Original Notice.

     Preproposal statement of inquiry was filed as WSR 02-11-123.

     Title of Rule: Amending WAC 458-20-209 Farming for hire and horticultural services ((performed for)) provided to farmers and 458-20-210 Sales of tangible personal property for farming--Sales of agricultural products by farmers; and repealing WAC 458-20-122 Sales of feed, seed, fertilizer, spray materials, and other tangible personal property for farm use.

     Purpose: To provide information about the tax-reporting responsibilities of farmers, persons doing business with farmers, persons providing horticultural services to farmers, and persons engaging in farming for hire.

     Statutory Authority for Adoption: RCW 82.32.300, 82.01.060(2), and 34.05.230.

     Statute Being Implemented: Provisions of chapters 82.04 RCW (B&O tax), 82.08 RCW (sales tax), 82.12 RCW (use tax), and 82.19 RCW (litter tax), as they relate to farmers and persons doing business with farmers.

     Summary: These rules provide tax-reporting information for farmers, persons doing business with farmers, persons providing horticultural services to farmers, and persons engaging in farming for hire.

     Reasons Supporting Proposal: These rules are being revised to incorporate recent legislative changes, to incorporate information contained in several excise tax advisories, and to consolidate information now provided in WAC 458-20-122 and 458-20-210 into a single rule (WAC 458-20-210).

     Name of Agency Personnel Responsible for Drafting: Mark Mullin, 1025 Union Avenue S.E., Suite #400, Olympia, WA, (360) 570-6112; Implementation: Alan R. Lynn, 1025 Union Avenue S.E., #400, Olympia, WA, (360) 570-6125; and Enforcement: Russell Brubaker, 1025 Union Avenue S.E., Suite #400, Olympia, WA, (360) 570-6131.

     Name of Proponent: Department of Revenue, governmental.

     Rule is not necessitated by federal law, federal or state court decision.

     Explanation of Rule, its Purpose, and Anticipated Effects: WAC 458-20-122 (Rule 122), 458-20-209 (Rule 209), and 458-20-210 (Rule 210) provide tax-reporting information for farmers, persons doing business with farmers, persons providing horticultural services to farmers, and persons engaging in farming for hire. Rule 122 explains the application of business and occupation (B&O) tax, retail sales, and use taxes to the sale and/or use of feed, seed, fertilizer, spray materials, and other tangible personal property for farm use. Rule 209 explains the application of B&O, retail sales, and use taxes to persons engaging in the business of farming for hire and persons who provide horticultural services to farmers. Rule 210 explains the B&O and retail sales tax applications to sales of agricultural products by farmers.

     The Department of Revenue (department) is proposing to incorporate the information provided in Rule 122 into Rule 210 and, as a result, Rule 122 would be repealed. Consolidating these two rules will provide the information to the public and department staff in a more efficient and user-friendly manner. The department is also proposing to incorporate information contained in several excise tax advisories into Rule 210. As a result, those advisories would be cancelled. Lastly, the department is proposing to incorporate a number of recent legislative changes affecting farmers and persons making sales to farmers into Rules 209 and 210. These changes include those provided in:

•	Chapter 118, Laws of 2001, modifying the definitions of "farmer" and "agricultural product" and extending the wholesaling B&O tax exemption provided by RCW 82.04.330 to farmers who grow, raise, or produce agricultural products owned by others (such as custom feed operations);
•	Chapter 17, Laws of 2001 2nd sp.s., providing retail sales and use tax exemptions for certain animal pharmaceuticals;
•	Chapter 25, Laws of 2001 2nd sp.s., providing a special B&O tax rate for persons engaging in the business of manufacturing dairy products and to persons who sell manufactured dairy products to purchasers who transport the goods out-of-state in the ordinary course of business, and providing sales and use tax exemptions for chicken bedding materials and propane or natural gas used exclusively to heat structures used exclusively to house chickens; and
•	Chapter 18, Laws of 2001 2nd sp.s., providing a sales and use tax exemption for dairy nutrient management equipment and facilities used exclusively to maintain a dairy management plan.

     Proposal Changes the Following Existing Rules: This proposal amends WAC 458-20-209 and 458-20-210 and repeals WAC 458-20-122 as explained above.

     No small business economic impact statement has been prepared under chapter 19.85 RCW. These rules do not impose any performance requirement or duty upon any business that results in additional business costs that is not already imposed by statute.

     RCW 34.05.328 does not apply to this rule adoption. These rules are interpretive rules as defined in RCW 34.05.328.

     Hearing Location: Capital Plaza Building, 4th Floor, Large Conference Room, 1025 Union Avenue S.E., Olympia, WA, on Tuesday, May 27, 2003, at 9:30 a.m.

     Assistance for Persons with Disabilities: Contact Sandy Davis no later than ten days before the hearing date, TTY 1-800-451-7985 or (360) 570-6175.

     Submit Written Comments to: Mark Mullin, Department of Revenue, P.O. Box 47467, Olympia, WA 98504-7467, fax (360) 664-0693, e-mail MarkM@dor.wa.gov, by May 27, 2003.

     Date of Intended Adoption: June 7, 2003.

April 23, 2003

Alan R. Lynn

Rules Coordinator

Legislation and Policy Division

OTS-6143.2

AMENDATORY SECTION(Amending WSR 94-07-050, filed 3/10/94, effective 4/10/94)

WAC 458-20-209   Farming for hire and horticultural services ((performed for)) provided to farmers.   (1) Introduction. ((This section provides tax reporting information for persons performing horticultural services for farmers. Persons providing horticultural services to persons other than farmers should refer to WAC 458-20-226. Farmers and persons making sales to farmers may also want to refer to the following sections of chapter 458-20 WAC:

     (a) WAC 458-20-122 (Sales of feed, seed, fertilizer, spray materials, and other tangible personal property for farm use);

     (b) WAC 458-20-210 (Sales of agricultural products by farmers); and

     (c) WAC 458-20-239 (Sales to nonresidents of farm machinery or implements).

     (2) Definitions. For the purposes of this section, the following definitions apply:

     (a) "Farmer" means any person engaged in the business of growing or producing, upon the person's own lands or upon the lands in which the person has a present right of possession, any agricultural product whatsoever for sale. "Farmer" does not include a person using such products as ingredients in a manufacturing process, or a person growing or producing such products for the person's own consumption. The term does not include a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard, slaughter or packing house. "Farmer" does not include any person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213.

     (b) "Agricultural product" means any product of plant cultivation or animal husbandry including, but not limited to a product of horticulture, grain cultivation, vermiculture, or viticulture. "Agricultural product" includes plantation Christmas trees, animals, birds, insects, or the substances obtained from such animals. RCW 82.04.213. On and after July 1, 1993, "agricultural product" includes products of "aquaculture" and animals that are "cultured aquatic products," as those terms are defined by RCW 15.85.020. Also effective July 1, 1993, "turf" was added to the definition of "agricultural product," and "animals intended to be pets" were specifically excluded. (See chapter 25, Laws of 1993 sp.s.)

     (c) "Horticultural services" include services related to the cultivation of vegetables, fruits, grains, field crops, ornamental floriculture, and nursery products. The term "horticultural services" includes, but is not limited to, the following:

     (i) Soil preparation services such as plowing or weed control before planting;

     (ii) Crop cultivation services such as planting, thinning, pruning, or spraying; and

     (iii) Crop harvesting services such as threshing grain, mowing and baling hay, or picking fruit.

