Board to Tax Out-of-State Farm Machine Purchases

By RONE TEMPEST

Nov. 27, 2000 12 AM PT

TIMES SACRAMENTO BUREAU CHIEF

SACRAMENTO —

Faced with tomato cannery bankruptcies, infestations of glassy-winged sharpshooters and slumping commodity prices, California farmers already had plenty to worry about.

Then the state Board of Equalization--spurred by farm equipment dealers in California--got on their case.

Beginning this month, farmers who bought tractors, combines and other heavy equipment from dealers outside California may be visited by “revenue opportunity specialists” from the Sacramento tax authority. They are part of a state pilot program to collect “use” fees that Californians who buy expensive goods in any other state technically owe to Sacramento.

And the technique used to track down the agricultural tax evaders--use of product warranty agreements to trace addresses--could conceivably apply in a wide variety of other cases. Those could range from builders who buy major construction equipment outside California to homeowners who buy appliances over the Internet.

A farmer or anyone else who purchases expensive equipment out of state is supposed to voluntarily pay a “use tax,” roughly equivalent to the state sales tax, when they bring it home. Adopted in 1935, the use tax was established to protect California businesses from competition in neighboring tax-free states.

It can add up to a lot of money. A new air-conditioned, four-wheel drive, articulated tractor can cost $120,000. A new computer-equipped combine or cotton picker can run $250,000. The sales tax on one of those cotton pickers can be from $18,000 to $21,000, depending on the local tax rate.

Use taxes, however, have been notoriously difficult to collect. Farm equipment not operated on public roads does not require vehicle registration. And there is no DMV to collect the tax for the state like there is with automobiles.

But pushed by the California-based Far West Equipment Dealers Assn., which represents 350 dealers in seven Western states--including some that offer tax-free competition to California--the Board of Equalization took the unprecedented step last summer of obtaining warranty records from two major U.S. manufacturers, Deere & Co., of Moline, Ill., and Case Equipment Corp. (now CNH), of Racine, Wis.

The tactic could have implications far beyond tractors and backhoes. With its broad subpoena powers, the Board of Equalization could decide to seek records on any product that carries a warranty, which is virtually everything with moving parts.

“We look at this as having some potential,” said Vic Anderson, a supervisor for special projects with the state tax board. “For anyone who buys a product, regardless of whether it is done through mail-order catalog, over the Internet or by telephone--that warranty could provide leads on tax liability.”

According to Board of Equalization documents, the idea for the farm equipment tax probe dates to 1996, when the Far West dealers association came before the board “seeking help in their fight against unfair, out-of-state competition.”

The equipment dealers, estimating the lost state revenue at $8 million a year, said out-of-state sales could be documented by the warranty information on machines brought into their dealerships for repairs or parts. Among other information, the warranty lists the name and address of the dealership that sold the equipment.

Prodded by the dealers, the tax board initially attacked the problem of unpaid fees with a publicity campaign informing farmers of their obligations under California law. The campaign had no discernible results. According to tax reports, in fiscal year 1997-98 only 1,373 individuals voluntarily paid use taxes totaling $7.8 million, about the same as in previous years. Only a small percentage of that was for farm equipment.

This year, authorities went to the nation’s two largest farm equipment manufacturers for their warranty records. How they got the records is unclear. Anderson, with the tax board in Sacramento, said the tax agents obtained the records directly from the manufacturer.

Ken Golden, public relations manager for Deere, said he can find no record of a request or subpoena from California officials.

“We are a decentralized company, so there could have been a request that I’m not finding through official channels,” Golden said. “There is the potential they got it through a dealers’ association in some way. It would not be normal for us to provide such information because we consider it confidential.”

The warranty records showed 1,200 individuals who bought equipment from out-of-state dealers in the tax years 1995-1998. On Nov. 9, the tax board sent the list of names to district offices to begin contacting farmers to demand receipts for the purchases and collect taxes and penalties if warranted.

California equipment dealers say their purpose in pushing the tax crackdown is to pressure the Legislature to exempt them from sales tax so they can compete evenly with dealers in tax-free states.

“We’ve never encouraged the Board of Equalization to go out on a mass investigation to audit every farmer in the state of California,” said Jeff Huckins, general manager and chief executive of Woodland Tractor & Equipment. “Our goal is to try and see if we can’t get the sales tax repealed somehow, some way.”

California is one of four states that still imposes full sales tax on new farm equipment.

John Gamper, a lobbyist for the California Farm Bureau Federation in Sacramento, said the tax operation amounts to hitting the state’s farmers when they are down.

“This could literally put farmers out of business when they are already teetering on the edge as it is,” he said.

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Taxes and Farm Equipment

Four states, including California, impose full state sales tax on new farm equipment:

California: 6%

Hawaii: 4%

Nevada: 6.5%

Washington: 6.5%

Eight states impose reduced sales tax:

Alabama: 1.5%

Florida: 3%

Mississippi: 1%-3%