From Seed to Sale: Landmark Court Decision Broadens the Scope of Tax Exemptions for Farmers and Ranchers

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The law in Texas is simple. Governments cannot tax machinery and equipment used in the “production” of farm and ranch products. However, getting taxpayers and appraisal districts to agree on what constitutes “production” is not so simple.

With no legislative or court guidance, taxpayers were left to the mercy of appraisal districts and their chosen definition of “production.” Many appraisal districts defined “production” narrowly, allowing them to tax more machinery and equipment as opposed to a broad definition of “production.” However, a Texas appellate court has brought clarity to this issue by defining “production” broadly in favor of farmers and ranchers.

In PPF Gin & Warehouse v. Delta County Appraisal District, a taxpayer – who grows cotton – claimed it was entitled to an exemption on its cotton module trucks. These trucks are designed to load modules filled with cotton, remove them from the field, and transport them to the gin for processing. The taxpayer claimed a farm machinery tax exemption, asserting its vehicles were exempt from taxation because they were used for the production of cotton. The appraisal district denied the exemption request, claiming the vehicles were used to transport cotton, not produce it.

The taxpayer, represented by Brusniak Turner Fine, LLP, filed suit in district court and obtained summary judgment in its favor. On appeal, the court considered the issue of whether the cotton module trucks qualified for a tax exemption as “machinery or equipment items that are used in the production of farm…products.” After an exhaustive analysis, the court found the cotton module trucks qualified for the tax exemption.

A key determination by the court was the definition of “production,” as that term is used in the Texas Property Tax Code. The court initially noted two possible interpretations: a narrow definition (limited to the actual creation of the product, e.g. when the cotton bolls ripen on the plant) and a broad definition. The court found that “production” should be defined in the broad sense, explaining how:

“[P]roduction is the creation of farm products to the extent that they become available for use by others and create economic value. Using that definition, production of cotton would include every stage of production from the cultivation of the cotton plants to the point that the cotton on those plants become available for sale in form that is usable by others.”

This landmark decision is the first time a court of appeals addressed the definition of “production” under the farm and ranch machinery equipment exemption. The broad interpretation of what qualifies as “production” significantly improves the ability of farmers and ranchers in Texas to obtain an exemption for their means of production.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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