Opinion Letter

Letter Number:O-2015-003
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Agricultural Credit Association - Farm Credit System
Effective Date:12/21/2015
Approval Date:12/21/2015

December 21, 2015

Thank you for your e-mail. Farm Agricultural Credit Association ("FACA"), headquartered in Dogjaw, Kansas, is an independently owned and operated "agricultural credit association" ("ACA") that is part of the Farm Credit System. FACA is owned by its customers, governed by a board of directors primarily elected from borrower-owners, and shares profits with its borrower-owners through patronage dividends.

FACA receives funds for its loans from AgriBank, which is owned by FACA and 16 other local ACAs. The ACAs are also AgriBank's customers. AgriBank is one of four regional wholesale banks in the nation, along with AgFirst, CoBank, and Farm Credit Banks of Texas. These wholesale banks are funded by the Federal Farm Credit Banks Funding Corporation, and insured by the Farm Credit Insurance Corporation.

ACAs, like the FACA, may be organized by 10 or more farmers, ranchers, or producers/ harvesters of aquatic products who want to borrow funds from a farm credit bank. 12 U.S.C. 2071(b). ACAs are statutorily limited to making short- and intermediate-term loans to farmers, ranchers, aquatic producers/harvesters, rural residents for housing financing, and custom cutters and others who furnish on-farm agricultural services to farmers and ranchers. 12 U.S.C. 2075(a) (1994). ACAs operate on a cooperative basis and are capitalized by their borrower-shareholders. 12 C.F.R. 615.5220 (2001); 12 C.F.R. 615.5230 (2001).

The voting stock of an ACA may only be held by borrowers who are farmers, ranchers, producers/harvesters of aquatic products, and certain other farm credit institutions. 12 U.S.C. 2154a(c) (1994). ACAs are statutorily required to apply their net income, first, to the restoration of the impairment of capital, second, to the establishment and maintenance of surplus accounts, and, third, to distributions, subject to the general direction of the Farm Credit Administration, in stock, participation certificates, or cash. 12 U.S.C. 2074(b) and (c).

You claim FACA qualifies as a federal land bank, and accordingly is exempt from paying sales tax on it purchases. This does not appear to be entirely accurate. FACA is an ACA, which are the product of a merger of federal land banks and production credit organizations under 12 U.S.Code, Section 2279c-1. The merger was approved by the Farm Credit Administration Board, which is a Federal agency. As an ACA, FACA is a new entity that is neither a federal land bank nor a production credit organization, as those terms are defined in federal farm credit laws. The merger of the two entities into a new entity is significant since, prior to their merger, Congress had exempted federal land banks from state taxation, but had not exempted production credit associations from state taxation. See Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 97 (1941).

Under 12 U.S.Code, Sec. 2279c-1, an ACA possesses all powers and succeeds to all obligations of the merging associations. Division (b)(2) of the statute empowers the Farm Credit Administration to “issue regulations that establish the manner in which the powers and obligations of the associations that form the merged association are consolidated and, to the extent necessary, reconciled in the merged association.” The Farm Credit Administration issued regulations to implement 12 U.S.Code, Sec. 2279 that refers to the merged organizations as “agricultural credit association[s].” The Farm Credit Administration also chartered ACAs as “Federally chartered instrumentalit[ies].” See Farm Credit Serv. of Mid-America v. Zaino, 91 Ohio St.3d 564,747 N.E.2d 814, 2001 (2007). Federal instrumentalities are generally exempt from State tax pursuant to McCulloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579(1819). ("Chief Justice Marshall ruled Maryland may not tax the bank, that was a federal instrumentality, without violating the Constitution.").

Nevertheless, the Federal statutes themselves do not declare that ACAs are federal instrumentalities, and do not specifically grant them Federal immunity from state taxation. The conflict created by the Farm Credit Administration's regulations and charters and the absence of the federal statutes that specifically grant tax immunity to ACAs generated considerable litigation over whether Congress granted Federal immunity from State taxation to the four regional wholesale banks --- AgFirst, AgriBank, CoBank, and Farm Credit Banks of Texas --- and to the ACAs including FACA .

In Missouri Director of Revenue v. CoBank ACB, 531 U.S. 316 (2001) ("CoBank"), the United States Supreme Court reviewed the history of the Farm Credit System, and declared that CoBank and the other three regional wholesale banks were not entitled to claim exemption from state income tax; It concluded:

While CoBank rejected the claim of entitlement to Federal immunity from State taxation that was made by regional wholesale banks, Farm Credit Serv. of Mid-America v. Zaino, 747 N.E.2d 814, 817-18, 91 Ohio St.3d 564, 566-67 (2001), rejected the claim of entitlement to federal immunity made by an ACA. The Ohio Supreme Court rejected the ACA's claim, reasoning:
The Ohio Supreme Court decision works in harmony with In re Farm Credit Services of Central Kansas, et al., 271 Kan. 805, 26 P.3d 695 (2001) and CoBank. Accordingly, no grant of federal immunity has been extended to FACA or any other ACA. The Kansas county treasurer was correct in rejecting the exemption claim that FACA submitted for its purchase of motor vehicle when it registered the vehicle for highway use. FACA was required to pay the sales tax that had previously gone unpaid on the vehicle.

Date Composed: 12/22/2015 Date Modified: 12/22/2015