     (3) Business and occupation tax. Persons performing horticultural services for farmers are generally subject to the service and other business activities B&O tax upon the gross proceeds. However, if the person providing horticultural services also sells tangible personal property for a separate and distinct charge, the charge made for the tangible personal property will be subject to either the wholesaling or retailing B&O tax, depending on the nature of the sale. Persons making sales of tangible personal property to farmers should refer to WAC 458-20-122 to determine whether the wholesaling or retailing tax applies, and under what circumstances retail sales tax must be collected.

     (a) A farmer who occasionally assists another farmer in planting or harvesting a crop is generally not considered to be engaged in the business of performing horticultural services. These activities are generally considered to be casual and incidental to the farming activity. For example, a farmer owning baling equipment which is used primarily for baling hay produced by the farmer, but who may occasionally accommodate neighboring farmers by baling small quantities of hay produced by them, is not considered to be in business with respect thereto.

     (b) The extent to which horticultural services are performed for others is determinative of whether or not they are considered taxable business activities. Persons who advertise or hold themselves out to the public as being available to perform farming for hire will be considered as being engaged in business. For example, a person who regularly engages in baling hay or threshing grain for others is engaged in business and taxable upon the gross proceeds derived therefrom, irrespective of the amount of such business or that this person also does some farming of his or her own land.

     (c) In cases where doubt exists in determining whether or not a person is engaged in the business of performing horticultural services, all pertinent information should be submitted to the department of revenue for a specific ruling.

     (4) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.

     (a) Purchases of machinery, machinery parts and repair, tools, and cleaning materials by persons performing horticultural services are subject to retail sales tax.

     (b) Persons taxable under the service and other business activities B&O tax classification are defined as consumers of anything they use in performing their services. (Refer to RCW 82.04.190.) As such, these persons are required to pay retail sales or use tax upon the purchase of all items used in performing the service, such as fertilizers, spray materials, and baling wire, which are not sold separate and apart from the service they perform.

     (5) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (a) John Doe is a wheat farmer owning threshing equipment which is generally used only for threshing his own wheat. Occasionally a neighbor's threshing equipment may break down and John will use his own equipment to assist the neighbor in completing the neighbor's wheat harvest. While John receives payment for providing the threshing assistance, this activity is considered to be a casual and isolated sale. John does not hold himself out as being in the business of performing farming (threshing) for hire. John Doe is not considered to be engaging in taxable business activities. The amounts John Doe receives for assisting in the harvest of his neighbors' wheat is not subject to tax.

     (b) X Spraying applies fertilizer to orchards owned by Farmer A. The sales invoice provided to Farmer A by X Spraying reflects a "lump sum" amount with no segregation of charges for the fertilizer and the application. When reporting its tax liability, X Spraying would report the total charge under the service B&O tax classification. X Spraying must also remit retail sales or use tax upon the purchase of the fertilizer. The entire amount charged by X Spraying is for horticultural services, and X Spraying is considered the consumer of the fertilizer.

     (c) Z Flying aerial sprays pesticides on crops owned by Farmer B. The sales invoice Z Flying provides to Farmer B segregates the charge for the pesticides and the charge for the application. When reporting its tax liability, Z Flying would report the charge for the application under the service B&O tax classification. The charge for the sale of the spray materials is subject to the wholesaling B&O tax, provided Z Flying obtains a resale certificate from Farmer B. (See WAC 458-20-122.) Z Flying's purchase of the pesticides is a purchase for resale and not subject to the retail sales tax.)) This rule explains the application of business and occupation (B&O), retail sales, and use taxes to persons engaging in the business of farming for hire and persons who provide horticultural services to farmers. Persons providing horticultural services to persons other than farmers should refer to WAC 458-20-226 for tax reporting information. Farmers and persons making sales to farmers may also want to refer to the following rules:

     (a) WAC 458-20-210 (Sales of tangible personal property for farming -- Sales of agricultural products by farmers);

     (b) WAC 458-20-222 (Veterinarians);

     (c) WAC 458-20-239 (Sales to nonresidents of farm machinery or implements, and related services); and

     (d) WAC 458-20-262 (Retail sales and use tax exemptions for agricultural employee housing).

     (2) Who is a farmer? A "farmer" is any person engaged in the business of growing, raising, or producing, upon the person's own lands or upon the lands in which the person has a present right of possession, any agricultural product to be sold. A "farmer" does not include a person growing, raising, or producing agricultural products for the person's own consumption; a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard, slaughterhouse, or packing house; or a person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213 and chapter 118, Laws of 2001.

     (3) What is an agricultural product? An "agricultural product" is any product of plant cultivation or animal husbandry including, but not limited to: A product of horticulture, grain cultivation, vermiculture, viticulture, or aquaculture as defined in RCW 15.85.020; plantation Christmas trees; short-rotation hardwoods as defined in RCW 84.33.035 (as of July 22, 2001); turf; or any animal, including, but not limited to, an animal that is a private sector cultured aquatic product as defined in RCW 15.85.020, a bird, an insect, or the substances obtained from such animals. An "agricultural product" does not include animals defined as pet animals under RCW 16.70.020. RCW 82.04.213 and chapter 118, Laws of 2001.

     (4) What are horticultural services provided to farmers? "Horticultural services provided to farmers" are activities related to the cultivation of plants, including vegetables, fruits, grains, field crops, ornamental floriculture, and nursery products. These activities include, but are not limited to: Soil preparation of land currently being used to raise plant crops, such as plowing, weed control, or stump removal before planting; cultivation activities such as planting, thinning, weeding, pruning, or spraying; and harvesting activities such as threshing grain or legumes, mowing and baling hay, or picking fruit.

     For example, XYZ Bulldozing Co. (XYZ) is hired to remove trees and stumps from a farmer's existing orchards in preparation for replanting. XYZ is providing a horticultural service to a farmer. However, if XYZ is hired to remove trees from a farmer's existing orchards in preparation for a housing development, XYZ is not providing a horticultural service to a farmer but is performing a land clearing activity subject to both retailing B&O and retail sales taxes. (Refer to WAC 458-20-172 for tax-reporting information regarding the clearing of land.)

     (5) Tax treatment of income received from farming for hire and/or performing horticultural services for farmers. Persons engaging in the business of farming for hire or providing horticultural services to farmers are generally subject to the service and other activities B&O tax upon the gross income of the business. If a person engaging in farming for hire or providing horticultural services to farmers also sells tangible personal property for a separate charge, the charge made for the tangible personal property is subject to either the wholesaling or retailing B&O tax depending on the nature of the sale. (See subsection (6) of this rule.) Persons selling tangible personal property to farmers should refer to WAC 458-20-210 to determine whether the wholesaling or retailing B&O tax applies, and under what circumstances retail sales tax must be collected.

     (a) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (i) X-Spraying is hired by farmers to apply fertilizer to their crops. The sales invoices provided to the farmers by X-Spraying reflects a lump sum amount with no segregation of charges for the fertilizer and the application. When reporting its tax liability, X-Spraying should report the total charge under the service and other activities B&O tax classification. In addition, X-Spraying is subject to retail sales or use tax on the purchase or use of the fertilizer. (See subsection (6)(a) of this rule for more information about the taxability of purchases at retail by persons in the business of farming for hire or providing horticultural services to farmers.)

     (ii) ABC Aviation Co. (ABC) is hired by farmers to spray pesticides on their crops. ABC segregates the charge for the pesticides and the charge for the application on its sales invoices. When reporting its tax liability, ABC should report the charge for the pesticide application under the service and other activities B&O tax classification. The charge for the sale of the spray materials is subject to the wholesaling B&O tax, provided ABC obtains a resale certificate from the farmers. (Refer to WAC 458-20-102 for information about resale certificates.) The purchases of pesticides by ABC are for resale and not subject to retail sales tax. (See subsection (6)(b) of this rule for more information about purchases for resale by persons in the business of farming for hire or providing horticultural services to farmers.)

