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House approves tax exemption for pesticides, fertilizers

The Governor’s Office is working to revamp the state’s water laws. In this photo, an irrigation ditch provides water for a farm in the East Valley near Recker and Williams Field roads. (Photo by Ellen O'Brien/Arizona Capitol Times)

Farmland in Gilbert. (Photo by Ellen O’Brien/Arizona Capitol Times)

State lawmakers voted Monday to exempt farmers from having to pay sales taxes on the pesticides and fertilizers they put on the crops grown for food in Arizona.

The 32-28 vote by the full House came following pleas from lawmakers representing agricultural communities that it’s unfair to require those who grow food for Arizonans and people across the country to pay taxes on items they need. And Rep. Mark Finchem, R-Oro Valley, argued that the higher costs will be passed along to consumers, effectively making the tax paid by farmers a tax on the poor.

But the idea drew an angry reaction from several lawmakers who mentioned not just the loss of state tax revenues – potentially up to $19 million – but the idea that it would somehow reward farmers for the use of pesticides, insecticides, herbicides and fertilizers.

“We don’t want more chemicals in our food supply,” said Rep. Pamela Powers Hannley, D-Tucson, telling colleagues that one out of every 33 children born in Arizona has a birth defect. “I don’t want to encourage this.”

What’s behind HB 2275 sponsored by Rep. Tim Dunn, R-Yuma, who is a farmer, is a ruling in January by the state Court of Appeals in a bid by Wilbur-Ellis Co., a California company, to get a refund of more than $8.3 million in taxes collected on the sale of fertilizers, pesticides and seeds sold in the state.

Arizona’s sales tax is actually a “transaction privilege tax,” levied on the business that makes the sale, though the costs normally are passed along to customers.

Company lawyers first argued that state law does exempt the sale of “propagative materials” from taxes.

Appellate Judge James Beene, writing for the unanimous court, acknowledged there is no definition in the statute of what is “propagative.” But he cited definitions that say these are things that reproduce, like parts of a bud, tuber, root or shoot used to reproduce the original plant.

“Neither fertilizers nor pesticides reproduce or multiply plants,” Beene wrote, even though they do make propagating more efficient.

The appellate judges were no more sympathetic to the company’s argument that the chemicals were being sold to farmers for resale.

What’s behind that argument is a recognized principle in Arizona law only the final transaction is taxable. So if something becomes part of a product that is resold, like sheet metal that becomes part of an air conditioner, the sale of the sheet metal is exempt from taxes.

In this case, Beene said, the company argued that the farmers do not use and consume the fertilizers but instead convey the nutrients in the fertilizer to their customers.

“Simply because some of the nutrients in the fertilizers end up in the crops does not mean the farmers purchased the fertilizers for resale,” the judge wrote. “The farmers purchased the fertilizers for their own use in producing the agricultural products.”

HB 2275 seeks to redefine what’s taxable to specifically exempt a laundry list of chemicals from sales taxes ranging from fertilizers and insecticides to fungicides, soil fumigants, plant growth regulators and rodenticides.

But Rep. Mitzi Epstein, D-Tempe, said that goes directly against what the Court of Appeals ruled.

“We don’t eat the pesticides, the fungicides, the herbicides,” she told colleagues. Instead, Epstein said these chemicals are much more like light bulbs purchased by the owner of a factor.

“You need them to run the factory,” she said. “But they’re not a raw material.”

Finchem, however, said that ignores the role that these chemicals play in ensuring an adequate supply of food.

“The agricultural community has put everything they have into doing more with less,” he said. And Finchem said one of the ways farmers can do that is with fertilizers and pesticides, including natural ones.

“I actually see this as a direct attack on the individuals that have fewer dollars to spend for food in their homes,” he said.

And Rep. Bob Thorpe, R-Flagstaff, said 47 other states have similar exemptions from sales taxes.

But Powers Hannley said she sees the issue in more basic terms.

“I don’t want more chemicals in the food supply,” she said.

The measure now goes to the Senate.

This story has been updated to reflect the final House vote. 

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