1. Taxes and Liability at the Farmers Market Pick TN Conference Hal Pepper Financial Analysis Specialist

2. Overview Sales tax Business license Introduction to risk Managing risk with liability insurance

4. Taxes Income (federal and state) Self-employment Payroll Property Permits, licenses and fees Sales Business

5. Sales Tax Sales Taxes on Sales of: –Raised and Purchased Farm Products –Value-Added Products Sales Tax Liability and Registering with Tennessee Department of Revenue

6. Misconceptions about Sales Tax “Farmers are always exempt from sales tax on the products they sell.” “Sales tax on food is only required when the food is sold at a grocery store.”

7. A man is driving 65 miles per hour on Highway 64. Is he breaking the law?

8. Keep in mind… Some points are clearer than others. Interpretations change Tax Guides : –Agricultural Tax Guide –Sales and Use Tax Guide Letter Ruling available on request

9. Sales Tax Privilege tax that permits you to engage in the business of: –Selling tangible personal property at retail –Rendering certain services at retail –Charging admission to events

10. Sales Tax Exemptions for Farmers Sales of farm products by the farmer who raised them Certain resales of farm products that were purchased from the farmer who raised them

11. Sales of Farm Products by the Farmer Who Raised Them “Products of the farm sold by the farmer who raised them” are exempt from sales tax. –Livestock –Nursery Stock –Fruits –Vegetables –Poultry

12. Sales of Farm Products by the Farmer Who Raised Them Sales of farm products by the farmer or entity who raises them to a consumer. The farmer who raises the product may be a person or an entity (i.e., a partnership, corporation, LLC or university).

13. Sales of Farm Products by the Farmer Who Raised Them Any Buyer Any Location No special registration needed

14. Certain Resales of Farm Products A farmer may buy farm products and resell them. When the farmer resells these “purchased” farm products, the sale is exempt from sales tax if both of the following two conditions are met…

15. Two Conditions for Tax Exempt Resales of Farm Products #1. The farm products must be purchased from the farmer who raised them.

16. Two Conditions for Tax Exempt Resales of Farm Products #2. The total amount of farm products raised and sold in a calendar year must be at least 50 percent of total sales of farm products in the same calendar year.

17. 50 Percent Test for Tax Exempt Resales of Farm Products

18. Example 1: Raised Farm Products are 100% of Total Sales Farmer Smith raises 40 goats and sells the live goats to consumers for $200 each for a total of $8,000. Does Farmer Smith owe sales tax when he sells the goats? Answer: No. The sales are exempt from sales tax because Farmer Smith raised the goats.

19. Example 2: Raised Farm Products are 50% or more of Total Sales Farmer Smith raises goats in a calendar year and sells them as live animals for $8,000, and resells pumpkins to consumers for $5,000 that were bought from the farmer who raised them in the same calendar year. Are any of the pumpkin sales taxable?

20. Example 2: Raised Farm Products Are 50% or More of Total Sales Answer: No, none of the resold pumpkins are taxable because the 50% test was met. The raised products (goats) are exempt from sales tax. The resold pumpkins are exempt from sales tax because at least 50 percent of the sales were from raised product sales.

21. 50 Percent Test for Tax Exempt Resales of Farm Products

22. Example 3: Raised Farm Products Are Less Than 50% of Total Sales Farmer Smith’s raised live goat sales are $8,000 and the pumpkins bought from the farmer who raised them are resold to consumers for $11,000. Are any of the resold pumpkins taxable for sales tax?

23. Example 3: Raised Farm Products Are Less Than 50% of Total Sales Answer: Yes, the resold pumpkins are taxable for sales tax because the 50% test was not met. The raised goats are exempt from sales tax.

24. 50 Percent Test for Tax Exempt Resales of Farm Products

25. Example 4: Farm Products Not Purchased From the Farmer Who Raised Them Farmer Smith’s raised live goat sales are $8,000 and the pumpkins are purchased from a broker and resold to consumers for $7,000… Are any of the pumpkin sales taxable for sales tax?