     (b) What are the tax consequences for farmers who assist other farmers on an occasional basis? A farmer may occasionally assist another farmer in planting or harvesting a crop. In such cases, the farmer is not considered to be engaging in the business of farming for hire. However, persons who advertise or otherwise hold themselves out to the public as being available to perform farming for hire are considered to be engaging in the business of farming for hire, irrespective of the amount of business conducted or whether the person does some farming on his or her own land.

     (i) Example. The following example identifies a number of facts and then states a conclusion. This example should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     JD is a wheat farmer who owns a combine that he generally uses only for harvesting his own wheat crops. JD does not hold himself out as being in the business of farming for hire. Occasionally a neighbor's combine will break down, and JD uses his combine to assist the neighbor in completing the neighbor's wheat harvest. While JD does receive payment for providing occasional assistance to his neighbors, this income is not subject to B&O tax. JD is not considered to be engaging in the business of farming for hire.

     (ii) What should I do if I cannot determine whether I am engaging in the business of farming for hire? In cases where doubt exists in determining whether or not a person is engaged in the business of farming for hire, all relevant information should be submitted in writing to the department for a specific ruling. Inquiries, with all pertinent facts, should be addressed to:

     Taxpayer Information and Education

     Department of Revenue

     P.O. Box 47478

     Olympia, WA 98504-7478

     In addition, inquiries may be faxed to the department at 360-486-2159.

     (6) Taxability of property used in the business of farming for hire or providing horticultural services to farmers. Persons taxable under the service and other activities B&O tax classification are consumers of anything they use in performing their services. RCW 82.04.190. If the seller does not collect retail sales tax on a retail sale, the buyer is required to pay the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department, unless specifically exempt by law. The "Combined Excise Tax Return" does not have a separate line for reporting deferred sales tax. Consequently, deferred sales tax liability should be reported on the use tax line of the buyer's Combined Excise Tax Return. If a deferred sales tax or use tax liability is incurred by a farmer who is not required to obtain a tax registration endorsement from the department (see WAC 458-20-101), the farmer must report the tax on a "Consumer Use Tax Return" and remit the appropriate tax to the department. The tax return and payment are due on or before the twenty-fifth day of the month following the end of the month in which the tax accrued. Refer to WAC 458-20-178 for detailed information regarding use tax.

     The Consumer Use Tax Return can be obtained by calling the department's telephone information center at 1-800-647-7706. The return may also be obtained from the department's website at: http://dor.wa.gov.

     (a) Purchases at retail. Purchases of machinery, machinery parts and repair, tools, and cleaning materials by persons in the business of farming for hire or providing horticultural services to farmers are subject to retail sales tax unless specifically exempt. In addition, purchases by such persons of supplies like fertilizers, spray materials, and baler twine or wire are subject to sales tax if not resold separate and apart from the services performed.

     (b) Purchases for resale. If a person engaging in the business of farming for hire or providing horticultural services to farmers also sells tangible personal property for a separate and distinct charge, the purchase of such tangible personal property by that person is a purchase for resale, provided the buyer gives the seller a properly completed resale certificate and the property is not put to any intervening use. (Refer to WAC 458-20-102 for information about resale certificates.)

[Statutory Authority: RCW 82.32.300. 94-07-050, § 458-20-209, filed 3/10/94, effective 4/10/94; 83-08-026 (Order ET 83-1), § 458-20-209, filed 3/30/83; Order ET 70-3, § 458-20-209 (Rule 209), filed 5/29/70, effective 7/1/70.]

OTS-6144.2

AMENDATORY SECTION(Amending WSR 94-07-048, filed 3/10/94, effective 4/10/94)

WAC 458-20-210   Sales of tangible personal property for farming -- Sales of agricultural products by farmers.   (1) Introduction. ((This section explains the B&O and retail sales tax applications to sales of agricultural products by farmers. Farmers should refer to WAC 458-20-101 to determine whether they must obtain a tax registration endorsement or a temporary registration certificate with the department of revenue. Farmers and persons making sales to farmers may also want to refer to the following sections of chapter 458-20 WAC:

     (a) WAC 458-20-122 (Sales of feed, seed, fertilizer, spray materials, and other tangible personal property for farm use);

     (b) WAC 458-20-209 (Farming for hire and horticultural services performed for farmers); or

     (c) WAC 458-20-239 (Sales to nonresidents of farm machinery or implements).

     (2) Definitions. For the purposes of this section, the following definitions apply:

     (a) "Farmer" means any person engaged in the business of growing or producing, upon the person's own lands or upon the lands in which the person has a present right of possession, any agricultural product whatsoever for sale. "Farmer" does not include a person using such products as ingredients in a manufacturing process, or a person growing or producing such products for the person's own consumption. The term does not include a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard, slaughter or packing house. "Farmer" does not include any person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213.

     (b) "Agricultural product" means any product of plant cultivation or animal husbandry including, but not limited to a product of horticulture, grain cultivation, vermiculture, or viticulture. "Agricultural product" includes plantation Christmas trees, animals, birds, insects, or the substances obtained from such animals. RCW 82.04.213. On and after July 1, 1993, "agricultural products" includes products of "aquaculture" and animals that are "cultured aquatic products," as those terms are defined by RCW 15.85.020. Also effective July 1, 1993, "turf" was added to the definition of "agricultural product," and "animals intended to be pets" were specifically excluded. (See chapter 25, Laws of 1993 sp.s.)

     (3) Business and occupation tax. Farmers selling agricultural products which they have not produced upon their own land or upon land which they have a present right of possession are subject to the provisions of the business and occupation tax, whether these products are sold at wholesale or retail. The business and occupation (B&O) tax applies to all sales of nonagricultural products. The B&O tax also applies to sales by persons operating a stockyard, slaughter or packing house who sell animal products raised by them.

     (a) Wholesale sales. Farmers making wholesale sales of agricultural products produced by them upon land owned by them, or upon which they have a present right of possession, are not subject to the B&O tax. (See RCW 82.04.330.) However, this exemption does not apply to farmers who produce agricultural products for use in a manufacturing process, or who sell products at wholesale which they do not grow.

     (b) Retail sales. Retail sales of agricultural products by farmers producing the same are subject to the retailing B&O tax. Thus, tax is due by any farmer engaging in the following activities:

     (i) Conducting a roadside stand or a stand displaying agricultural products for sale at retail;

     (ii) Posting signs on the premises, or through other forms of advertising soliciting sales at retail;

     (iii) Operating a regular delivery route from which agricultural products are sold at retail from door to door; or

     (iv) Maintaining an established place of business for the purpose of making retail sales of agricultural products.

     (c) Specific B&O tax exemptions. There are specific B&O tax exemptions provided by statute for certain sales of agricultural products which do not otherwise qualify for exemption under RCW 82.04.330. The B&O tax does not apply to the following:

     (i) Amounts received for the sale of hatching eggs or poultry by farmers producing the same, when these products are for use in the production for sale of poultry or poultry products. RCW 82.04.410.

     (ii) Amounts received by hop growers or dealers for hops shipped outside the state of Washington for first use, even though the hops have been processed into extract, pellets, or powder in this state. RCW 82.04.337. However, the processor or warehouser of such products is not exempt on amounts charged for processing or warehousing such products.

