Search Category: Sales Tax

Purchases that Qualify for Production Exemption

Purchase Requirements

An item qualifies for the exemption if it meets all the following requirements:

  • Primarily used in the production process. (See Idaho Code section 63-3607A.)
  • Necessary or essential – can’t produce your goods without it
  • Tangible personal property – must not become real property
  • Allowable by law – not excluded from the production exemption by law or rule
  • Directly used during the production process – after the beginning, and before the end of the process
    • This begins at the processing site, when the operator first handles the raw materials used in production.
    • The process ends at the later of
      – When you place your product in storage, even temporarily, to be prepared for shipment, or
      – When your product is ready to be sold in its final form.
      – Note: Farming and ranching have different beginning and ending points for the production process

Special activities

If you qualify for the exemption, items used in some activities are exempt, even though they’re not directly used in production. These activities include:

Quality control

Quality control is a necessary step of the production process in some industries. Its purpose is to maintain specific product standards. Equipment and supplies are exempt if they’re integral and necessary to maintain specific product standards during a quality control function.

Research and development

Equipment and materials are exempt if they are used more than 50% of the time in an activity that advances knowledge or capability in creating or producing tangible personal property. See Idaho Code section 63-3622RR.

Clean room environment in semiconductor manufacturing

Equipment and materials are exempt if you use them:

  • Exclusively in or to maintain the environment of a clean room, and
  • For research and development or production of semiconductors.

This includes fixtures or improvements to real property that become part of the clean room.

Pollution control

Equipment and materials used to meet air and water quality standards are exempt. The standards must be set by a state or federal agency that has authority to set and regulate them. For producers, the exemption includes tangible personal property that becomes real property used to meet air and water quality emission standards.

Clean-in-place systems

Equipment used in clean-in-place systems in the food processing and food manufacturing industries qualify for the production exemption. The exemption applies to systems that:

  • Have automated cleaning processes (i.e., no human intervention), and
  • Don’t need to be disassembled to clean the equipment.

Buy without paying tax

If you qualify for the production exemption, you can buy the following items without paying tax:

Raw materials

Raw materials that become an ingredient or component part of the product

Examples:

  • Metals bought by a metal fabricator
  • Logs bought by a lumber mill
  • Potatoes bought by a French fry producer
  • Feed bought by a cattle rancher
  • Elk and food bought to maintain an elk herd for hunting packages you sell and charge tax on

Chemicals and catalysts

Chemicals and catalysts that cause a physical change or are used to remove impurities from a product. They don’t become an ingredient or component part, but they qualify when they’re used directly and consumed in the production process.

Examples:

  • Chemicals used by a potato processor to remove impurities from the potatoes
  • Chemicals used to refine metallic ores
  • Chemicals used to strip oil and impurities from electronic parts
  • Chemicals used in a clean-in-place system in food processing/manufacturing
  • Gases used in welding to mold and join a product that’s being fabricated
  • Chemicals used in a research and development laboratory

Equipment that’s consumed

Equipment and supplies, including hand tools, that are consumed or used more than 50% of the time directly in the production process and are necessary to the process.

Examples:

  • A computer used to run manufacturing equipment
  • Equipment used to run or regulate machinery in the production process
  • Equipment and supplies used to perform a necessary quality control step to meet product standards
  • Equipment and chemicals used in clean-in-place systems in the food processing and food manufacturing industries
  • Cranes and lifts used to install production equipment
  • Repair parts, lubricants, hydraulic oil, and coolants that become part of production equipment
  • Fuel used in production equipment during the production process (e.g., diesel, gasoline, propane)
  • Equipment, supplies, and fixtures used in a semiconductor clean room environment

Safety equipment that’s required

Safety equipment and supplies required by a state or federal agency and used in a production area, such as:

  • Hard hats
  • Protective clothing
  • Gloves
  • Fire extinguishers used for the safety of your workers
  • A first aid kit stored and used in the production area

Taxable Items – Production

Even if you qualify for the production exemption, the following items are taxable:

Used in nonproduction activities

Equipment and supplies used in nonproduction activities are taxable.