26. Example 4: Farm Products Not Purchased From the Farmer Who Raised Them Answer: The sales of the purchased pumpkins ($7,000) are subject to sales tax because the pumpkins were not purchased from the farmer who raised them. Farmer Smith must pay sales tax on the sale of the purchased pumpkins.

27. Sales Tax on Sales of Value-Added Products Exemption for certain value-added products: When a farmer adds value to farm-raised products by processing or packaging them, the sales of the value- added products are exempt from sales tax as long as the only non-raised ingredients added are salt, water, sugar, pectin or preservatives. However, if another farmer’s products are incorporated when making the value-added product, the value-added product is not exempt from sales tax.

28. Example 5: Value-Added Products Farmer Smith makes soap from the milk of the goats he raised. He adds various oils and lye to make the soap. He sells $5,000 of goat soap products. Should Farmer Smith pay sales tax on the soap sales?

29. Example 5: Value-Added Products Answer: Since the soap contains something other than Farmer Smith’s farm-raised products, salt, water, sugar, pectin and preservatives, the soap is not considered an exempt farm-raised product and sales of the soap are subject to sales tax.

30. Would the following value-added products be exempt from sales tax? Wreaths made with trimmings from the farmer’s raised Christmas trees Strawberry preserves made from the farmer’s strawberries Ground beef from cattle raised by the farmer

31. Would the following value-added products be exempt from sales tax? Sausage from hogs raised by the farmer Pure, unflavored honey from the farmer’s hives Hamburgers and hot dogs sold at concession stand on the farm Plants and flowers

32. Internet Sales of Farm Products Question: When Farmer Smith sells a product not subject to sales tax over the internet to a customer in another state, should sales tax be paid to the state where the customer resides?

33. Internet Sales of Farm Products Answer: There is no requirement for sales tax to be remitted to the other state if the raised farm product is sold over the internet and shipped from Tennessee to the other state. As long as the farmer doesn’t deliver the product to the out-of-state customer using the farmer’s own vehicle there is no tax due the other state.

34. Note: If the farmer does deliver the farm raised product into the other state using his/her own vehicle, the farmer would have to ask the other state if there is a tax liability.

35. Use Revenue Help

36. Registering with Tennessee Department of Revenue for Sales Tax If Farmer Smith owes sale tax, he should complete an Application for Registration with Tennessee Department of Revenue. The Application for Registration may be completed and submitted online at http://www.tn.gov/revenue/forms/sales/index.s html http://www.tn.gov/revenue/forms/sales/index.s html

38. Application for Registration

39. Remitting Sales Taxes When the Application for Registration is completed, the business must file a tax return online. File State and Local Sales & Use Tax Return—SLS 450—to report to Tennessee Department of Revenue by the 20 th of the month following the period for which tax is due.

40. Documents Business Will Receive Upon registering, a business will receive: Certificate of Registration Blanket Certificate of Resale (if qualified to make purchases for resale)

41. Note: The business is liable for sales tax even if it doesn’t collect the tax from the customer.

42. Sales Tax Rates State tax rate for most items: 7% – Food (fruits & vegetables) tax rate: 5% – Candy & prepared food tax rate: 7% Local tax rate varies from 1.00% to 2.75% Maximum combined state and local tax rate is 9.75% (7.75% for food)

43. Sales Tax Take Home Messages A farmer’s sales of raised farm products (“products of the farm sold by the farmer who raised them”) are exempt from sales tax. The same business entity must raise and sell the farm products if the sale is to be exempt from sales tax.

44. Sales Tax Take Home Messages Farmers may resell farm products tax exempt that were purchased from the farmer who raised them if raised farm product sales are at least 50% of total farm product sales. Farmers with sales of taxable products (>$4,800 as long as sales tax was paid to the supplier for everything bought and resold) should complete Application for Registration and remit sales tax.

