Summary of a Recent
Judicial Development in
Estate Planning & Taxation

Property Used Directly in Production
Process Exempted From Taxation

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In Graham Creek Farms v. Indiana Department of State Revenue, No. 49T10-0007-TA-87, 2004 WL 3105682 (Ind. Tax 2004), the Indiana Tax Court affirmed in part, reversed in part, and remanded in part, a decision by the Indiana Department of State Revenue to deny a farm's claim for refund of sales and use tax paid for the years 1993 through 1995.

Background

Graham Creek Farms (Graham) was a farming partnership in Indiana that farmed 6,975 acres of land. See id. The Indiana Department of State Revenue (Department) audited Graham and determined that sales tax had not been paid on various items purchased by Graham and assessed back taxes totaling $9,945.82. See id. Graham paid the taxes and filed a claim for a refund, which was denied by the Department. See id. Consequently, Graham brought an action before the Indiana Tax Court. See id.

Analysis

Graham argued that the amount it paid should be refunded because the items purchased were exempt from sales and use taxes under Indiana law. See id. Under Indiana law, tangible personal property used in agricultural production is exempted from sales and use taxes. See id. The tax court explained that to be exempted, "the tangible personal property . . . must be integral and essential to . . . [the farm's] production process, a determination that is often made by identifying the points where production begins and where it ends." See id.

The court examined each of the items to which an exemption was claimed to determine whether the Department was correct in its findings of non-exempt status. See id. The items were rain slickers for employees; a replacement part for a backhoe; waste for turkey house bedding; labor and material expenses in constructing a tobacco barn; rat bait; paint, stone, and mineral spirits; fencing and gate supplies; a bush hog PTO shaft; shop supplies; and miscellaneous supplies, such as rope and tarps. See id. The court explained that the primary question was whether an item was used directly in the production process.

The court determined that the rain slickers were not used directly in the production process because turkeys could be loaded onto trucks without the use of rain slickers; they were merely a convenience. See id. Likewise, the court determined that the replacement part, rat bait, paint, stone, and mineral spirits, a portion of the PTO use, shop supplies, and certain portions of the miscellaneous items were not directly used in the production process. See id. Thus, the court held that these items were not exempted from taxation.

The court held that the waste used as turkey bedding, tobacco barn expenses, fencing and gate supplies, a portion of the PTO shaft, and certain miscellaneous items were directly used in the production process and therefore exempted from taxation. See id. The court remanded the matter so that the Department could refund the amount attributable to the exempted items.

The case was decided on December 13, 2004; this summary was posted Mar. 24, 2005.