Sales of Racehorses Are Not Exempt Merely Because the Purchaser Uses the Horses' Manure to Fertilize Crops.

Friday, May 10th, 2013


The Indiana Department of Revenue has ruled that a taxpayer could not purchase racehorses exempt from tax, even though he used the horses' manure to help fertilize his crops. Ind. Ltr. of Findings No. 04-20120693 (Dept. of Revenue Feb. 27, 2013).

The taxpayer purchased horses at claiming races without paying sales tax. The taxpayer stabled the horses at his farm and entered them in races at Hoosier Park and Indiana Downs. When the Department of Revenue assessed tax on the taxpayer's purchases of the horses, the taxpayer argued his purchases of the horses were exempt. The taxpayer explained that he used the horses' manure to help fertilize his corn and soy crops, so he reasoned that he used the horses in producing food. Based on that reasoning, the taxpayer argued that his purchases of the horses were exempt sales of animals used in the production of food.

Indiana exempts sales of animals used directly in the direct production of food and food ingredients. Ind. Code sec. 6-2.5-5-1. In a letter of findings, the Department of Revenue explained that the sales in question did not meet this "double direct" test. To meet this test, property must have an immediate effect on the food produced. It must be an essential and integral part of an integrated process to produce the food. These horses were too far removed from the direct agricultural process. Were the horses draft animals, their sale would be exempt. As it was, the horses' use in agriculture was too indirect. The horses' purchase was therefore subject to tax.

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