It happened again this week. A couple had inherited some rural land and they wanted to keep it, perhaps turn it into an agricultural business. Above all, they had lots of questions and wanted to understand the myriad of taxes and regulations that can baffle those outside of the agricultural world.
First of all, putting aside all politics, our government is generally very helpful with taxes and regulations regarding true agricultural producers (farmers and ranchers). I believe this is a well-intentioned effort to support the production of food and fiber. There are lower property taxes for agricultural land and Texas doesn’t charge sales tax for items used in agricultural production.
Let us pause right here to recognize that starting an agricultural business endeavor just to save on some taxes is unwise at best. The amount of effort, overhead costs, and risk involved in raising crops or livestock takes a tremendous understanding of environmental challenges, fluctuating markets, and incredible personal skill. In fact, one of the reasons I urge homeowners to raise a garden is just so that they may have a small appreciation of what farmers do!
Please don’t read the following and be penny wise and pound foolish.
To enjoy any tax benefits, you must have a bona-fide agricultural business. You can’t have a vegetable garden and be called a farmer. You cannot have two pretty cows in a field beside your home and call yourself a rancher. No, you have to be involved in the wonderful, difficult, and challenging work of producing food or fiber.
Starting with property taxes, each county appraisal district will have a set of guidelines for what constitutes agricultural production. My 10 by 20-foot vegetable garden doesn’t make me a farmer. In Angelina County, one has to have at least five acres of vegetable production to receive the open land appraisal designation that we often call the ‘agriculture land valuation’.
Likewise, that same five acres with a couple of cows on it won’t cut it for a commercial cattle operation. Look at the website of the Angelina County appraisal district (if that’s where your land is located), and you’ll find their minimum requirement is 20 acres if on native grass pasture. Of course, if your property is not located in Angelina County, you need to check their guidelines as they certainly can differ.
It is important to note that the open space provision is not an absolute exemption. If the land changes to a nonagricultural use, the owner must pay a rollback tax equal to the tax savings for the 5 most recent years (plus interest accrued from the dates that the taxes were due).
The provision saves taxes only for people who maintain their land’s open space status for more than five years. Nevertheless, this special treatment saves landowners more money in yearly tax savings than any other state or local agricultural tax exemption or provision.
Regarding sales tax, farmers and ranchers are exempt from state and local sales taxes for most agricultural inputs they buy as well as for the products they sell. The exemption covers practically all inputs used exclusively to produce agricultural goods.
While not a new tax law, as of January 1, 2012, agricultural businesses must obtain a Texas Agriculture and Timber Exemption Registration Number (“Ag/Timber Number”) from the state comptroller. The Texas Comptroller’s office has a form you can fill out to apply for an agricultural sales tax exemption for some items that are required for farm and ranch use. You may apply online at the comptroller’s website at www.GetReadyTexas.org.
On the back end, products sold by farms and ranches such as grain, milk, livestock, and produce are also tax exempt. In the state of Texas, food products like flour, sugar, raw meat, milk or produce are not taxable. Go to your favorite local grocer and buy nothing but raw ag products and see how much tax you pay!
Other tax benefits that ag producers are eligible for include motor vehicle sales and use taxes for vehicles specialized for agricultural production. Sales and excise taxes on fuel used on farms and ranches, and lastly some state franchise taxes are exempted.
Regarding regulations, the Texas Department of Agriculture will have a list of any and all regulations that agricultural producers must follow. With few exceptions, I find tremendous support for agriculture in the existing laws.
Go to the Texas Dept of Agriculture’s website and look under the ‘Regulatory Programs’ and you’ll discover that they verify commercial scales, regulate the raw eggs sold wholesale, and several other areas. Ultimately, that state department has a strong consumer protection program, which includes overseeing items like grocery store scales, egg quality, and nursery/floral plants.
Got more questions about a new venture? Schedule a visit with your local County Extension office. It would be prudent to understand the business of agriculture before you expend a number of resources.