     (4) Retail sales tax. Farmers required to obtain a tax registration endorsement must collect and remit retail sales tax upon any retail sale for which a specific retail sales tax exemption is not provided. Retail sales tax exemptions are available for the following sales of agricultural products:

     (a) Sales of food products for human consumption. This exemption also applies to sales of livestock sold for personal consumption as food. RCW 82.08.0293.

     (b) Sales of pollen. RCW 82.08.0277.

     (c) Sales of semen for use in the artificial insemination of livestock. RCW 82.08.0272.

     (d) Sales of poultry for use in the production for sale of poultry or poultry products. RCW 82.08.0267.

     (e) Sales of beef and/or dairy cattle for use by a farmer in producing an agricultural product. RCW 82.08.0259.

     (f) Sales of purebred livestock for breeding purposes where the animals are registered in a nationally recognized breeding association. RCW 82.08.0259. Sellers claiming such an exemption should refer to WAC 458-20-122 for a description of the exemption certificate which must be retained by the seller.

     (5) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.

     (6) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (a) BG Orchards produces apples at its own orchards. Most apples are sold at wholesale, but BG does operate a seasonal roadside fruit stand at which it sells apples at retail. The gross proceeds derived from the wholesale sale of apples is exempt from the business and occupation tax. However, the retailing B&O tax applies to the retail sales of apples, notwithstanding these sales qualify for the food product sales tax exemption.

     (b) AC, Inc. owns and operates a hatchery which produces poultry from eggs. The resulting poultry is then sold to egg producers. AC, Inc. is making retail sales of poultry. However, the gross proceeds received from these sales are exempt from both the retailing B&O and retail sales taxes under the provisions of RCW 82.04.410 and 82.08.0267, respectively.)) This rule explains the application of business and occupation (B&O), retail sales, and use taxes to the sale and/or use of feed, seed, fertilizer, spray materials, and other tangible personal property for farming. This rule also explains the application of B&O, retail sales, and litter taxes to the sale of agricultural products by farmers. Farmers should refer to WAC 458-20-101 to determine whether they must obtain a tax registration endorsement or a temporary registration certificate from the department of revenue (department).

     Farmers and persons making sales to farmers may also want to refer to the following rules for additional information:

     (a) WAC 458-20-209 (Farming for hire and horticultural services provided to farmers);

     (b) WAC 458-20-222 (Veterinarians);

     (c) WAC 458-20-239 (Sales to nonresidents of farm machinery or implements, and related services); and

     (d) WAC 458-20-262 (Retail sales and use tax exemptions for agricultural employee housing).

     (2) Who is a farmer? A "farmer" is any person engaged in the business of growing, raising, or producing, upon the person's own lands or upon the lands in which the person has a present right of possession, any agricultural product to be sold. A "farmer" does not include a person growing, raising, or producing agricultural products for the person's own consumption; a person selling any animal or substance obtained therefrom in connection with the person's business of operating a stockyard, slaughterhouse, or packing house; or a person in respect to the business of taking, cultivating, or raising timber. RCW 82.04.213 and chapter 118, Laws of 2001.

     (3) What is an agricultural product? An "agricultural product" is any product of plant cultivation or animal husbandry including, but not limited to: A product of horticulture, grain cultivation, vermiculture, viticulture, or aquaculture as defined in RCW 15.85.020; plantation Christmas trees; short-rotation hardwoods as defined in RCW 84.33.035 (as of July 22, 2001); turf; or any animal, including, but not limited to, an animal that is a private sector cultured aquatic product as defined in RCW 15.85.020, a bird, an insect, or the substances obtained from such animals. An "agricultural product" does not include animals defined under RCW 16.70.020 as "pet animals." RCW 82.04.213 and chapter 118, Laws of 2001.

     (4) Sales to farmers. Persons making sales of tangible personal property to farmers are generally subject to wholesaling or retailing B&O tax, as the case may be, on the gross proceeds of sales. Sales of some services performed for farmers, such as installing or repairing tangible personal property, are retail sales and subject to retailing B&O tax on the gross proceeds of such sales. Persons making retail sales must collect retail sales tax from the buyer, unless the sale is specifically exempt by law. Readers should refer to subsection (6) of this rule for information about specific sales tax exemptions available for sales to farmers.

     (a) Documenting wholesale sales. A seller must obtain a resale certificate from the buyer to document the wholesale nature of any transaction. (Refer to WAC 458-20-102 for detailed information about resale certificates.)

     (b) Buyer's responsibility when the seller does not collect retail sales tax on a retail sale. If the seller does not collect retail sales tax on a retail sale, the buyer must pay the retail sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department, unless the sale is specifically exempt by law. The "Combined Excise Tax Return" does not have a separate line for reporting deferred sales tax. Consequently, deferred sales tax liability should be reported on the use tax line of the buyer's Combined Excise Tax Return. If a deferred sales tax or use tax liability is incurred by a farmer who is not required to obtain a tax registration endorsement from the department (see WAC 458-20-101), the farmer must report the tax on a "Consumer Use Tax Return" and remit the appropriate tax to the department. The tax return and payment are due on or before the twenty-fifth day of the month following the end of the month in which the tax accrued. Refer to WAC 458-20-178 for detailed information regarding use tax.

     The Consumer Use Tax Return can be obtained by calling the department's telephone information center at 1-800-647-7706. The return may also be obtained from the department's website at: http://dor.wa.gov.

     (c) Feed, seed, seedlings, fertilizer, spray materials, and agents for enhanced pollination. Sales to farmers of feed, seed, seedlings, fertilizer, spray materials, and agents for enhanced pollination, including insects such as bees, to be used for the purpose of producing an agricultural product, whether for wholesale or retail sale, are wholesale sales.

     However, when these items are sold to consumers for purposes other than producing agricultural products for sale, the sales are retail sales. For example, sales of feed to riding clubs, racetrack operators, boarders, or similar persons who do not resell the feed at a specific charge are retail sales. Sales of feed for feeding pets or work animals, or for raising animals for the purpose of producing agricultural products for personal consumption are also retail sales. Sales of seed, fertilizer, and spray materials for use on lawns and gardens, or for any other personal use, are likewise retail sales.

     (i) What is feed? "Feed" is any substance used as food to sustain or improve animals, birds, fish, or insects, including whole and processed grains or mixtures thereof, hay and forages or meals made therefrom, mill feeds and feeding concentrates, stock salt, hay salt, bone meal, fish meal, cod liver oil, double purpose limestone grit, oyster shell, and other similar substances. Food additives that are given for their beneficial growth or weight effects are "feed."

     Hormones or similar products that do not make a direct nutritional or energy contribution to the body are not "feed," nor are products used as medicines.

     (ii) What is seed? "Seed" is the propagative portions of plants commonly used for seeding or planting whether true seed, bulbs, plants, seed-like fruits, seedlings, or tubers.

     (iii) What is fertilizer? "Fertilizer" is any substance containing one or more recognized plant nutrients and is used for its plant nutrient content and/or is designated for use in promoting plant growth. "Fertilizer" includes limes, gypsum, and manipulated animal and vegetable manures. There is no requirement that fertilizers be applied directly to the soil.

     (iv) What are spray materials? "Spray materials" are any substance or mixture of substances in liquid, powder, granular, dry flowable, or gaseous form, which is intended to prevent, destroy, control, repel, or mitigate any insect, rodent, nematode, mollusk, fungus, weed, and any other form of plant or animal life normally considered to be a pest. The term includes treated materials, such as grains, that are intended to destroy, control, or repel such pests. "Spray materials" also include substances that act as plant regulators, defoliants, desiccants, or spray adjuvants.

     (v) Examples. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (A) Sue grows vegetables for retail sale at a local market. Sue purchases fertilizers and spray materials that she applies to the vegetable plants. She also purchases feed for poultry that she raises to produce eggs for her personal consumption. Because the vegetables are an agricultural product produced for sale, retail sales tax does not apply to Sue's purchases of fertilizers and spray materials, provided she gives the seller a resale certificate. Retail sales tax does apply to her purchases of poultry feed, as the poultry are raised to produce eggs for Sue's personal consumption.

     (B) WG Vineyards (WG) grows grapes that it uses to manufacture wine for sale. WG purchases pesticides and fertilizers that are applied to its vineyards. WG may purchase these pesticides and fertilizers at wholesale, provided WG gives the seller a resale certificate.

     (C) Seed Co. contracts with farmers to raise seed. Seed Co. provides the seed and agrees to purchase the crop if it meets specified standards. The contracts provide that ownership of the crop is retained by Seed Co., and the risk of crop loss is borne by the farmers. The farmers are obligated to pay for the seed whether or not the crop meets the specified standard. The transfer of the possession of the seed to the farmers is a wholesale sale, provided Seed Co. obtains a resale certificate from the farmers.

     (d) Chemical sprays or washes. Sales of chemical sprays or washes, whether sold to farmers or other persons, for the purpose of post-harvest treatment of fruit for the prevention of scald, fungus, mold, or decay are wholesale sales.

     (e) Farming equipment. Sales to farmers of farming equipment such as machinery, machinery parts and repair, tools, and cleaning materials are retail sales and subject to retailing B&O and retail sales taxes, unless specifically exempt by law. Refer to subsections (4)(i) and (6) of this rule for information about sales tax exemptions available to farmers.

     (f) Packing materials and containers. Sales of packing materials and containers, or tangible personal property that will become part of a container, to a farmer who will sell the property to be contained therein are wholesale sales, provided the packing materials and containers are not put to intervening use by the farmer. Thus, sales to farmers of binder twine for binding bales of hay that will be sold or wrappers for fruit and vegetables to be sold are subject to wholesaling B&O tax. However, sales of packing materials and containers to a farmer who will use the items as a consumer are retail sales and subject to retailing B&O and retail sales taxes. Thus, sales of binder twine to a farmer for binding bales of hay that will be used to feed the farmer's livestock are retail sales.

     (g) Purchases for dual purposes. A buyer normally engaged in both consuming and reselling certain types of tangible personal property and not able to determine at the time of purchase whether the particular property purchased will be consumed or resold must purchase according to the general nature of his or her business. RCW 82.08.130. If the buyer principally consumes the articles in question, the buyer should not give a resale certificate for any part of the purchase. If the buyer principally resells the articles, the buyer may issue a resale certificate for the entire purchase. For the purposes of this subsection, the term "principally" means greater than fifty percent.

     If a buyer makes a purchase for dual purposes and does not give a resale certificate for any of the purchase and thereafter resells some of the articles purchased, the buyer may claim a "taxable amount for tax paid at source" deduction. Refer to WAC 458-20-102 for additional information regarding purchases for dual purposes and the "taxable amount for tax paid at source" deduction.

     (i) Potential deferred sales tax liability. If the buyer gives a resale certificate for all purchases and thereafter consumes some of the articles purchased, the buyer is liable for deferred sales tax and must remit the tax directly to the department. Refer to subsection (4)(b) of this rule and WAC 458-20-102 for more information regarding deferred sales tax.

     (ii) Example. A farmer purchases binder twine for binding bales of hay. Some of the hay will be sold and some will be used to feed the farmer's livestock. More than fifty percent of the binder twine is used for binding bales of hay that will be sold. Because the farmer principally uses the binder twine for binding bales of hay that will be sold, the farmer may issue a resale certificate to the seller for the entire purchase. The farmer is liable for deferred sales tax on the binder twine used for binding bales of hay that are used to feed the farmer's livestock and must remit the tax directly to the department.

     (h) "Fruit bin rentals" by fruit packers. Fruit packers often itemize their charges to farmers for various services related to the packing and storage of fruit. An example is a charge for the bins which the packer uses in the receiving, sorting, inspecting, and storing of fruit (commonly referred to as "bin rentals"). The packer delivers the bins to the grower, who fills them with fruit for eventual storage in the packer's warehouse. Charges by fruit packers to farmers for such bin rentals do not constitute the rental of tangible personal property to the farmer where the bins are under the control of the packer for use in the receiving, sorting, inspecting, and storing of fruit. These charges are income to the packer related to the receipt or storage of fruit. The packer, as the consumer of the bins, is subject to retail sales or use tax on the purchase or use of the bins. (Information regarding the taxability of fruit packing is contained in WAC 458-20-214.)

     (i) Machinery and equipment used directly in a manufacturing operation. Machinery and equipment used directly in a manufacturing operation by a manufacturer or processor for hire is exempt from sales or use tax provided that all requirements for the exemption are met. RCW 82.08.02565 and 82.12.02565. This exemption is commonly referred to as the M&E exemption. Farmers who use agricultural products that they have grown, raised, or produced as ingredients in a manufacturing process may be entitled to the M&E exemption on the acquisition of machinery and equipment used directly in their manufacturing operation. Refer to WAC 458-20-13601 for detailed information regarding the M&E exemption.

     See subsection (5)(b) of this rule for an example illustrating a farmer using agricultural products that the farmer has grown as an ingredient in a manufacturing process.

     (5) Sales by farmers. Farmers are not subject to B&O tax on wholesale sales of agricultural products. RCW 82.04.330. Farmers who manufacture products using agricultural products that they have grown, raised, or produced should refer to subsection (5)(b) of this rule for tax-reporting information.

     Farmers are subject to retailing B&O tax on retail sales of agricultural products and retailing or wholesaling B&O tax on sales of nonagricultural products, as the case may be, unless specifically exempt by law. Also, B&O tax applies to sales of agricultural products that the seller has not grown, raised, or produced upon the seller's own land or upon land in which the seller has a present right of possession, whether these products are sold at wholesale or retail. Likewise, B&O tax applies to sales of animals or substances derived from animals in connection with the business of operating a stockyard, slaughterhouse, or packing house. Farmers may be eligible to claim a small business B&O tax credit if the amount of B&O tax liability in a reporting period is under a certain amount. For detailed information about this credit, refer to WAC 458-20-104.

     (a) Litter tax. The gross proceeds of sales of certain products, including food for human or pet consumption, are subject to litter tax. RCW 82.19.020. Litter tax does not apply to sales of agricultural products that are exempt from B&O tax under RCW 82.04.330. RCW 82.19.050 and chapter 118, Laws of 2001. Thus, farmers are not subject to litter tax on wholesale sales of agricultural products but are liable for litter tax on the gross proceeds of retail sales of agricultural products that constitute food for human or pet consumption. Also, farmers that manufacture products for use and consumption within this state (e.g., a farmer who produces wine from grapes that the farmer has grown) may be liable for litter tax measured by the value of the products manufactured. For detailed information about the litter tax, refer to chapter 82.19 RCW and WAC 458-20-243.

     For example, RD Orchards (RD) grows apples at its orchards. Most apples are sold at wholesale, but RD operates a seasonal roadside fruit stand from which it makes retail sales of apples. The wholesale sales of apples are exempt from both B&O and litter taxes. The retail sales of apples are subject to retailing B&O and litter taxes but are exempt from sales tax because the apples are sold as a food product for human consumption. (See subsection (6)(d) of this rule for information about the retail sales tax exemption applicable to sales of food products for human consumption.)

