Farmers in 38 states pay no sales tax when they buy new or used farm equipment.
California is not one of those states. And, more over, California is the only state that does not allow trade-in values to be deducted from the gross sales price of equipment. Farmers must pay taxes on the full purchase price.
That means a California producer would pay $7,500 in taxes on a $100,000 tractor. No one other U.S. farmers would pay that much tax. Most would pay no tax. There is little wonder there is a booming trade in Californians purchasing farm machinery and parts out of state.
A coalition of producers groups and the Far West Equipment Dealers Association is trying to change that with state legislation (Assembly Bill 7) sponsored this session by Merced assemblyman Dennis Cardoza.
Jeff Huckins, president of Woodland Tractor, Woodland, Calif., is spearheading the lobbying effort to repeal the sales tax for the equipment dealers association.
“I have been working for 10 years on this problem,” said Huckins. “There have been legislative attempts to deal with it through investment tax credits, but they went nowhere. Now, we are facing the problem head-on and asking for state sales tax repeal. The economic conditions of farmers today makes it imperative that we try to get relief through this unfair tax that only puts California farmers at an economic disadvantage with farmers in other states.”
Cardoza is the newly appointed chairman of the powerful Assembly Rule Committee and represents a strong advocate for getting this tax repealed. He is the former chairman of the Assembly ag committee.
“The current California tax structure puts our farmers at a disadvantage to those other states,” said Cardoza, the grandson of immigrants who began farming in Merced County 80 years ago. “I am proud to be joined by the men and women in agriculture in our shared effort to put an end to this unfair and unacceptable tax.”
Only state tax
Huckins emphasized that AB 7 repeals only the state sales tax (6 percent) and would not impact local taxes.
While this onerous tax has been in place for many years, its repeal has taken on added urgency because the California Board of Equalization has instituted a program to collect taxes on farm equipment purchased out of state.
Hoy F. Carmen, professor of agriculture and resource economics at the University of California, Davis, said an estimated $103 million in new and used farm equipment was purchased out of state by California producers in 1999.
This is almost 17 percent of the total new and used agricultural equipment purchased by California producers that year. This represents not only lost tax revenue, but also lost sales for local equipment dealers.
The board of equalization has obtained the warranty records of farmers from major farm equipment manufacturers like John Deere to collect sales tax on tractors purchased out of state. They did it under threat of legal action.
Obviously many farmers have long been aware that they can beat the California sales tax by purchasing from out of state. With more use of the Internet, this is likely increasing. Some manufacturers have ordered dealers outside of California to stop knowingly selling equipment to California producers.
However, Huckins, who set up a booth at the recent World Ag Expo in Tulare, Calif., to collect signatures on Stop The Tractor Tax petitions said many producers he talked to there were not aware producers in other states were not taxed like California growers.
“It was surprising to see how many were not aware the California tax code,” said Huckins.
And, then there were producers who told Huckins the stepped up auditing of the state board of equalization would be costly for them.
“One producer said he bought four new tractors a year out of state and $100,000 a year in parts. If he ordered them in quantities of $1,000 or more, freight was free. He was looking at a tax liability, including interest and penalties, of $100,000,” said Huckins.
Grower groups join
Joining with the equipment dealers association in supporting the repeal are grower groups representing grape and tree fruit producers; cotton growers; cattlemen; citrus farmers; dairymen; nurserymen and the fertilizer and pesticide industry.
“This is a broad based effort and we are hopeful we will finally get the state sales tax repealed,” said Huckins. “It is a significant economic issue for all segments of California agriculture.”
Only four states, California, Hawaii, Nevada and Washington tax new agricultural equipment at the same rate as sales tax for other items. However, Neither Nevada nor Washington has state income taxes.
Arizona does not tax new machinery, but it does levy full sales tax on used agricultural machinery and on ag machinery rentals.
As the only state that taxes the gross sales price and does not allowing trade-in values to be deducted, California producers paid double taxes on about $31 million in trade-in value in 1999. This costs California farmers about $2.25 million in “double taxation.”
California's sales tax treatment of other agricultural inputs is more in line with other states. Among the major non-durable agricultural inputs, California taxes only chemical sales. Exempt are feed, seed, plants (except perennials), fertilizers, livestock, drugs and medicines.