Tax Type
Retail Sales and Use Tax
Description
Horse breeding and training
Topic
Taxability of Persons and Transactions
Date Issued
07-29-1988
July 29, 1988
Re: § 58.1-1821 Application/Sales and Use Tax
Dear **********************
This will refer to your letter of January 17, 1988 to Senators ******** and *********** in which you address a recent sales and use tax audit of *********** Senators**********and furnished copies of your letter to the department, which I am considering as an appeal under the provisions of § 58.1-1821 of the Code of Virginia.
FACTS
******** (Taxpayer) is engaged as a breeder and trainer of race horses. A recent audit of the taxpayer produced an assessment for supplies used in the training and rehabilitation of race horses. The taxpayer contests portions of the assessment, contending that some supplies were used in the breeding of race horses for market.
DETERMINATION
§ 58.1-608.3 of the Code of Virginia provides an exemption from the sales and use tax for "tangible personal property, except for structural construction materials, necessary for use in agricultural production for market ...(and) agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production." Emphasis added
For purposes of this exemption, the department has consistently deemed the breeding and raising of horses for sale to constitute agricultural production for market. However, no exemption is available for persons who merely engage in the keeping or training of horses for others or who hold horses for racing, showing, or pleasure riding inasmuch as these individuals are clearly not engaged in agricultural production for market.
Further, the department has consistently interpreted the exemption as applying only to horses that are used exclusively in the breeding of horses for market or which are themselves bred and raised exclusively for market. This policy is set forth in Virginia Regulation 630-10-4.C (copy enclosed) and was previously included in § 1-4 of the 1969 and 1979 editions of the Virginia Retail Sales and Use Tax Regulations. For your information, I have enclosed a copy of a recent Illinois court opinion, which upheld the assessment of tax on horses not used exclusively for breeding purposes.
Under the department's longstanding policy, a farmer enjoys an exemption from the tax when he purchases a horse for use exclusively in breeding other horses for sale or resale. Similarly, feed and supplies for horses used exclusively in breeding are nontaxable. Feed and supplies for the horses produced through the breeding process are also exempt until such time that the horses are sold, placed into training for racing, or used for some other non-agricultural activity.
The exemption does not apply to horses that are used both for breeding purposes and for racing or showing. The exemption does apply, however, when a horse permanently retires from racing for use exclusively in breeding. The department will revise its assessment in the event that any such horses (or feed and supplies for the horses) were included in the audit.
Below I will address the other issues raised in the taxpayer's appeal:
Blacksmith Fees
The department has traditionally deemed such fees to represent charges for the labor of the blacksmith. As such, any such fees will be removed from the audit.
Veterinary Fees
A veterinarian is the provider of a professional service; as such, his fees are typically not subject to the tax. However, when a veterinarian goes beyond the rendition of a service and sells goods at retail, the tax does apply. The department's policy in this regard is set forth in Virginia Tax Bulletin 87-9. The department's auditor will review the fees in question in order to ensure compliance with the established policy.
Horses Transferred to Training Center
Breeding horses retain their exempt status when temporarily transferred to the ***********Training Center due to insufficient space on the taxpayer's farm, provided that they are not placed into training for racing or used in a non-agricultural manner. The department will revise its audit if the taxpayer can show that any horses transferred to the training center continued to be used exclusively for breeding purposes.
Boarding Fees
Charges for the boarding of horses or other animals are not subject to the sales and use tax. Any such charges included in the department's audit will be removed.
Building Materials
§ 58.1-608.3 of the Code of Virginia specifically excludes "structural construction materials" from the agricultural exemption. As such, materials used to construct sheds were properly included in the audit.
Photographs
Virginia Regulation 630-10-82 provides that the tax applies to sales of photographs. As the taxpayer has not demonstrated that the sales tax was paid on the purchase of photographs in other states, the use tax was properly applied to these items.
Equipment and Supplies
Generators, seeds and fertilizer, disinfectant, fly spray, and other equipment and supplies were taxed in part (using a percentage based on the number of horses not used exclusively for breeding purposes to the total number of horses held by the taxpayer). This percentage may decrease due to other revisions to the department's audit.
Further revisions will be in order if the taxpayer can demonstrate that any equipment or supplies taxed on a prorated basis in the audit were in fact completely utilized in connection with exempt breeding horses (example, articles purchased for a specific exempt horse or for exempt horses only).
Horses Purchased by Partnership
These transactions will be removed from the audit if the taxpayer can demonstrate that the horses were actually purchased by a partnership or if the horses were purchased for exclusive use in breeding horses for market.
Horses Maintained Outside of Virginia
The audit will be revised if the taxpayer can demonstrate that any horses included in the computation of the percentage of taxable usage were not present in Virginia during the audit period or were used exclusively for breeding purposes while in Virginia.
The department will revise its assessment in a manner consistent with this determination. Please contact us within the next thirty days if you would like to schedule a meeting to discuss this determination.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner