Straw that cows eat is exempt from sales and use taxes in South Dakota. But straw that cows lie on isn't.
That's one reading of tax laws that is tripping up South Dakota dairies.
The South Department of Revenue and Regulation reportedly recently sent the 100 biggest dairies in the state letters that they were going to be audited. Auditors can go back through the previous 5-6 years.
After one such audit, the departments assessed a dairy more than $60,000 in back taxes, interest and penalties.
State tax officials and members of the South Dakota Dairy Producers met recently to talk about the audits.
Tax department officials said they were simply enforcing the law. Besides having to pay a 4% sales tax on bedding, farmers must pay sales tax on machinery, vet supplies, building equipment and other products.
Most South Dakota retailers understand the tax system, collect the money and pay the state properly, they said.
But out-of-state retailers sometimes don't collect the South Dakota tax. In that case, the farmer must pay the state themselves.
Producers complained the ag exemption and sales/use tax code is confusing.
How could straw used to bed livestock not be an ag use? (The law doesn't specifically exempt it, tax officials said.
Why didn't my accountant know about the tax? (Accountants have ignored sales and use tax for years, one of the tax officials said. Auditors love it when they hear an accountant is involved because there will likely be a large claim.)
News of the audits clearly shook some of the dairy farmers who attended the meeting.
One woman cried, saying they lost hundreds of thousands of dollars in recent years due to low milk prices and high input costs and now face a huge tax bill and penalties. Why was the state trying to put them out of business? she asked.
Others to be audited
The Revenue Department recently decided to audit dairies, but tax officials said assured dairy producers that they have audited grain growers, beef feedlot operators and hog producers in the past and plan to audit more in the future. They also audit other industries regularly.
The department also plans to audit out-of-state ag retailers that they suspect are not correctly collecting and paying taxes on products they sell to South Dakotan farmers and ranchers.
More on South Dakota's ag taxes: http://www.state.sd.us/drr2/businesstax/publications/taxfacts/agriculture.pdf.