United States

Alabama: Substance Must Govern Over Form in Pumpkin Patch Sales Tax Dispute

Aug 29, 2016
From KPMG TaxWatch

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Although it certainly does not feel like fall in much of the country, a recent revenue ruling from the Alabama Tax Tribunal reminds us that fall is fast-approaching and with it brings new sales tax issues with which states and taxpayers must grapple. The taxpayers at issue in the ruling operated a pumpkin patch with a corn maze, small train, see-saws, swings, and various other playground items. Following an audit, the Department of Revenue assessed tax on the taxpayers’ sales of tangible personal property and its gross receipts from operating an amusement business. The taxpayers conceded that they owed tax, but argued that many of their receipts were from exempt sales. During the fall period, the taxpayers hosted large groups of school children. The schools paid five or six dollars per child for the kids to have the opportunity to ride a wagon to the pumpkin patch and pick out a pumpkin to take home. The taxpayers asserted that these sales were exempt because the schools were exempt entities.  The ALJ, noting that substance must govern over form in sales tax matters, disagreed. Although the schools paid the taxpayers, it was undisputed that the schools collected the money from the kids’ parents. Thus, the taxpayers were making sales to the parents, not to the exempt schools. The ALJ also noted that there is an exemption from tax for sales of agricultural products by the person that planted, cultivated, and harvested the agricultural products. Unfortunately, the taxpayers only raised 15 to 25 percent of the 10,000 plus pumpkins they went through each year. Thus, they could only claim the exemption to the extent they had records documenting how many home grown pumpkins they sold versus those ones purchased for resale from a neighboring farmer.

Alabama is not the first state to address the taxability of pumpkins. Around the fall holidays pumpkins serve a dual purpose―they are decorative and are used to make delicious fall foods (pumpkin pies, breads, muffins, soups, pasta, etc.). This creates an issue as to whether sales of pumpkins are exempt as food or taxable as home décor. Several years ago, in 2007, the Iowa Department of Revenue refined their pumpkin policy to clarify that pumpkins were taxable if they were advertised to be used as jack-o’lanterns or decorations, but were exempt if they were purchased for eating. The revised pumpkin policy was rather quickly rescinded after the Department learned that not all sellers of pumpkins were aware of the change. Thus, going forward all pumpkins―regardless of use―are exempt in Iowa. Please stay tuned to TWIST as we fall(ow) more breaking pumpkin developments.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.