There are at least three possibilities in this category:
(a) A qualified farmer with an agricultural certificate of exemption purchases his own gin to gin the
cotton that he has grown. The cotton gin is machinery and equipment used directly and principally
to produce an agricultural product and can be purchased tax exempt by the qualified farmer.
(b) A business owns a gin. Such business gins the cotton for area farmers and is either paid for the service of ginning by the farmers’ cotton or exchanges the ginning service for the cotton seeds. The cotton is returned to the farmer. This business may have already qualified for and received authorization from the Department as a manufacturer. This business can qualify for the Agricultural Sales and Use Tax Certificate of Exemption under the criteria of providing for-hire custom agricultural services for the processing of agricultural products. The cotton gin, repair or replacement parts, and repair labor for the cotton gin, and the electricity, natural gas, liquefied gas, or fuel oil used to operate the gin can be purchased tax exempt by a person in the business of providing for-hire ginning services if the person is a holder of an Agricultural Sales and Use Tax Certificate of Exemption. The electricity, natural gas, liquefied gas, or fuel oil used to operate the cotton gin is directly used to produce fiber for human consumption. Such energy fuel used to operate the gin must be separately metered from other energy fuels that are subject to tax at the 1.5% tax rate on energy fuel sold to and use by manufacturers.
(c) A business owns a gin. The business buys cotton from the area farmers, processes the cotton by separating the seed from the fiber, and sells the seed and cotton to others for further sale. Under these conditions, and upon application to the Department of Revenue, the business may qualify as a manufacturer (processor) eligible for sales tax exemption on machinery and equipment used to process the cotton and reduced tax rates on water and energy fuel used by the manufacturer. This business is not providing for-hire services to process the farmers’ cotton and therefore will not qualify for the agricultural certificate of exemption. The cotton gin, repair and replacement parts, and repair labor for the cotton gin can be purchased exempt from tax if the business has qualified for and received authorization as a manufacturer. The electricity, natural gas, liquefied gas, or fuel oil used to operate the cotton gin will be subject to tax at the 1.5% tax rate on energy fuel sold to and used by qualified manufacturers.