Changing audit regulation rules still up for debate

Farmers advised to understand law before claiming exemption

GRANT COUNTY — New tax exemptions on farm machinery will go into effect in July, but the language on an older, less clear rule is still being discussed.

State Bill 5663, signed into law by Gov. Christine Gregoire in May, made the regulations more clear as to what equipment qualifies for a tax incentive to use alternate methods to reduce field stubble other than burning.

To qualify for the sales and use tax exemption under the new regulation, a farmer must have more than 50 percent of his or her tillable acres in cereal grains, or field and turf grasses grown for seed production, and be located in a qualified county — one in which at least 15,000 acres are in the production of cereal grain.

Based on 2002 statistics, Adams and Grant counties qualify.

Exempted equipment includes no-till and minimum-till drills, sprayers, plows, chisels, discs, cultivators, harrows, mowers, swathers, power rakes, balers, bale handlers, shredders, transplanters and tractors over 250 horse power designed to pull conservation equipment on steep slopes and highly erodible lands. Labor and services for constructing hay sheds would also be exempted.

The measure takes effect July 1.

Chris Hesse, from the Moses Lake office of accounting firm LeMaster and Daniels, provided relevant legal and background information at several meetings led by Rep. Janea Holmquist beginning in April between the Department of Revenue and representatives of the Washington Association of Wheat Growers and the Washington Farm Bureau.

"I've been really pleased with the Department of Revenue's willingness to listen," Holmquist said. "We just need to stay the course and ensure the proper interpretation of the statute is realized."

Hesse echoed her sentiment, adding that the Department has been receptive to hearing about the various scenarios that could arise from the Certified Public Accountant, implement dealer, farm and wheat growing communities.

A follow-up meeting was held Thursday in Spokane to review the Bureau's revised exemption certificate and special notice providing information.

Hesse explained that two things are going on — continuing discussions with the state Department of Revenue regarding field burning and sales tax exemptions under the old law, and assisting the Department with regard to drafting the rules under the new law.

Regarding the old law, the Department of Revenue is unsure about several provisions in the law, including the definition of what types of crops qualify for sales tax exemptions. To qualify under the old law, equipment had to be used more than 50 percent of the time in the qualifying activity.

Hesse said that it remains unsettled whether that provision means equipment must be used more than 50 percent of the time each calendar year, or whether it means that the equipment must be used 50 percent of the time cumulatively, from the date of purchase and afterwards.

"The difference could be in our area, with diversified farming — you could have corn, wheat one year, potatoes in another," Hesse said, explaining that a piece of equipment could be used more for one activity in one year and another activity in another year. "We prefer it cumulatively. Otherwise, it could be just through your normal farming practices that you're going to accidentally fall under this 50 percent test."

The new law has no such time test. Hesse explained that the old law still must be defined because it went into effect March 2000, and the Department of Revenue is auditing to see whether people have complied with the purchase of equipment without sales tax regulations.

"That's why it's in dispute — it's for those people who have purchased equipment in the past who are now being audited," Hesse said. "For the future, it's an education issue. We want to make sure people understand what the rules are as to how all of that fits together."

Hesse said he is not certain how the dispute will be resolved.

"A big part of this is going to be this 50 percent time test, and I really don't know where that's going to end up," he said, noting that Holmquist has stated in the past that the law is unclear and the taxpayer should get the benefit of the doubt.

Holmquist said she and Sen. Mark Schoesler, R-Ritzville, recently composed a letter to the Department of Revenue requesting that they consider stepping back from the current audits, and move forward and ensure that the new law is very clear, user-friendly and the predicament does not resurface in the future.

While not certain what the chances are of having that happen, Holmquist said it seems the most practical, considering how many state resources have been used in interpreting the law.

The only potential issue Hesse sees with the new law is the definition of bale handler. If a bale handler loader attachment is used on a tractor, that does not mean the tractor itself is going to qualify for exemption unless it exceeds 250 horse power.

Another issue regarding whether a farmer's custom-hire income is subject to business and occupation (B&O) tax is still ongoing as the Department of Revenue presently concentrates on field burning tax exemptions, Hesse said.

He added that Grant County has been more affected by the field burning because it is an area for diversified crops, which will also mean the county is impacted with the B&O.

"There's a lot more tension involved because of the amount of time under the old law, and we'll need to be quite specific with regard to the new law about the number of acres," Hesse said, noting that farmers generally have good records to establish what has been planted on their crops because of filings with farm service agencies and crop insurance companies.

Hesse advised farmers to keep in contact with their state representatives and senator. Before claiming an exemption from something, they should also be certain they understand the regulations of the law.

"We hear stories of farmers who have been handed a sales tax exemption certificate and (told), 'Just sign this and you don't have to pay sales tax.'" Hesse said. Those people sign without reading the certificate and understanding what it is that they are signing. "People are finding themselves with fairly large tax bills as a result of not reading these documents."

Holmquist views the overall situation as a testimony to the political process working. When farmers were hit with audits after they believed they had signed certificates in good faith, they and other representatives of the industry like Hesse called her office.

"If you do get involved, you can make good, positive change," Holmquist said. "No matter what, coming out of this, we're going to be better off. It's going to pay off because it's going to have positive impacts for the future."