Examples:

  • Maintenance and janitorial activities
  • Office and administrative activities
  • Selling and distribution activities
  • Transportation activities, such as:
    • Moving property over roads, highways, canals, rivers, rail lines, through pipelines or slurry lines, or on aircraft
    • Moving goods, including partially completed goods, from one exempt processing location to a separate location that’s part of the continuous exempt processing activity
    • Moving raw materials, except farm produce, from the point of origin to where the production process begins

Licensed motor vehicles and aircraft

Used to make repairs

Machinery, equipment, tools, and other property used to make repairs is taxable.

Tangible personal property

Tangible personal property that becomes part of real property is taxable.

Examples:

  • Equipment used more than 50% of the time to improve real property
  • Materials that become part of real property

Recreation-related vehicles

Examples:

  • Snowmobiles
  • Off-highway motorbikes
  • Motorcycles
  • All-terrain vehicles (ATV’s)
  • Motor homes
  • Travel trailers
  • Park model recreational vehicles
  • Truck campers
  • Camping trailers

Used to make items that you won’t sell

Machinery, equipment, tools, or other property used to make items that you won’t sell is taxable.

Coatings or paint

Coatings or paint used to protect and maintain equipment, including production equipment is taxable.

Safety equipment

Safety equipment and supplies that aren’t used in a production area are taxable.

Examples:

  • First aid kit in the office
  • Fire extinguisher in the shipping area
  • Jacket or gloves used in a production area to keep an employee warm, but not required by OSHA

Change Use of Exempt Item – Production

If you change the use of an item

If you buy an item exempt to use in a production activity, it becomes taxable if you stop using it in a production activity. You must then pay tax on the fair market value of the item.

Note: The opposite isn’t true. If you pay tax on an item because you use it in a nonproduction activity, you can’t claim a tax credit if you begin to use it in a production activity.

Buyer’s Responsibility – Production

Buyer’s responsibility when making exempt purchases

You must keep records of all your purchases, and show whether you paid tax on them.

  • Records must show what you bought, how much you paid for the goods, and how much tax you paid.
  • Your accounting records must include the standard books and records maintained in a business.
  • Keep all your records for at least four years.

Use tax

When you buy, use, or store taxable goods in Idaho, but didn’t pay sales tax when you bought them, you owe use tax.

Use tax is often due when:

  • You buy goods from an internet retailer that doesn’t collect tax
  • You buy a taxable item from a seller who didn’t charge sales tax because the seller has your exemption certificate on file
  • You buy an item in a state that doesn’t have sales tax, then bring the item to Idaho
  • You change how you use an exempt item (See If you change the primary use of an item.)

Learn more about use tax on our Use Tax page.

Exemption Certificates – Production

To buy an item exempt from sales tax, give the seller a completed exemption certificate.

ST-101, Idaho Resale or Exemption Certificate

pdf Form ST-101 – Sales Tax Resale or Exemption Certificate

Fill in the form:

  1. Write the name and address of both the seller and your business at the top.
  2. In section 2 “Producer Exemptions,” check the box for the producer exemption(s) you qualify for.
  3. List any products you produce on the line at the bottom of section 2.
  4. Under “Buyer,” at the bottom of the page, sign the form. Fill in the rest of the fields (name, title, EIN or driver’s license information, and date).

Optional short version of ST-101

  • Retailers can print or stamp a short version of the ST-101 on sales invoices, or
  • Purchasers can print the short version on their purchase orders.
  • This shorter version must be completed for each sale. The wording must be:

I certify that the property I’ve purchased will be used by me directly and primarily in the process of producing tangible personal property by mining, manufacturing, processing, fabricating, or farming, or as a repair part for equipment used primarily as described above. This tax exemption qualifies if this statement is signed by the buyer and the name, address, and nature of the buyer’s business are shown on the invoice. Any person who signs this certification with the intention of evading payment of tax is guilty of a misdemeanor.

