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Tax tactics for sellers

by Bill Walsh, Article donated by the mane points horse resource center..

Your aging hunter was as kind and cooperative as he'd always been, but just a little too much of his get-up-and-go had gotten up and left. You sold him to your friend with the riding school. There, a less strenuous life was assured, and your longtime companion could still contribute.

The thoroughbred you bought off the track to replace him, too slow to make a living on the turf, proved too hot to make a home with you. An acquaintance on the lookout for a steeplechase possibility bought him gladly.

About the same time, you decided-finally-to part with your daughter's long-outgrown pony, and off it went, bought by your sister-in-law to, you hope, do as good a job with her kids as she had done with yours.

And the five-year-old gelding you bought cheaply on a lark really was learning his dressage lessons well-so well, in fact, that you couldn't turn down the rather surprising offer from the stable just down the road....

Now, though, tax scofflaw, you might be in trouble.

You ride and own horses for the huge enjoyment they provide, but in selling that fourth horse within a year's time, it's possible-and laws vary from state to state-that your equine activities have switched over to a professional category in the eyes of the state's tax department.

"Sales tax on horses doesn't apply if you are an occasional seller, which is defined in the regulations (in Virginia) as somebody who sells three or less of any commodity within the year," explains attorney Verne Hosta. "But if you sell the fourth, it can trigger a tax-due bill from the first three."

In other words, as an occasional seller, you are normally not required to collect sales tax on the first, second, or third horse that you sell within a year. Sell the fourth, though, and the tax comes due on all four. (The rules are different, however, for selling breeding stock.)

"That is something to be wary of," Hosta cautions. "It could put you into another category. Whether or not it destroys exemption from the first three or not, there is probably no firm answer to that. But I think I know what the (tax) department's answer would be.

"People don't want to face it," he adds. "When they sell an animal, they don't want to collect sales tax because it might queer the sale. They don't want to address this with the buyer because they feel that the buyer is going to take a hike. Obviously, it ought to be documented somewhere as to who-if this gets ugly, if there's an audit in the future-is going to pay the tax. There ought to be some sort of indemnity agreement between the two parties, spelling out the liability.

"For the backyard person, who is not selling a lot of horses, they probably are exempt from the sale of animals. But certainly taxation is the rule. There are exemptions, but I'd be very careful on which ones you rely. There aren't that many you can use. If you fit squarely within one of those ... exemptions, fine. If you don't, then you're on your own," Hosta notes.

Faced with the possibility of selling a horse or two in the coming year, you are probably well advised to check with your state's department of taxation for guidelines.

Read the next horse breeding article on Horse infertility.
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