Nebaska Explains Sales Tax Exemption for Agricultural Machinery and Equipment

Wednesday, July 18th, 2012


Nebraska's Department of Revenue (DOR) recently updated an information guide that explains the state's sales tax exemption for agricultural machinery and equipment. Neb. Info. Guide: Neb. Agricultural Mach. & Equip. Sales Tax Exemption (Dept. of Revenue July 2012).

This exemption does not extend to all equipment and supplies used by farmers; rather, Nebraska exempts only purchases and leases of depreciable agricultural machinery and equipment that is for direct use in commercial agriculture. See Neb. Rev. Stat. sec. 77-2704.36. In the updated information guide, the DOR explained the effects of the two critical, limiting elements of this exemption: (1) the items must be used in commercial agriculture, and (2) the items must be depreciable machinery or equipment.

According to the DOR, "[c]ommercial agriculture is the business of producing food products or other useful and valuable crops, or raising animal life," and it "includes commercial production in greenhouses, nurseries, tree farms, sod farms, and feedlots."

Depreciable agricultural machinery and equipment is not defined in Nebraska sales tax laws or regulations. However, in the updated information guide, the DOR explained that depreciable agricultural machinery and equipment is tangible personal property that (1) is used on a farm or ranch directly in (a) cultivating or harvesting a crop, (b) raising or caring for animal life, or (c) collecting or processing an agricultural product and (2) is depreciable, which means that it has a determinable life of longer than one year.

Because this exemption is limited to depreciable items, sales of repair and replacement parts for agriculture machinery and equipment are generally subject to tax. The DOR explained that taxable repair and replacement parts include items that would typically be found on a parts list for a given piece of machinery or equipment. Examples of repair parts include: antifreeze, batteries, spark plugs, and tires. However, the DOR explained that a purchaser may apply for a refund of the sales tax paid on repair and replacement parts for agricultural machinery and equipment that are depreciable. As a general rule, repair and replacement parts are depreciable if they will appreciably prolong the life of the property, arrest its deterioration, or increase its value or usefulness, and they are ordinarily capital expenditures for which a deduction is allowed only through the depreciation/cost recovery allowance.

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