PAULSON, JOHN (O) (2011)

Topic Code: F026 Farm Equipment (W)          Document Reference: 11300069

                                        Iowa Department of Inspections and Appeals

                                                  Administrative Hearings Division

                                          Wallace State Office Building, Third Floor

In the Matter of:                                                        )

)           DIA No. 11DORFC012

John Paulson,                                                            )           Rev. Docket No. 09-30-1-0272

)

v.                                                                                 )

)

Iowa Department of Revenue.                                  )           PROPOSED DECISION

)

This matter came on for a contested case hearing on August 3, 2011.  Assistant Attorney General Donald Stanley represented the Iowa Department of Revenue (the department).  The department’s exhibits A-C were admitted into the record.  The department called Jeff Aten as a witness.  The department filed a brief that was served on the date of the hearing.

Appellant John Paulson represented himself and testified at the hearing.  He also called John Devries as a witness.  Protester’s exhibit packet was admitted jointly into the record as exhibit 1.  I allowed Mr. Paulson to August 24, 2011, to file a response to the department’s brief.  He filed a brief by the deadline.

John Paulson purchased a farm outside of Council Bluffs in 2003.  The farm consists of 191 acres, of which 120 acres are tillable.  Mr. Paulson rented out the 120 tillable acres to Tim Boehm, who had been farming the land prior to Mr. Paulson’s purchase.  Mr. Paulson charged rent of $120.00 per acre.  (Protest; Paulson testimony).

In 2006, Mr. Paulson purchased a large used mower from Eppley Airfield in Omaha for $28,000.00.  The mower is described in the protest as a “triple gang commercial mower,” but was referenced in the hearing as a “brush hog mower.”  A brush hog mower is commonly used by farmers to maintain the areas around farmlands.  A brush hog mower can cut grass, weeds, bushes, and trees up to one inch in diameter.  Mr. Paulson did not pay sales tax on the purchase.  (Protest; Paulson, Devries testimony).

Mr. Paulson uses the brush hog mower to mow the non-tillable portion of the farm, including the circumference of the tillable farm, and the terraces that run through the tillable land.  Terraces are used to reduce erosion and soil run-off, as well as for other reasons.  These areas are mowed to reduce the movement of weeds to the tillable land, which, in turn, improves crop yield.  Mr. Paulson does not use the brush hog mower for routine mowing around his house – he has two standard mower for that purpose.  (Paulson, Devries testimony; Exhibit 1, NRCS Conservation Choices, ISU Stewards of our Streams).

Mr. Paulson has received financial benefits from mowing.  He receives incentive payments from the State for maintaining terraces and grassways behind his farm.  He testified that he cannot manage these areas without the mower.  Also, he amended his rental agreement with his tenant after purchasing the mower in 2006.  Mr. Paulson agreed to mow the terraces and areas around the farm so the tenant could concentrate on row farming.  Mr. Boehm agreed to pay an additional $40.00 per acre in rent due to Mr. Paulson’s agreement to take on the maintenance work.^[1]  (Paulson testimony; Exhibit 1, SWCD Contract).

In 2009, the department conducted an audit whether Mr. Paulson owed sales tax on his purchase of the mower.  On May 13, 2009, the department issued a notice of assessment stating that Mr. Paulson owed sales tax of $1,960.00, as well as penalty and interest.  Mr. Paulson filed a protest.  He claims that the mower was used in the development of his farm, even when he was renting the row crop operation.  He claims the purchase was exempt as farm machinery and equipment.  The department claims that the mower does not meet the exemption because it is not directly used in the production of agriculture.  (Exhibits A-C).

Iowa law provides for a tax of five percent on the sales of tangible personal property, consisting of goods, wares, or merchandise, sold at retail in the state to consumers or users, except as otherwise provided by law.^[2]  The statute also lists a number of exemptions.^[3]  The courts construe tax exemption statutes strictly, with all doubts resolved in favor of taxation.^[4]  A party seeking an exemption has the burden of proving entitlement.

Mr. Paulson claims the following exemption:

The sales price exclusive of services of farm machinery and equipment, including auxiliary attachments which improve the performance, safety, operation. or efficiency of the machinery and equipment and replacement parts, if the following conditions are met:

a. The farm machinery and equipment shall be directly and primarily used in production of agricultural products. . . .^[5]  (emphasis added).

The department cites the Iowa Supreme Court decision in Iowa Ag Construction Co., Inc. v. Iowa State Board of Tax Review, which is instructive on this issue.^[6]  In Iowa Ag, a hog confinement operator claimed that mowers should be exempt because they were used to cut grass and weeds around the buildings for rodent control.  The operator also used mowers as required by the Department of Natural Resources to maintain sewage lagoons. The court rejected that argument, holding that the mowers were not directly and primarily used in the production of agricultural products.  The court affirmed the agency’s finding that they were “one step removed” from being directly used in the production of livestock.

Mr. Paulson argued that this case is distinguishable because it involves crops rather than livestock.  However, I find the two cases to be comparable.  There was no dispute in Iowa Ag that mowing might indirectly improve livestock production, either by slowing the spread of disease or other means.  Similarly, there is no dispute that Mr. Paulson’s use of the brush hog mower might indirectly increase crop yield by reducing weeds and managing terraces.  Still, in both cases, the impact on the production of agricultural products is indirect.  Mr. Paulson is not using his mower directly in crop production, unlike other machinery such as tillers, planters, and combines.  As the court stated in Iowa Ag, Mr. Paulson’s use of his mower is one step removed from the production of crops.

Mr. Paulson also discussed how the brush hog mower was important to receive government payments for maintaining terraces and waterways.  This may be true, but the standard is not whether he is receiving revenue from the use of the machine, but whether the machine is directly involved in the production of agricultural products.  The protection and maintenance of terraces and waterways benefits Mr. Paulson and the general public in multiple ways, but these actions do not directly produce agricultural products.

Mr. Paulson submitted as an exhibit a guide that listed exempt and non-exempt equipment.  That guide listed brush hogs as “usually exempt.”  I can understand some confusion in light of some of the materials, but I must ultimately use the statute and the supreme court decisions interpreting the statutes as my guide.  The Iowa Ag decision considered a similar issue, and is controlling on the question presented during this appeal. The department’s assessment is consistent with the governing law.

ORDER

The department’s assessment dated May 13, 2009 is affirmed.  If Mr. Paulson has not paid the tax, he shall pay the tax listed on the assessment, along with the legally required interest and penalty.

Dated this 26^th day of September, 2011.

Jeffrey D. Farrell

Administrative Law Judge

515-281-6870

cc:       Donald Stanley   (by email)

            Connie Larson  (by email – acceptance of service requested)

            John Paulson  (certified mail, return receipt requested)