California Agricultural Diesel Tax Exemptions Explained

Helping your business succeed is important to us, and we recognize that understanding the tax issues specific to the agricultural industry and to those who sell farm and related supplies can be time-consuming and complicated. To help you better understand the tax obligations specific to your industry, we have reviewed the Tax Guide for the Agricultural Industry and put together key information detailing the tax issues and information most important to your business.

As you may know, most diesel fuel sales and purchases are taxable, but the state of California offers various tax exemptions for businesses engaged in agricultural activities, like farms, nurseries or food processing.

The first is the California partial agricultural tax exemption which affects the sales tax charged on diesel fuel. While most farms and nurseries are aware of this exemption, it is less known that other businesses, like trucking companies that haul agricultural products, can qualify when they support agricultural operations.

The partial exemption applies to the sale or purchase of diesel fuel only if the diesel meets the following two requirements:

1. Be a type of diesel fuel that qualifies for the exemption.

  • Diesel fuel means any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in a diesel-powered highway vehicle. A liquid meets this requirement if, without further processing or blending, the liquid has practical and commercial fitness for use in the engine of a diesel-powered highway vehicle.
  • A liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the engine of a diesel-powered vehicle.

2. Be used in qualifying farming activities or food processing, or related contract hauling.

You should identify diesel fuel accordingly on your sales invoices. It is important you obtain a timely exemption certificate from your purchasers and maintain copies for your records to support exempt fuels. The diesel must also be purchased through an Ultimate Petroleum Distributor, like us, and you need to make sure that you have accurate records of these types of fuels and related transactions prior to tax filing.

The second part of qualifying for the partial fuel tax exemption is related to fuel use. Sales of diesel fuel to farmers or ranchers will qualify for the partial sales and use tax exemption when they use fuel to:

  • Prepare land for planting
  • Plant, protect or grow crops
  • Harvest crops
  • Feed, water or transport livestock
  • Transport the harvested agricultural or horticultural products from the field or ranch to the buyers

An example of a farming activity use that qualifies for the partial exemption is: A farmer raises lemons and sells the crop to a citrus cooperative in which he holds shares. The cooperative grades and packs the farmer's lemons and sells them to a grocery distributor. In this example, these diesel sales would qualify for the partial exemption:

  • The sale to the farmer of diesel the farmer uses to transport the lemons to the cooperative,
  • The sale to the cooperative of diesel it uses to grade or pack the farmer's lemons, and
  • The sale to the cooperative of diesel it uses to haul the products to the grocery distributor.

Sales of diesel to food processors will qualify for the partial exemption when they use fuel for:

  • Hauling a raw agricultural product to the processing plant. Raw agricultural product means an unprocessed product such as grain, vegetables, fruit, or livestock.
  • Processing agricultural products. This includes using diesel to run processing equipment, backup generators, and equipment used to move the product during processing.
  • Hauling supplies and materials to the processing plant. This includes only items used in producing the processed food product, such as cans, labels, and ingredients.
  • Hauling partially processed food products between processing plants owned by the same company. For example, one division of a company processes tomatoes into tomato paste. Another division uses the paste to produce spaghetti sauce. Moving the paste between the two plants is a qualifying food processing activity.

The sale of diesel to persons who contract to haul agricultural products for a rancher, farmer or food processors may qualify for the partial tax exemption. The contractor must use the diesel to:

  • Transport to buyers or intermediate points for handling agricultural products produced and owned by a rancher, farmer, or a business wholly or partially owned by a rancher or farmer.
  • Transport raw products, materials, and supplies for a food processor.

Diesel used to move the product after processing is completed, does not qualify for the exemption.

For more detailed information about diesel used in farming, see Regulation 1533.2, Diesel Fuel Used in Farming Activities or Food Processing.

In addition to the partial tax exemption, California also offers a Diesel Fuel Tax Exemption for diesel fuel used on a farm for farming purposes, which reduces federal and state excise taxes. For diesel fuel excise tax purposes, a farmer may purchase diesel fuel tax without paying the excise tax by using an exemption certificate to his/her vendor, or by purchasing dyed diesel fuel.

Dyed diesel fuel may not be used to operate a vehicle on any public highway in the state of California. There are severe penalties for using dyed diesel fuel on the highway (either $10 for every gallon of diesel involved or $1,000, whichever is greater).

To claim the exemption for the excise fuel tax, the diesel must be used:

  • In carrying on a trade or business of farming,
  • On a farm in California, and
  • For farming purposes, by the owner, tenant, or operator of the farm.

Please note that transporting/hauling agricultural products from the farm/ranch to buyers it not an exempt use of diesel fuel for excise tax purposes.

Your diesel fuel vendor may provide you with a CDTFA-608, Certificate of Farming Use, that you must complete to purchase diesel fuel for farming activities without paying the excise tax. The farmer exemption certificate meets criteria established by the Internal Revenue Service. To be valid, all requested information on the certificate must be provided. You will need to note on the certificate if it covers a particular purchase, all purchases, or a percentage of your purchases. You must annually renew your exemption certificate.

For further information, see Diesel Fuel Tax Regulation 1431, Diesel Fuel Used on a Farm for Farming Purposes.

Keep in mind, the two exemptions are not mutually exclusive since they affect different types of taxes, and some businesses might even qualify for both.

Get the California ag exemptions applied to your bulk fuel and fuel card purchases.

Understanding the diesel fuel tax exemption for these industries can be difficult. Getting diesel supply service shouldn’t be. We recommend you discuss your eligibility for exemption with your CPA or a tax professional. but if you need diesel fuel for your farm, ranch, plant, or hauler, Greg’s Petroleum Service can help. Click here for more information or contact us today.