45. Sales Tax Take Home Messages Value-added products are exempt from sales tax as long as the only non-raised ingredients are salt, water, sugar, pectin or preservatives.

46. Business License Who Needs a Business License? When a Business Tax Return Must Be Filed Exemption for Farmers How to Get a Business License Paying Business Tax

47. Misconceptions about Business License “Only businesses need a business license. Farmers are always exempt from the requirement to have a business license.” “As long as most of what I sell was raised by me, I don’t need a business license.”

48. Business License A farmer would only need a business license when selling products he/she did not raise. A farmer selling only the farm products raised on his/her farm does not need a business license of any kind. The dollar amount of annual sales of products not raised by the farmer determines whether and what type of a business license is needed.

49. Who Needs a Business License? Any person in business for profit or gain who has gross annual sales of non-raised products of $3,000 or less does not need a business license.

50. Who Needs a Business License? Any person in business for profit or gain who has gross annual sales between $3,000 and $10,000 must have a minimal activity license for each place of business. The cost is $15 each year. If located in a city, the city may require a minimal activity license a well.

51. Who Needs a Business License? Any person in business for profit or gain who has gross annual sales of $10,000 or more must have a business license for each place of business. The license fee is $15 for all new businesses. It is renewed annually at no charge when the annual business tax return is filed. If located in a city, the city may require a business license as well.

52. When a Business Tax Return Must Be Filed Businesses in a county or municipality with less than $10,000 in annual sales do not have to file a business tax return. Businesses with annual sales of $10,000 or more must file a business tax return.

53. Business Tax A privilege tax that permits you to engage in the business of: – Selling tangible personal property at wholesale or retail – Rendering certain services Exempt services are listed at http://www.tn.gov/revenue/tntaxes/businesstax/clas sification3.shtml http://www.tn.gov/revenue/tntaxes/businesstax/clas sification3.shtml

54. Farmer Exemption from Business Tax “Tennessee gross sales of livestock, horses, poultry, nursery stock, and other farm products direct from the farm are exempt from the tax, provided that those sales are made directly by the producer, breeder, or trainer.” T ennessee Department of Revenue’s Business Tax Guide Tennessee Code Annotated Section 67-4-712

55. Question: Is there an exemption for farmers from getting a business license on the resale of farm products? Answer: There is no exemption from business tax for a farmer’s resale of purchased products. If a farmer purchases farm products, when he sells those purchased products they are subject to business tax.

56. Counties and Cities Issue Business Licenses Business tax law allows local governments, by a local ordinance or resolution, to levy business tax. Local governments (counties and cities) issue licenses. Effective Jan 1, 2014 business in all 95 counties are subject to business tax; hundreds of cities also license businesses. The State of Tennessee is responsible for return processing, tax payments, audit and collection.

57. How to Get a Business License County clerks and designated city officials (city tax collectors) issue minimal activity licenses and business licenses. Minimal activity licenses are $15 per year. Business licenses require a one-time registration fee of $15. There is no additional fee for annual business license renewal. You must contact the respective county or city official for registration information and forms as required by that jurisdiction. If the business is located in a city and a county that both have approved a business tax, two separate tax returns must be filed.

58. Where to Register for Business License If the farmers market becomes a permanent location for a vendor (i.e., the farmer makes sales on a continuous basis for six months or more), the farmer must register for a business license with the respective county and city in which the farmers market is located. If the farmers market is not a permanent location for a vendor, the farmer must register for a business license based on his/her home jurisdiction.

59. Paying Business Tax Taxes are paid when the annual business tax returns are filed with the Tennessee Department of Revenue. Tax returns for the county and city (if the city has a business tax) should be filed. A list of the tax returns for each business tax classification is available at http://www.tennessee.gov/revenue/forms/business/in dex.shtml. http://www.tennessee.gov/revenue/forms/business/in dex.shtml County clerks and designated city officials will renew the business license annually after the tax return has been filed with the Tennessee Department of Revenue.

