Tax Considerations on Agricultural Businesses


It happened again this week. A couple had inherited some rural land and they wanted to keep it,
perhaps turn it into a agricultural business. Above all they had lots of questions and wanted to
understand the myriad of taxes and regulations that seem to baffle those outside of the agricultural

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 ag 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, markets, and incredible
personal skill. One of the reasons I urge homeowners to raise a garden is just so that they’ll have a small
appreciation of what farmers do!

Please don’t read the following and be penny wise and pound foolish.

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 and/or fiber.
Starting with property taxes, each county appraisal district will have a set of guidelines for what
constitutes agricultural production. My 20 by 10-foot vegetable garden doesn’t make me a farmer.

Currently one has to have at least five acres of vegetable production to receive the open land appraisal
designation that we often call the ag 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 7 percent 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

On the back end, products sold by farms and ranches such as grain, milk, livestock, and raw cotton for
further processing 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.

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 flexibility in the existing

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 as 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? Schedule a visit with your local County Extension office. It would be prudent to
understand the business of agriculture before you expend any amount of resources.

Cary Sims
Cary Sims is the County Extension Agent for agriculture and natural resources for Angelina County. His email address is Educational programs of the Texas AgriLife Extension Service are open to all people without regard to race, color, sex, disability, religion, age, or national origin.

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