. Typical facilities on farms or ranches include petroleum products storage tanks, grain storage bins, refrigerated storage structures for unprocessed fruit, silos, and vehicle-mounted fertilizer spreaders or feed mills (not licensed for highway use). General purpose facilities that are used to store bulk fungible commodities, farm produce or equipment do not qualify for exemption from tax. Only those facilities that cannot be used for any purpose other than the storage of fungible goods qualify as farm equipment;

(C) a building or structure that is essentially an item of equipment or machinery necessary for agricultural production if it is specifically designed for such use and cannot be economically used for any other purpose. For example, automated laying houses, farrowing houses, and commercial greenhouses.

(h) Sales tax is due on the sale of computer hardware for use on farms and ranches unless specifically designed as a part of production equipment, such as a computer-operated feed mixing device. Computer software that is designed specifically to aid in the production, processing, packing, or marketing of agricultural products of the original producer qualifies for exemption. Computer software used for, but not limited to, household budgeting, payrolls, bookkeeping, educational, or recreational purposes is taxable.

(i) Buildings and structural components and/or the materials used to build, construct, or fabricate the following facilities are not exempt from the limited sales and use tax.

(1) Buildings include any structures or edifices enclosing a space within their walls, and usually covered by a roof, the purpose of which may be to provide storage, shelter, or housing, or to provide working, office, or sales space (for example, houses, offices, barns, storage facilities, warehouses, garages, and stores).

(2) Structural components include those parts of a building or machinery in, on, or adjacent to a building, relating to the operation or maintenance of the building (for example, air conditioning or heating systems). However, if the sole justification for installation is to meet humidity or temperature requirements essential for the operation of other machinery or the processing of plants, animals, or foodstuffs, the structural component is exempt.

(j) Ice used on agricultural products.

(1) Sales or use tax is not due on ice used to remove field heat from agricultural products.

(2) Sales or use tax is not due on bunker ice, top ice, or any ice placed on transportation facilities by growers. For example, ice used inside or outside crates of lettuce to cool the lettuce while being shipped is exempt.

(3) Sales or use tax is due on the subsequent icing after the initial icing for the purpose of preservation prior to sale except by the original producer, as that term is defined in subsection (b)(1) of this section.

(k) Sales or use tax is not due on ice exclusively used by commercial fishermen on commercial fishing boats in the storing of aquatic species, such as shrimp and other crustaceans, finfish, mollusks, and other similar creatures.

Source Note: The provisions of this §3.296 adopted to be effective January 1, 1976; amended to be effective May 17, 1978, 3 TexReg 1582; amended to be effective March 30, 1987, 12 TexReg 824; amended to be effective September 5, 1988, 13 TexReg 4134; amended to be effective December 28, 1993, 18 TexReg 9312; amended to be effective March 5, 1996, 21 TexReg 1584; amended to be effective December 6, 1996, 21 TexReg 11498.