60. Document Business Will Receive Upon registering, a business will receive: – Business License (for each county and municipality where sales occur) The taxpayer must exhibit the license in the taxpayer’s place of business.

61. Threshold for Business Tax – Taxable product sales are more than $10,000/year

62. Business Tax Classifications Five classifications of businesses, each subject to a different rate. Rates within some classifications vary according to whether the sales are made at wholesale or retail. Dominant business activity determines classification A farmer making retail sales of products over $10,000 that he did not raise would be in Classification 4.

63. Business Tax Rates CLASSIFICATIONRETAILWHOLESALETAX PERIODDUE DATE Class 1A0.0010.00025Taxpayer’s fiscal/federal tax year 15 th day of 4 th month following end of year Class 1B & 1C0.0010.000375Same as above Class 1D – Fuel0.0005N/ASame as above Class 20.00150.000375Same as above Class 30.0018750.000375Same as above Class 40.001N/ASame as above Class 50.003.003Same as above The minimum tax for taxpayers in Classification 4 is $22. If sales are over $22,000, the tax is computed by multiplying sales by 0.001.

64. Farmers Markets Vendors Vendors selling any products they did not raise at a farmers market have these options: – Obtain a business license – In lieu of getting a business license, pay a $1 fee ($2 if city has a business license) per day per booth to the farmers market

65. Farmers Markets Farmers markets must collect $1 fee ($2 if city has a business license) per day per booth from a vendor selling any products he (she) did not raise, if the vendor does not have a business license.

66. Farmers Markets Booth rental fees collected by the farmers market are subject to sales tax and business tax. This is true even if the farmers market is a non-profit or run by a municipality.

67. Farmers Markets A farmers market that does not charge its vendors a booth or membership fee and whose vendors raise everything they sell would not need to complete an application for sales tax or get a business license.

68. Business Tax Take Home Messages Farmers with sales between $3,000 and $10,000 of products they did not raise are required to get a minimal activity license. The city may require a minimal activity license as well. Farmers with sales of $10,000 or more of products they did not raise must get a business license from the local clerk. There is a one-time $15 license fee and business tax must be paid annually to the Tennessee Department of Revenue. The city may require a business license as well.

69. Resources Sales Tax in Tennessee on the Purchase and Sale of Farm Products PB 1806 https://utextension.tennessee.edu/publications/ Documents/PB1806.pdf https://utextension.tennessee.edu/publications/ Documents/PB1806.pdf Agricultural Tax Guide http://www.state.tn.us/revenue/taxguides/agricu ltural.pdf http://www.state.tn.us/revenue/taxguides/agricu ltural.pdf Sales and Use Tax Guide http://state.tn.us/revenue/taxguides/salesanduse.pdf http://state.tn.us/revenue/taxguides/salesanduse.pdf

70. Resources Business Tax Information http://www.tn.gov/revenue/tntaxes/business.shtml http://www.tn.gov/revenue/tntaxes/business.shtml Business Tax Guide http://www.tennessee.gov/revenue/taxguides/busta xguide.pdf http://www.tennessee.gov/revenue/taxguides/busta xguide.pdf Tennessee Department of Revenue – (800)342-1003 – http://www.tn.gov/revenue/index.shtml http://www.tn.gov/revenue/index.shtml – Email TN.revenue@TN.govTN.revenue@TN.gov

71. Introduction to Risk

72. Risk is… The uncertainty regarding likelihood or magnitude of loss, damage or injury

73. Assessing Risk

74. Managing Risk Avoid Risk Reduce Risk Transfer RiskAccept Risk

75. Even with local foods, food safety is an issue!

76. Examples of Incidents of Food-borne Illness 2011 StrawberriesOregonE. coli. 2011CantaloupesColoradoListeria 2012CantaloupesIndianaSalmonella 2013Mixed saladMexicoCyclospora 2014Caramel apples10 statesListeria

77. Using Liability Insurance to Manage Risk

78. Transferring Risk with Insurance Obtain insurance Learn and follow insurance requirements and claim procedures

79. Transferring Risk with Insurance Start with a visit to a qualified insurance agent—preferably one who is familiar with how direct farm marketers operate.