     (b) Farmers using agricultural products in a manufacturing process. The B&O tax exemption provided by RCW 82.04.330 does not apply to any person selling manufactured substances or articles. Thus, farmers who manufacture products using agricultural products that they have grown, raised, or produced are subject to manufacturing B&O tax on the value of products manufactured. Farmers who sell their manufactured products at retail or wholesale in the state of Washington are also generally subject to the retailing or wholesaling B&O tax, as the case may be. In such cases, a multiple activities tax credit (MATC) may be available. For detailed information regarding the manufacturing B&O tax and the MATC, refer to WAC 458-20-136 and 458-20-19301, respectively.

     For example, WG Vineyards (WG) produces wine from grapes that it grows in its vineyards located within this state. WG makes wholesale sales of its wine to customers both within and outside of this state. WG is subject to manufacturing B&O tax on the value of the wine it produces. WG is also subject to wholesaling B&O tax on wholesale sales of wine delivered to buyers within this state, and WG is entitled to a multiple activities tax credit. In addition, WG is subject to litter tax on the value of wine sold within this state. (See subsection (5)(a) of this rule for information on the litter tax.)

     (i) Special B&O tax rate for manufacturing fresh fruits and vegetables. A special lower B&O tax rate is provided by RCW 82.04.260 to persons manufacturing fresh fruits or vegetables by canning, preserving, freezing, processing, or dehydrating. Thus, farmers and other persons manufacturing fresh fruits and vegetables using these processes should report their manufacturing activity under the manufacturing fresh fruits and vegetables B&O tax classification.

     Wholesale sales of fresh fruits or vegetables canned, preserved, frozen, processed, or dehydrated by the seller and sold to purchasers who transport the goods out of this state in the ordinary course of business are also subject to the lower B&O tax rate provided by RCW 82.04.260.

     (ii) Special B&O tax rate for manufacturing dairy products. Effective September 20, 2001, a special lower B&O tax rate is provided by RCW 82.04.260 to persons manufacturing dairy products that, as of that date, are identified in 21 CFR, chapter 1, parts 131, 133, and 135. These products include milk, buttermilk, cream, yogurt, cheese, and ice cream, and also include by-products from the manufacturing of dairy products such as whey and casein. Thus, farmers and other persons manufacturing qualifying dairy products should report their manufacturing activity under the manufacturing dairy products B&O tax classification. This special rate does not apply, however, when dairy products are used merely as an ingredient or component of a manufactured product that is not a dairy product (e.g., milk-based soups or pizza).

     The special B&O tax rate provided by RCW 82.04.260 also applies to persons selling manufactured dairy products to purchasers who transport the goods outside of this state in the ordinary course of business. Unlike the special B&O tax rate for certain wholesale sales of fresh fruits or vegetables (see subsection (5)(b)(i) of this rule), the special B&O tax rate for sales of qualifying dairy products does not require that the sales be made by the person who manufactured the dairy products nor that they be sales at wholesale.

     (c) Raising cattle for wholesale sale. Persons who raise cattle for wholesale sale are exempt from B&O tax under RCW 82.04.330 provided that the cattle are held for at least sixty days prior to the sale. Persons who purchase and hold cattle for fewer than sixty days before reselling the cattle are not considered to be engaging in the normal activities of growing, raising, or producing livestock for sale.

     For example, a feedlot operation purchases cattle and feeds them until they attain a good market condition. The cattle are then sold at wholesale. The feedlot operator is exempt from B&O tax on wholesale sales of cattle if the cattle are held for at least sixty days while they are prepared for market. However, the feedlot operator is subject to wholesaling B&O tax on wholesale sales of cattle held for fewer than sixty days prior to the sale.

     (d) B&O tax exemptions available to farmers. In addition to the exemption for wholesale sales of agricultural products, there are several other B&O tax exemptions available to farmers which are discussed in this subsection.

     (i) Growing, raising, or producing agricultural products owned by other persons. RCW 82.04.330 exempts amounts received by a farmer for growing, raising, or producing agricultural products owned by others, such as custom feed operations.

     For example, a farmer is engaged in the business of raising cattle owned by others (commonly referred to as "custom feeding"). After the cattle attain a good market condition, the owner then sells them. Amounts received by the farmer for custom feeding are exempt from B&O tax under RCW 82.04.330, provided that the cattle are held by the farmer for at least sixty days. Farmers are not considered to be engaging in the activity of raising cattle for sale unless the cattle are held for at least sixty days while the cattle are prepared for market. (See subsection (5)(c) of this rule.)

     (ii) Sales of hatching eggs or poultry. RCW 82.04.410 exempts amounts received for the sale of hatching eggs or poultry by farmers producing hatching eggs or poultry, when these agricultural products are for use in the production for sale of poultry or poultry products.

     (iii) Processed hops shipped outside Washington for first use. RCW 82.04.337 exempts amounts received by hop growers or dealers for hops shipped outside the state of Washington for first use, if those hops have been processed into extract, pellets, or powder in this state. However, the processor or warehouser of such products is not exempt on amounts charged for processing or warehousing such products.

     (e) B&O tax credit to encourage alternatives to field burning. Persons who qualify for a sales or use tax exemption under RCW 82.08.840 or 82.12.840 (machinery, equipment, or structures that reduce emissions from field burning) also qualify for a B&O tax credit. RCW 82.04.4459. The amount of the credit is equal to fifty percent of the amount of costs expended for constructing structures or acquiring machinery and equipment for which an exemption was taken under RCW 82.08.840 or 82.12.840. (See subsection (6)(l) of this rule for information about the sales and use tax exemptions provided by RCW 82.08.840 and 82.12.840.) No application is necessary for the credit. Persons taking the credit must keep records necessary for the department to verify eligibility for the credit. This credit is subject to the following limitations:

     (i) No credit may be taken in excess of the amount of B&O tax that would otherwise be due;

     (ii) Credit may not be carried over to subsequent calendar years;

     (iii) The credit must be claimed by the due date of the last tax return for the calendar year in which the payment is made;

     (iv) Any unused credit expires;

     (v) Refunds will not be given in place of credits;

     (vi) The credit may not be claimed for expenditures that occurred before March 22, 2000; and

     (vii) The credit expires on January 1, 2006.

     (6) Retail sales and use tax exemptions. This subsection provides information about a number of retail sales tax and corresponding use tax exemptions available to farmers and persons buying tangible personal property at retail from farmers. Some exemptions require the buyer to provide the seller with an exemption certificate. Readers should refer to subsection (7) of this rule for additional information regarding exemption certificates.

     This subsection contains a number of examples which illustrate these exemptions. The examples identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all of the facts and circumstances.

     (a) Pollen. Pollen is exempt from retail sales and use taxes. RCW 82.08.0277 and 82.12.0273.

     (b) Semen. Semen used in the artificial insemination of livestock is exempt from retail sales and use taxes. RCW 82.08.0272 and 82.12.0267.

     (c) Feed for livestock at public livestock markets. Feed to be consumed by livestock at a public livestock market is exempt from retail sales and use taxes. RCW 82.08.0296 and 82.12.0296.

     (d) Food products. Food products for human consumption are exempt from retail sales and use taxes. RCW 82.08.0293 and 82.12.0293. This exemption also applies to the sale and/or use of livestock for personal consumption as food. For detailed information about food products that qualify for this exemption, refer to WAC 458-20-244.

