Following a council visit to his growing site in Totland, Big Trees managing director Neil Edmundson was told he must remove the trees or change his use to "storage".
The site was registered for a "gardening" use, but planning enforcement officers from Isle of Wight Council told him he was in breach of planning control.
However, after more than four months of fighting the case, the council has admitted its mistake.
"I had never heard anything so stupid in my life. The majority of our growing is above ground in Air-Pots," explained Edmundson.
Big Trees moved to its current site in a walled garden at Weston Manor just over a year ago. The firm grows around 900 trees for selling on to people who require large trees for immediate impact.
He put the council's mistake down to a lack of understanding and said he had been determined to make sure the same problem didn't occur again.
"It became clear they (the council) were totally wrong in their supposition during a recent meeting I had with the enforcement officer," added Edmundson.
"I had to push to get a written reply but now at last we all can move on."
Area compliance officer Paula Debenham-Garry has now written to Edmundson and told him: "I am pleased to advise you that the Local Planning Authority have considered the growing process of the trees at Weston Manor and are happy that this use is ancillary to the use of the walled garden.
"This view is based on the trees being grown on site, albeit mostly above ground, with some root below ground and as such the land is not being used for storage."
The case reflects the experience of Majestic Trees managing director Steve McCurdy, who fought for five years to ensure that his own Hertfordshire business was not reclassified as a "storage" site by valuation officers.
"There is almost no one who grows trees in the ground from beginning to end now, and we fought and proved that," said McCurdy.
"The bottom line is that you cannot give in. I spent thousands of pounds fighting the case."
Edmundson said: "I have had so much support from across the whole industry and locally so it has been heartening."