Is that transaction subject to sales or use tax?

This article was first published in Blood-Horse Magazine

In the United States more than 10,000 state and local jurisdictions impose sales and use taxes. The majority of the taxing jurisdictions are city, county, or other local governments, as only 45 states and the District of Columbia impose the taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a sales or use tax, although Alaska permits local jurisdictions to levy the taxes. Based on the number of taxing jurisdictions, sales and use taxes account for approximately 25% of total state and local tax collections.

Every taxing jurisdiction has its own set of laws related to sales and use taxes. When that fact is combined with the number of taxing jurisdictions, it comes as no surprise that sales and use taxes are riddled with complexities. This article focuses on making sense of those complexities in the context of buying and selling horses for racing and breeding, with emphasis on the states of California, Florida, Kentucky, and New York.

In the beginning

Understanding sales and use taxation of horse transactions begins with a general understanding of sales and use taxes. These taxes are imposed on a particular “transaction,” i.e., a transfer of a taxable product or service for a consideration. In particular, sales taxes apply to retail sales of tangible personal property, digital property, and some specifically enumerated services. Tangible personal property includes property that might be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. Because horses fall within this definition, sales of horses are taxable unless the transaction qualifies for a specific statutory exemption.

Jurisdictions that impose a sales tax also impose a complementary use tax, which is imposed on the storage, use, or other consumption of taxable property in a state if no sales tax was paid to that state when the property was purchased. Most states allow a credit against the use tax due for sales tax paid to another state at the time of purchase. Because horses might be purchased in one state and trained, boarded, or raced in other states, use tax is especially relevant in the equine industry. Unlike the sales tax, which the seller generally is required to collect from the purchaser and remit to the taxing authority, the use tax typically is the obligation of the purchaser.

All gross receipts derived from the retail sale of tangible personal property, other than sales for resale, are presumed taxable. However, states and localities often carve out exemptions from tax for certain types of transactions. In most circumstances, the seller must obtain and maintain in its records a properly completed exemption certificate from the purchaser as proof that the sale is exempt from tax. Examples of types of exempt transactions in various states include sales and purchases: (a) in interstate or foreign commerce; (b) of horses for breeding purposes; and (c) of racehorses. The following sections explore how these exemptions apply in California, Florida, Kentucky, and New York.

Interstate and foreign commerce

In all four states, sales in interstate and foreign commerce are exempt from tax. For this exemption to apply, the purchaser must take possession of the horse outside the taxing state. Buyers and sellers can take advantage of this exemption by structuring the transaction so that the seller is obligated, as a condition of the sale, to ship the horse by common carrier to the purchaser at a point outside the state. For example, if a seller in Kentucky makes physical delivery of a horse by common carrier to a purchaser in New York, the sale is exempt from Kentucky’s sales tax. However, New York’s use tax might apply to the transaction.

Horses purchased for breeding

California, Florida, Kentucky, and New York all offer preferential treatment to horses purchased for breeding purposes. The exemptions for sales of horses for breeding purposes are broader in Florida and Kentucky because the exemptions in California and New York are limited to racehorses purchased for the purpose of breeding. Additionally, California’s exemption does not apply to local taxes.

In California and Kentucky, the purchaser must intend to use the horse solely for breeding purposes to qualify for the exemption. Guidance issued by New York is conflicting as to whether the purchaser must intend to use the horse exclusively (i.e., 100%) or predominately (i.e., more than 50%) for breeding purposes. Florida law requires only that the horse be purchased for breeding purposes and does not mandate that this be the purchaser’s sole intent.

Sales of horses by the breeder also are exempt from tax in Florida. This exemption applies even if a horse is registered with a breeders or registry association prior to the sale and the sale takes place at a show or race meeting, as long as the sale is made within Florida by the original breeder.

Racehorses

New York offers the most favorable treatment when it comes to racehorses. In New York the purchase of a Thoroughbred or Standardbred racehorse is exempt from tax if the horse is: (1) registered with The Jockey Club, the United States Trotting Association, or the National Steeplechase and Hunt Association (or is no more than 24 months old and eligible to be registered with one of these associations), and (2) purchased with the intent of entering the horse in a racing event in which pari-mutuel wagering is authorized by law. Sales of racehorses are taxable in California, Florida, and Kentucky. However, Kentucky exempts the sale of horses less than 2 years old at the time of sale, provided the sale is made to a non-resident of Kentucky. A non-resident includes an individual who is not a resident of Kentucky, as well as a business that is not commercially domiciled in the Commonwealth.

Use tax considerations

Finally, because horses often are transported to multiple states for training, racing, or other purposes, special consideration should be paid to the use tax laws of each state. In some states, including California and Florida, property purchased and used outside of the state for a certain length of time might be exempt from use tax if subsequently brought into the state. For example, property used more than 90 days from the date of purchase to the date of entry into California is accepted as proof that the property was not purchased for use in California and, thus, is not subject to use tax in California. Likewise, under Florida law, property used in another state for six months or more before being imported into Florida is presumed not to have been purchased for use in Florida.

Kentucky and New York have equine-specific use tax exemptions. Kentucky exempts from tax the temporary use of horses in the state for purposes of racing, exhibiting, or performing. In New York, no use tax is due if a horse is purchased outside New York and brought into the state for the purpose of entering racing events or preparing for such events if the horse is not entered into racing events on more than five days in any one calendar year.

How this works in practice

The interplay between the sales and use tax laws of various states can be illustrated best by example. Suppose a California resident purchases a Thoroughbred yearling at an auction in Kentucky and takes delivery in Kentucky. Because the horse is less than 2 years old and the purchaser is a non-resident, no Kentucky sales tax is due on the transaction. However, if the horse is transported to Florida for training within six months of its purchase, a Florida use tax liability would arise. The purchaser could avoid Florida use tax by waiting six months or more before transporting the horse to Florida.

What if the California resident also has a farm in Kentucky where she spends more than half the year? Under these circumstances, Kentucky sales tax would apply to the purchase of the yearling because the purchaser does not qualify as a non-resident of Kentucky. If the horse is shipped to Florida for training within six months of purchase, the purchaser also is liable for Florida use tax. However, she can take a credit against the Florida use tax for the sales tax paid to Kentucky. Because Florida and Kentucky both impose tax at the rate of 6%, the credit for sales tax paid to Kentucky would fully offset the purchaser’s Florida use tax liability.

These are just a few examples of the impact of sales and use taxes on the equine industry. More complex scenarios arise when multiple parties, several states, and local taxes factor into the equation. Individuals and businesses engaged in the buying and selling of horses should consider sales and use taxes before entering into any transaction to avoid an unpleasant tax surprise down the road.