80. Transferring Risk with Insurance Explain your operation in detail. Request an insurance proposal that addresses all your operation’s risks and potential amount of loss. Consider comparing policies from multiple agents. Can you add product liability insurance as a rider to your existing policy?

81. Transferring Risk with Insurance Some farmers markets require vendors to have proof of product liability insurance. Ask whether the policy only covers product liability arising from raw/unprocessed farm- grown products grown on the farm.

82. Transferring Risk with Insurance Does the policy cover a farmer’s sales at: – Roadside stands? – Farmers markets? – Restaurants? – CSAs? – Other vendors?

83. Transferring Risk with Insurance Make sure the policy covers “products and completed operations” Does the policy cover sales of: – Products you purchased for resale? – Processed products?

84. Are You Covered? Many general farm liability insurance policies are written to cover injuries that occur on the farm premises or as a result of farm operations. They may not consider direct marketing activities as “farming” or as “necessary operations”.

85. Caution Many farmers believe their general farm liability policy provides them with coverage in the situation where someone gets ill from eating food the farmer sold them. However in many situations it may not!

86. Caution The sale of farm products purchased from another farmer is likely NOT covered under a general farm liability insurance policy.

87. Commercial General Liability (CGL) Insurance Covers activities that a farmer also undertakes that are not considered “farming” Written specifically for the business involved May provide coverage for injuries excluded in a general farm liability insurance policy

88. Some points to consider… Insurance policies are contracts. Know what you’re paying for. Understand the exclusions (what the policy does NOT cover).

89. Exclusions Some policies limit the scope of bodily injury. Example: “Bodily injury does not include: – The transmission or exposure directly or indirectly by any insured or by any other person or instrumentality to any other person of any communicable disease, bacteria, virus, parasite, or other organism.”

90. Product Liability Insurance Policy Protects against claims of injury from fresh or processed food products that cause food-borne illness Covers “products and completed operations”

91. Excess/Umbrella/Surplus Lines of Insurance Provide catastrophic loss protection when the underlying insurance is inadequate

92. Safe Haven??? “No need to worry… I only sell to friends and family.”

93. When you buy an insurance policy… You are required to pay the premium at the time required or the policy will no longer be in force. You are required to report (in a timely fashion) any occurrences to the agent and company.

94. When you buy an insurance policy… You are required to report any material changes in the nature of your activities or the property which is subject to insurance. You are required to cooperate with the insurer in matters of subrogration.

95. How Much Insurance? Consider the value of your assets. Consider the probability of a loss occurring and the dollar value of potential claims. What problems have others in farm direct marketing or agritourism experienced? What are you doing to reduce the chances of loss to your business? Buyers may require a minimum amount of product liability insurance.

96. Points to Remember Make sure the proper entity is insured. Provide annual sales updates to your agent. Premiums often are based largely on product sales and hazards involved. Reevaluate your coverage annually.

97. Farmers Markets Need Insurance Too! Injury to employees, customers and vendors Board of directors

98. Take Home Messages Product liability insurance is a vital legal risk management tool for direct marketers. Carefully consider needs for coverage. Work closely with insurance agent and communicate well and often.

99. Sources of Product Liability Insurance

101. “Thanks” to: Tennessee Department of Agriculture

102. Contact Us Center for Profitable Agriculture https://ag.Tennessee.edu/cpa Email hal.pepper@utk.eduhal.pepper@utk.edu (931) 486-2777