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Taxes are a part of life, and there are many different types of taxes to track when running a business. Taxes fall into three basic categories: taxes on income, property, and goods and services. Fortunately, agricultural operations often benefit from exemptions and deductions. This post will discuss tax exemptions available to Maryland farmers for business personal property tax, sales and use tax, and income tax deductions on certain conservation costs.
Quick Tax Primer
Property taxes generally include taxes on real property and personal property. Property taxes are an essential source of revenue for state and local governments in the U.S. Real property includes immovable property like land, homes, and buildings. Real property in Maryland is appraised at market value and taxed on assessed value. Therefore, both state and local real property taxes are applied to assessed value. Personal property is property that can be moved or touched, such as business equipment, machinery, inventory, furniture, and vehicles. There is no Maryland state tax on business personal property, but each county and/or municipality may set a personal property tax rate.
There are also a number of taxes for goods and services, such as sales tax, use tax, excise tax (per item tax for imports/exports), luxury tax (jewelry), and sin tax (cigarettes and alcohol). Sales tax is imposed on anything purchased as a retail transaction, is percentage-based, and determined by the price of the item being bought.
Income tax is, of course, the tax levied by federal and state governments on an individual’s earned wages and other income or business’ revenue.
Business Personal Property Tax
Most businesses formed, qualified, or registered to do business in Maryland are required to file a Business Personal Property Tax Return with the State Department of Assessments and Taxation (SDAT). This is because most businesses own, lease, or use personal property within Maryland.
The Business Personal Property unit is responsible for the valuation of taxable personal property owned by business entities throughout the state of Maryland. While several counties in Maryland do not levy a personal property tax), the majority of counties and several municipalities do levy a tax on the depreciated value of business personal property. The depreciation rate depends on the type of business and property reported, but typically is 10% annually down to a minimum of 25% of the original cost. Current tax rate tables are posted in the SDAT webpage.
State law, however, requires that certain types of personal property be fully exempt throughout Maryland from any assessment and taxation, including “the farming implements owned or leased by a farmer.“ MD TAX PROPERTY § 7-223. This is a broad category of personal property. According to a dictionary definition, “Implements” means any “tool, utensil, or other piece of equipment, especially as used for a particular purpose.”
Further, state law also exempts the following from personal property tax:
Farm trucks, tractors, trailers, other farm vehicles (MD TAX PROPERTY § 7-230)
Crops or the produce of any farmed land in the possession of the person operating the farm;
Fish in the possession of persons catching, salting, or packing the fish or in the possession of agents until sold;
Unaltered green coffee beans;
Poultry & Eggs (MD TAX PROPERTY § 7-219)
Other livestock (MD TAX PROPERTY § 7-224)
When completing the Annual Report and Business Personal Property Tax Filing that applies to the business, farmers should also complete and submit a Form SD-1 – Supplemental Detail to report exempt property, expensed property, and transfers in or out of Maryland. If you have any questions about how or whether to report a piece of farm business property, contact your local assessment office. Local Assessment Office Contacts - https://dat.maryland.gov/realproperty/Pages/Maryland-Assessment-Offices.aspx.
Sales & Use Tax - Exemptions for Agriculture
The Maryland sales and use tax rate stands at six percent, unless a specific exemption is provided (such as for sales of food intended for later consumption). Maryland's counties and municipalities do not levy general sales or use taxes.
The sales and use tax does not apply to sales, including rentals, to a farmer of farm equipment used to:
raise livestock and poultry,
prepare, irrigate or tend the soil, or
plant, service, harvest, store, clean, dry or transport seeds or crops.
Farm equipment that is used for traditional agricultural purposes is exempt from sales and use tax even if attached to real property. SDAT has a guidance publication that provides an extensive list of items eligible for the exemptions: Business tax tip #11 Sales and Use Tax Exemptions for Agriculture. This includes equipment for beekeeping, egg handling, milking, raising poultry, irrigation, feeding livestock, mowers, sprayers, storage tanks, etc. In addition, seeds (including plants and seedlings), fertilizer, lime, fungicide, herbicide and insecticide are also exempt when sold for agricultural purposes.
Other types of businesses can apply for tax-exempt status in the state and are issued a certificate and tax number that must be renewed annually. Farm businesses, however, do not need to apply or register with the Maryland Comptroller’s Office in order to claim agricultural sales tax exemptions. Instead, aA vendor may ask for a signed statement (such as the form in the image) to indicate that the customer is a farmer or that the purchases will be used only for agricultural purposes.
If a business pays sales & use tax for exempt items, it can request a refund from SDAT using Form SUT 205. Non-returnable copies of records supporting the refund request should accompany this form (invoices, resale certificates, canceled checks, etc.).
Sales & Use Tax - Exemptions for Production Activities
If a farmer is engaged in processing food for sale, there are exemptions available for purchases of capitalized equipment and consumables. These exemptions are explained in Business Tax Tip #9 - Sales and Use Tax Exemptions for Production Activities.
This exemption, however, generally does not apply to property used to process food for sale by grocery stores, bakeries, and other food retailers. However, there is a specific exemption for the sale of equipment to be used by a retail food vendor to manufacture or process bread or bakery goods for resale. To qualify for the exemption, the vendor must operate a “substantial grocery or market business” at the same location where the food is sold, and the taxable price of each piece of qualified equipment must be at least $2,000.
A grocery or market business is considered substantial if sales of grocery or market food items total at least 10 percent of all sales of food. When calculating if a business meets the 10 percent threshold for a substantial grocery or market business, you may not include sales of single servings, heated or prepared food or sales to be consumed on the premises.
Income Tax Deductions for Conservation Costs
Maryland allows farmers to deduct certain costs associated with buying and installing certain types of conservation equipment from their taxable income on individual and corporate tax returns. Md. Code, Tax-Gen. §10-402. The percent of cost available for deduction varies depending on the type of equipment, but can be up to 100% of the cost of purchase and installation for conservation tillage equipment, manure spreading equipment, and global positioning devices. Additionally, the equipment must have a useful life of at least four years and remain in the taxpayer’s possession for at least three years after the tax modification is made. Finally, farmers must fill out a certification form and submit it to their local soil conservation district along with signed and dated receipts to verify equipment eligibility. See Navigating Tax Issues When Leasing Farmland for more details on this topic.
Farmers and landowners who have further questions on agricultural tax exemptions or claiming deductions for conservation equipment and expenses should consult a tax preparer or certified accountant with specialized knowledge. For further reading on various tax issues, check out previous blog posts on Farm Income Tax Returns, Estate Tax, the Homestead Tax Credit, and Sales Tax.