     (e) Auction sales of farm property. Retail sales and use taxes do not apply to tangible personal property, including household goods, which have been used in conducting a farm activity, if the property was purchased from a farmer at an auction sale held or conducted by an auctioneer upon a farm. RCW 82.08.0257 and 82.12.0258.

     (f) Poultry. Poultry used in the production for sale of poultry or poultry products is exempt from retail sales and use taxes. RCW 82.08.0267 and 82.12.0262.

     For example, a poultry hatchery produces poultry from eggs. The resulting poultry are sold to egg producers. These sales are exempt from retail sales taxes under RCW 82.08.0267. (They are also exempt from B&O tax. See subsection (5)(d)(ii) of this rule.)

     (g) Leases of irrigation equipment. Retail sales and use taxes do not apply to the lease or use of irrigation equipment, but only if:

     (i) The lessor purchased the irrigation equipment for the purpose of irrigating land controlled by the lessor;

     (ii) The lessor has paid retail sales or use tax upon the irrigation equipment;

     (iii) The irrigation equipment is attached to the land in whole or in part; and

     (iv) The irrigation equipment is leased to the lessee as an incidental part of the lease of the underlying land and is used solely on such land. RCW 82.08.0288 and 82.12.0283.

     (h) Beef and dairy cattle. Beef and dairy cattle to be used by a farmer in producing an agricultural product are exempt from retail sales and use taxes. RCW 82.08.0259 and 82.12.0261.

     For example, John operates a farm where he raises beef and dairy cattle for sale. He also raises other livestock for sale including hogs, sheep, and goats. All of John's sales of dairy and beef cattle for use on a farm are exempt from retail sales tax. However, John must collect retail sales tax on all retail sales of sheep, goats, and hogs unless the sales qualify for either the food products exemption described in subsection (6)(d) of this rule, or the exemption for sales of livestock for breeding purposes which is described immediately below.

     (i) Livestock for breeding purposes. The sale or use of livestock, as defined in RCW 16.36.005, for breeding purposes where the animals are registered in a nationally recognized breed association is exempt from retail sales and use taxes. RCW 82.08.0259 and 82.12.0261. This exemption is available only when the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department.

     For example, ABC Farms raises and sells quarter horses registered in the American Quarter Horse Association (AQHA). Quarter horses are generally recognized as a definite breed of horse, and the AQHA is a nationally recognized breed association. Therefore, ABC Farms is not required to collect sales tax on retail sales of quarter horses for breeding purposes, provided it receives a completed exemption certificate from the buyer.

     (j) Bedding materials for chickens. Retail sales and use taxes do not apply to materials used by farmers to accumulate and facilitate the removal of chicken manure provided that the farmer is raising chickens that are sold as agricultural products. RCW 82.08.920 and 82.12.920. The exemption became effective September 20, 2001, and is available only when the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department.

     (i) What are bedding materials? "Bedding materials" are wood shavings, straw, sawdust, shredded paper, and other similar materials.

     (ii) Example. Farmer raises chickens for use in producing eggs for sale. When the chickens are no longer useful for producing eggs, Farmer sells the chickens to food processors for soup and stew meat. Farmer purchases bedding materials used to accumulate and facilitate the removal of chicken manure. The purchases of bedding materials by Farmer are exempt from retail sales tax. The law merely requires that the chickens be sold as agricultural products. It is immaterial that Farmer primarily raises the chickens to produce eggs.

     (k) Propane or natural gas used to heat structures housing chickens. Retail sales and use taxes do not apply to propane or natural gas used by farmers to heat structures used to house chickens. The propane or natural gas must be used exclusively to heat the structures, and the structures must be used exclusively to house chickens that are sold as agricultural products. RCW 82.08.910 and 82.12.910. The exemption became effective September 20, 2001, and is available only when the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department.

     (i) What are "structures"? "Structures" are barns, sheds, and other similar buildings in which chickens are housed.

     (ii) Example. Farmer purchases natural gas that is used to heat structures housing chickens. The natural gas is used exclusively to heat the structures, and the structures are used exclusively to house chickens. The chickens are used to produce eggs. When the chickens are no longer useful for producing eggs, Farmer sells the chickens to food processors for soup and stew meat. The purchase of natural gas by Farmer is exempt from retail sales tax. The law merely requires that the chickens be sold as agricultural products. It is immaterial that Farmer primarily houses these chickens to produce eggs.

     (iii) Example. Farmer purchases natural gas that is used to heat structures used in the incubation of chicken eggs and structures used for washing, packing, and storing eggs. The natural gas used to heat these structures is not exempt from retail sales tax because the structures are not used exclusively to house chickens that are sold as agricultural products.

     (l) Machinery, equipment, and structures used to reduce emissions from field burning. RCW 82.08.840 and 82.12.840 provide a sales and use tax exemption for certain property used to reduce field burning of cereal grains and field and turf grass grown for seed, or to reduce air emissions resulting from such field burning. The retail sales tax exemption applies to sales of machinery and equipment, and to services rendered in respect to constructing structures, installing, constructing, repairing, cleaning, decorating, altering, or improving of structures or eligible machinery and equipment, and to sales of tangible personal property that becomes an ingredient or component of eligible structures or eligible machinery and equipment, if all of the requirements for the exemption listed below in this subsection are met. RCW 82.08.840. The use tax exemption applies to the use of machinery and equipment, and of tangible personal property that becomes an ingredient or component of eligible machinery and equipment, if all of the requirements for the exemption listed below in this subsection are met. RCW 82.12.840.

     These exemptions are available beginning March 22, 2000, and expire January 1, 2006. Persons taking an exemption must keep records necessary for the department to verify eligibility for the exemption. Persons who have taken an exemption and then discover that they do not meet the requirements for the exemption are subject to a deferred sales tax or use tax liability. (For additional information about deferred sales tax and use tax, refer to subsection (4)(b) of this rule.)

     (i) Majority use requirement. To qualify for an exemption, the machinery, equipment, or structure must be used more than half (50%) of the time:

     (A) For gathering, densifying, processing, handling, storing, transporting, or incorporating straw or straw-based products that results in a reduction in field burning of cereal grains and field and turf grass grown for seed; or

     (B) To decrease air emissions resulting from field burning of cereal grains and field and turf grass grown for seed.

     (ii) Exemption certificates. For the sales tax exemption, the buyer must provide the seller with an exemption certificate in a form and manner prescribed by the department.

     (iii) Examples. The following examples illustrate this exemption:

     (A) Farmer cultivates turf grass. Farmer purchases spray equipment. As an alternative to field burning, the fields in which the spray equipment is used must be sprayed five times instead of twice. The use of the spray equipment meets the requirement that the equipment be used more than half of the time to decrease air emissions resulting from field burning; therefore, the purchase of the spray equipment is exempt.

     (B) Farmer, who performs custom baling, purchases a new baler for use in baling hay and straw. The purchase of the baler is exempt if it will be used more than half of the time to bale straw, which results in a reduction in field burning.

     (C) Farmer purchases a new combine for use in harvesting wheat. In addition to cutting the stalks, separating the kernels from the chaff, and unloading the kernels, the combine also chops the residual chaff before discharging it onto the field. While the need for field burning may decrease because the smaller residue more readily decomposes, the purchase of the combine does not qualify for the exemption. The combine is not used more than half of the time to decrease air emissions from field burning.

     (m) Dairy nutrient management equipment and facilities. Sales to, or use by, eligible persons of tangible personal property that becomes an ingredient or component of dairy nutrient management equipment and facilities is exempt from retail sales and use taxes. Also, sales to eligible persons of services rendered in respect to operating, repairing, cleaning, altering, or improving dairy nutrient management equipment and facilities are exempt from retail sales tax. RCW 82.08.890 and 82.12.890. These exemptions became effective July 13, 2001, and apply to sales made, or tangible personal property used, after the dairy nutrient management plan is certified under chapter 90.64 RCW.

