The sale of agricultural products by a farmer or nurseryman is exempt from sales and use tax if 50% or more of such products sold are grown or produced in the calendar year by the farmer or nurseryman. If less than 50% of such products sold in any calendar year are grown or produced by the farmer or nurseryman, then only the gross proceeds from the sale of the products actually grown or produced by the farmer or nurseryman are exempt from sales and use tax.
For example, during a given calendar year, Farmer A sells $2,000 worth of pumpkins, $1,200 of which was from pumpkins Farmer A produced and $800 of which was from pumpkins Farmer A purchased for resale from Farmer B. For the purpose of this example, assume that the relative value of the pumpkins sold correlates directly to the relative amount of pumpkins sold (e.g., one pumpkin equals one dollar). In this case, all $2,000 of proceeds from these pumpkin sales are exempt from sales and use tax because 60% ($1,200/$2,000) of the pumpkins sold during the calendar year were produced by Farmer A.
Now assume that only $800 worth of the $2,000 of pumpkins sold during the calendar year were produced by Farmer A, and the remaining $1,200 of pumpkins sold were purchased for resale by Farmer A from Farmer B. In this case, because only 40% ($800/$2,000) of the pumpkins sold were produced by Farmer A, Farmer A would be required to collect sales tax on the $1,200 of proceeds attributable to the pumpkins purchased for resale from Farmer B. The $800 of proceeds from the pumpkins Farmer A produced remain exempt from sales and use tax. Farmer A must keep records to properly distinguish taxable sales from non-taxable sales.
Reference: Tenn. Code Ann. § 67-6-301.