[Indicate spaces for NATURE OF BUSINESS and SIGNATURE OF BUYER]

Multijurisdictional

If you buy from out-of-state businesses that are registered Idaho retailers, you can complete the Uniform Sales and Use Tax Certificate – Multijurisdiction instead of Form ST-101. Fill in the form:

  1. Write the name and address of both the seller and your business at the top.
  2. Check the box for “Manufacturer.”
  3. Write your Idaho sellers permit number in the ID section.
  4. Sign and fill in the bottom of the form.

Remember: Even if you buy from a seller who has your exemption certificate, not everything is exempt.

  • Some items are always taxable.
  • Some items are taxable if they’re not used in qualifying activities.

Sales by or to Producers

Selling the goods you produce

  • If you sell the goods you produce to a retailer, don’t charge sales tax if the retailer gives you a completed exemption certificate (e.g., ST-101).
  • If you sell your goods at retail to the final consumer, you must charge tax. The only exceptions are if:
    • The item is never taxed in Idaho, or
    • The buyer gives you a completed exemption certificate.

Seller’s responsibility to document sales

If you’re selling to producers with an exemption certificate, you must keep complete records to document all exempt and taxable sales. If you have a complete and accurate certificate on file, don’t collect sales tax on purchases that qualify for the claimed exemption.

Note: Not everything is exempt for producers. You must charge tax on items that aren’t exempt from sales tax. Read more on making sales in our Retailers guide.

Laws and Rules for Production Exemption

Learn more about production exemptions:

Learn more about Idaho tax statutes 

Learn more about our Rules 

Farms and Ranches That Qualify for Production Exemption

Businesses that qualify for the exemption

To be eligible for the production exemption, your business must:

  • Be actively producing in a qualifying farming or ranching activity. This includes:
    • Raising stock, poultry, or fish
    • Growing crops
    • Operating a dairy
    • Raising animals for fur
    • Operating a fruit farm, truck farm, or orchard
    • Operating a ranch or range
  • Be primarily devoted to farming or ranching. One way many businesses satisfy this requirement is that they devote the majority of their business operations to qualifying farming or ranching activities. Example: Spending more than 50% of the business’s working time and activities producing farm and ranch goods for sale.
  • Own the goods you produce
  • Sell the goods you produce. Either your business or someone else must sell your goods at retail.
  • Report your business’ profit or loss on an income tax return.

OR

  • Be a custom farming or ranching operation. Your business performs a qualifying farming or ranching activity for a farmer or rancher and receives money or other compensation for the work. Examples:
    • Harvesting
    • Spraying fields
    • Planting
    • Branding livestock
    • Shearing sheep
    • Breeding livestock
  • The exemption doesn’t include:
    • Improving real property
    • Clearing land

A custom farmer or rancher doesn’t have to own the goods that are produced or the land that is worked as long as the goods produced are sold.

Separately operated business segment

A separately operated business segment can also qualify. It can be a division, branch, or even a cost center. You must keep separate accounting records for the business segment to qualify as a separately operated business segment. This includes recording income, expenses, wages, and assets of the business segment separately. You must also have employees dedicated to operating the separate business segment.