     (i) These exemptions are available only if all of the following requirements are met:

     (A) The equipment and facilities must be used exclusively for activities necessary to maintain a dairy nutrient management plan as required under chapter 90.64 RCW; and

     (B) The buyer provides the seller with an exemption certificate in a form and manner prescribed by the department which must be retained in the seller's files. The department will provide an exemption certificate to an eligible person upon application. A sample letter for use in applying for an exemption certificate can be obtained from the department as provided in subsection (7) of this rule.

     (ii) For purposes of this exemption, the following definitions apply:

     (A) "Eligible person" means a person licensed to produce milk under chapter 15.36 RCW who has a certified dairy nutrient management plan by December 31, 2003, as required by chapter 90.64 RCW.

     (B) "Dairy nutrient management equipment and facilities" means machinery, equipment, and structures used exclusively in the handling and treatment of dairy manure, such as aerators, agitators, alley scrapers, augers, dams, gutter cleaners, loaders, lagoons, pipes, pumps, separators, and tanks. The term also includes tangible personal property that becomes an ingredient or component of the equipment and facilities, including repair and replacement parts.

     (n) Animal pharmaceuticals. Certain animal pharmaceuticals are exempt from retail sales and use taxes when sold to, or used by, farmers or veterinarians. RCW 82.08.880 and 82.12.880. To qualify for the exemption, the animal pharmaceutical must be administered to an animal that is raised by a farmer for the purpose of producing an agricultural product for sale. Also, the animal pharmaceutical must be approved by the United States Department of Agriculture (USDA) or the United States Food and Drug Administration (FDA).

     This exemption became effective August 1, 2001, and is available only when the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department.

     (i) What is a "veterinarian"? A "veterinarian" means a person who is licensed to practice veterinary medicine, surgery, or dentistry under chapter 18.92 RCW.

     (ii) How can I determine whether the FDA or USDA has approved an animal pharmaceutical? The FDA and USDA have an established approval process set forth in federal regulations. The FDA maintains a list of all approved animal pharmaceuticals called the "Green Book." The USDA maintains a list of approved biotechnology products called the "Veterinary Biologics Product Catalogue." Pharmaceuticals that are not on either of these lists have not been approved and are not eligible for the exemption.

     (iii) Example. Dairy Farmer purchases sterilizing agents. The sterilizing agents are applied to the equipment and facilities where Dairy Farmer's cows are milked. Dairy Farmer also purchases teat dips, antiseptic udder washes, and salves that are not listed in either the FDA's Green Book of approved animal pharmaceuticals or the USDA's Veterinary Biologics Product Catalogue of approved biotechnology products. The purchases of sterilizing agents are not exempt as animal pharmaceuticals because the sterilizing agents are not administered to animals. The teat dips, antiseptic udder washes, and salves are likewise not exempt because they have not been approved by the FDA or USDA. This is the case even if these products are approved by the United States Environmental Protection Agency or any other governmental agency.

     (iv) What type of animal must the pharmaceutical be administered to? As noted above, the exemption is limited to the sale and/or use of animal pharmaceuticals administered to an animal that is raised by a farmer for the purpose of producing an agricultural product for sale. The conditions under which a farmer may purchase tax-exempt animal pharmaceuticals are similar to those under which a farmer may purchase feed at wholesale. Both types of purchases require that the particular product be sold to a farmer (or a veterinarian in the case of animal pharmaceuticals), and that the product be given or administered to an animal raised by a farmer for the purpose of producing an agricultural product for sale.

     (v) Examples of animals raised for the purpose of producing agricultural products for sale. The animal pharmaceutical exemption is available in the following nonexclusive list of examples because the animals are being raised for the purpose of producing an agricultural product for sale, presuming all other requirements for the exemption are met:

     (A) Horses, cattle, or other livestock raised by a farmer for sale;

     (B) Cattle raised by a farmer for the purpose of slaughtering, if the resulting products are sold;

     (C) Milk cows raised and/or used by a dairy farmer for the purpose of producing milk for sale;

     (D) Horses raised by a farmer for the purpose of producing foals for sale;

     (E) Sheep raised by a farmer for the purpose of producing wool for sale; and

     (F) "Private sector cultured aquatic products" as defined by RCW 15.85.020 (e.g., salmon, catfish, and mussels) raised by an aquatic farmer for the purpose of sale.

     (vi) Examples of animals that are not raised for the purpose of producing agricultural products for sale. The animal pharmaceutical exemption is not available in the following nonexclusive list of examples because the animals are not being raised for the purpose of producing an agricultural product for sale:

     (A) Cattle raised for the purpose of slaughtering if the resulting products are not produced for sale;

     (B) Sheep and other livestock raised as pets;

     (C) Dogs or cats, whether raised as pets or for sale. Dogs and cats are pet animals; therefore, they are not considered to be agricultural products. (See subsection (3) of this rule); and

     (D) Horses raised for the purpose of racing, showing, riding, and jumping. However, if at some time in the future the horses are no longer raised for racing, showing, riding, or jumping and are instead being raised by a farmer for the purpose of producing foals for sale, the exemption will apply if all other requirements for the exemption are met.

     (vii) Do products that are used to administer animal pharmaceuticals qualify for the exemption? Sales of products that are used to administer animal pharmaceuticals (e.g., syringes) do not qualify for the exemption, even if they are later used to administer a tax-exempt animal pharmaceutical. However, sales of tax-exempt animal pharmaceuticals contained in a product used to administer the animal pharmaceutical (e.g., a dose of a tax-exempt pharmaceutical contained in a syringe or cotton applicator) do qualify for the exemption.

     (7) Sales tax exemption certificates. As indicated in subsection (6) of this rule, certain sales of tangible personal property and retail services either to or by farmers are exempt from retail sales tax. Except as provided below, for those exemptions that require the buyer to provide the seller with an exemption certificate at the time of sale, farmers may use the department's "Farmers' Retail Sales Tax Exemption Certificate" or another certificate with substantially the same information as it relates to the claimed exemption. Sellers must retain a copy of the exemption certificate in their files. Without proper documentation, sellers are liable for payment of the retail sales tax on sales claimed as exempt.

     The Farmers' Retail Sales Tax Exemption Certificate cannot be used for the dairy nutrient management exemption discussed in subsection (6)(m) of this rule. However, as noted above, the department will provide eligible persons, upon application, with an exemption certificate for this exemption. The Farmers' Retail Sales Tax Exemption Certificate and a sample letter for use in applying for the Dairy Nutrient Management Exemption Certificate can be obtained by calling the department's taxpayer information center at 1-800-647-7706. These documents can also be downloaded from the department's website at http://dor.wa.gov/.

[Statutory Authority: RCW 82.32.300. 94-07-048, § 458-20-210, filed 3/10/94 effective 4/10/94; 86-21-085 (Order ET 86-18), § 458-20-210, filed 10/17/86; 86-07-005 (Order ET 86-3), § 458-20-210, filed 3/6/86; 83-08-026 (Order ET 83-1), § 458-20-210, filed 3/30/83. Statutory Authority: RCW 82.01.060(2) and 82.32.300. 78-07-045 (Order ET 78-4), § 458-20-210, filed 6/27/78; Order ET 70-3, § 458-20-210 (Rule 210), filed 5/29/70, effective 7/1/70.]

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