The Supreme Court of Ohio has reversed the tax assessment and penalty levied against a Monroe County timber farm related to the operator’s purchase of an off-road Mercedes SUV used in the daily management of the farm.

The state Board of Tax Appeals previously had affirmed the $9,461.58 use-tax assessment, which included unpaid tax, preassessment interest and a penalty on Claugus Family Farm LP (CFF) for the 2018 purchase of a then-3-year-old Mercedes-Benz Geländewagen for $111,997.

“CFF challenges the board’s determination that because the Mercedes is used merely to transport people and equipment through the forest, the vehicle is not used directly in farming and thus fails the second part of the tax-exemption test,” Justice Megan Shanahan wrote for the 7-0 court. “CFF asserts that the Mercedes is used for farming activities because the vehicle facilitates the carriage of people, chemicals and equipment through the forest. CFF asserts that without the Mercedes, such tasks as removing non-native, invasive species and traversing the forest’s rugged terrain to identify diseased and mature timber would be ‘impossible to complete.’ We agree with CFF that the vehicle is used in farming.”

According to case summary, 900 forested acres of the 1,100-acre farm in southeast Ohio are devoted to timbering operations. The farm did not pay tax on the vehicle at the time of purchase, claiming that the vehicle was not subject to taxation, because it would be used directly in farming.

The tax commissioner disagreed, having determined that the farm failed to meet the requirements of a three-part test that would permit the use-tax exemption, and issued the assessment and penalty.

The requirements were: CFF had to be engaged in the business of farming; the vehicle had to be used directly in farming activities, such as growing crops; and farming activities had to account for the vehicle’s primary use.

The tax commissioner noted that despite the presence of marketable timber on its property, CFF had not sold timber or reported any income since 2011 and determined evidence of previous timber sales was insufficient to demonstrate the business was engaged in farming.

The tax commissioner also concluded that the vehicle was used merely for “maintaining property which contains a forest,” summary continued.

Lastly, the tax commissioner held that because the farm did not quantify the vehicle’s use in terms of percentages, its primary use could not be determined.

CFF appealed the tax commissioner’s ruling to the Board of Tax Appeals.

In an evidentiary hearing, the farm’s forest-management consultant, Alex Kindler, testified that CFF’s objective is to cultivate a healthy, sustainable and valuable forest for timber harvesting, employing the selective cutting process, which allows timber 15 to 20 years to fully mature.

Kindler testified that if timber stock is managed properly, the owner should see an annual return of 10 percent.

The farm’s managing general partner, Bruce Claugus, also testified, addressing the purchase of the SUV. He told the board that the farm previously purchased a Chevrolet Silverado and a Jeep Wrangler for use on the farm, but found neither suitable for the work.

Claugus testified that the Mercedes was more ruggedly built than the previously used vehicles, was capable of traversing the forest’s terrain at up to a 45-degree angle and driving through two feet of water, had an adequate payload and offered adequate space for carrying equipment.

He estimated that 95 percent of the Mercedes’ use was for timber farming and without it “the forest would have to be traversed by foot,” which takes eight days to walk the forest’s central acreage.

The board determined that CFF’s purchase of the Mercedes was taxable, and it upheld the tax commissioner’s final determination.

“It did not make a definitive ruling as to whether CFF is engaged in farming as a business under the first part of the test for determining whether the use-tax exemption for farming applies,” Shanahan wrote. “But with respect to the second part of the test, it determined that CFF does not use the Mercedes directly in farming activities but, rather, for transportation around the farm generally. … And regarding the third part of the test, the board determined that the Mercedes is primarily used for transportation, not farming.”

The farm subsequently appealed to the Supreme Court.

“In support of her position that CFF is not engaged in the business of farming, the tax commissioner (Patricia Harris) advances a rationale similar to that reflected in the board’s order, namely, that CFF has failed to make any sales or generate any income for several years. But she goes a step further, arguing that CFF is not engaged in farming as a business, because it did not claim any labor expenses … filed with its federal-income-tax returns,” Shanahan wrote. “The absence of labor expenses from CFF’s tax filings is perhaps peculiar. But Claugus testified that CFF has spent thousands of dollars for timber-stand-improvement vendors to traverse the forest with chemicals and chainsaws to address the non-native, invasive species, and the tax commissioner does not dispute that this work occurred and that CFF paid for it.

“Accordingly, we conclude that CFF is engaged in farming as a business.”

The justices determined that the board’s decision regarding the farm’s use of the use-tax exemption for farming was neither reasonable nor lawful.