Businesses that don’t qualify for the exemption

The farming and ranching exemption is only for businesses that devote the majority of their business operations to qualifying farming and ranching activities trying to make a profit. Operations that aren’t eligible for the exemption include:

  • Hobby farms or ranches
  • Farming or ranching for personal use of the goods raised
  • Businesses that only show or race horses
  • Businesses that only breed horses to race or show

Purchases that Qualify for Farming and Ranching Exemption

Purchase Requirements

An item qualifies for the exemption, if it meets all of the following requirements:

  • Primarily used in the farming or ranching process. This means it’s mostly used for farming or ranching. (See Idaho Code section 63-3607A.)
  • Reasonably necessary or essential – you can’t produce your goods without it.
  • Directly used or consumed in or during the farming or ranching process – includes any operation reasonably necessary to the total business:
    • The farming or ranching process begins when you perform an activity that’s reasonably necessary to your total business.
    • The process ends when you remove the product from initial storage, and it’s ready for transportation.
  • Tangible personal property – must not become real property
  • Allowable by law – must not be specifically excluded from the farming and ranching exemption

Examples of items that qualify:

Examples of items that don’t qualify:

Exempt Purchases — Farming and Ranching

The production exemption guide lists items that are exempt from tax. Qualifying farmers and ranchers can also buy the following items exempt:

Farm Implements

Examples:

  • Dry and liquid fertilizer spreaders, combines, discs
  • Harvesting and stacking equipment, swathers, harrows, hay balers
  • Pesticide applicators, plows, farm wagons

Agricultural irrigation – equipment and supplies

  • All irrigation equipment and supplies used directly for agricultural irrigation are exempt. This includes materials that are attached to real property:
    • Concrete for irrigation ditches
    • Well casings
  • Irrigation equipment and supplies don’t qualify if they’re:
    • Incidental or only indirectly related to the agricultural irrigation process
    • Used to install or maintain the irrigation system
    • Used on a golf course

The installer must use pdf Form ST-103C – Sales Tax Exemption Certificate – Real Property Contractors, to buy qualifying irrigation equipment and supplies exempt.

The equipment can be installed by either the farmer, the rancher, or the contractor.

Milking activities – equipment and supplies

Includes disinfectants used in clean-in-place systems

Seeds and plants for growing crops

Including seedlings and cuttings for orchard trees and grapevines

Fertilizers and pesticides

If used on crops

Feed and vaccines

For livestock

Farm produce beds

If easily removed from a licensed vehicle (e.g., spud beds)

Hand tools

If used directly and primarily in the farming or ranching process

Examples:

  • Shovels, pitchforks
  • Reusable syringes, emasculators
  • Branding irons, cattle prods
  • Ropes, whips

Note: Hand tools used in maintenance and repair activities are taxable.

Equipment for transporting produce

Equipment mounted on a licensed motor vehicle and used to move farm produce to initial storage can be purchased exempt from sales tax if:

  • It can be easily removed from the vehicle,
  • It’s separately stated on the vendor’s invoice, and
  • The buyer is a qualified farmer or rancher that gives the seller a completed exemption certificate.

Note: The licensed motor vehicle is taxable; only the equipment is exempt.

Taxable Items – Farming and Ranching

Even if you qualify for the production exemption, some items are taxable. Also, the following commonly-used items are taxable to farmers or ranchers:

Feed, supplies, and vaccines for:

  • Household pets
  • Livestock used for personal use or consumption
  • 4H or FFA projects

Real property improvement materials

Examples:

  • Concrete, rebar
  • Light fixtures (indoor or outdoor)
  • Shingles, barn lumber, granaries
  • Gates, fence posts, wire
  • Materials to construct large grain bins and silos

Farm produce beds

If permanently attached to licensed vehicles

Aircraft and supplies

Used in any activity

Equipment and supplies used to maintain roads

Including:

  • Road graders
  • Bulldozers

Trailers or vehicles

That require licensing for use on public roads

Shop equipment and supplies

Used to make repairs

Examples:

  • Hand tools
  • Power tools and compressors, including their accessories
  • Welders and cutting torches, including the gas you use to operate them
  • Solvents, cleaners, degreasers, shop rags
  • Paint, even if used for production equipment

Office, maintenance, or janitorial

Equipment and supplies

Marketing, promotional, sales, or distribution

Equipment and supplies

Equipment and supplies to analyze or model financial results