Sales Tax, Business Tax and Product Liability

InsuranceTennessee Small Ruminant Conference

Knoxville

May 19, 2017

Hal Pepper

Financial Analysis Specialist

Overview

• Sales taxes on the sale of farm products• Business license and business tax on the sale of farm

products• Product liability insurance

Objectives

• Increase understanding of:

• General sales tax and business tax rules

• Exemptions for farmers who sell farm products

• Product liability insurance as a tool to manage risk

Question:

• A man is driving 65 miles per hour on Highway 64.

• Is he breaking the law?

Sales Tax

Sales Tax Topics

• Sales Taxes on Sales of:• Raised and Purchased Farm Products• Value-Added Products

• Sales Tax Liability and Registering with Tennessee Department of Revenue

True or False ?

• “Farmers are always exempt from sales tax on products they sell.”

Things to remember…

• Taxes are complicated.• Interpretations change.• Useful Tennessee Department of Revenue

Tax Guides:• Agricultural Tax Guide• Sales and Use Tax Guide

• A Letter Ruling ($500) can be requested.

Sales Tax(General Rule)

• A 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

Exemptions from Sales Tax for Farmers

• Sales of farm products by the farmer who raised them

• Certain sales of farm products that were purchased from the farmer who raised them

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

Sales of Farm Products by the Farmer Who Raised Them

• The farmer who raises the product may be:• Individual• Entity

• The same farmer must both raise and sell the farm product if the sale is to be considered a raised farm product exempt from sales tax.

Sales of Farm Products by the Farmer Who Raised Them

• To any buyer

• At any location

• No special registration as a farmer is needed

Sales of Purchased Farm Products By a Farmer

A farmer may also 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…

Two Conditions for Tax Exempt Sales of Purchased Farm Products:

1. The products must be purchased from the farmer who raised them, and…

Two Conditions for Tax Exempt Sales of Purchased Farm Products:

2. The amount of farm products raised & sold in a calendar year must be at least 50% of total sales of farm products in the same calendar year.

Sales of Farm ProductsSales ofRaisedFarmProductsSales ofPurchasedFarmProducts

Value-Added Products (Processed)

• A farmer may add value to farm-raised products by processing or packaging them.

• The sale of a value-added product is considered a farm-raised product exempt from sales tax as long as the only added non-raised ingredients are:

• Salt• Water• Sugar• Pectin• Preservatives

Example 1 Raised products are 100% of total sales• Farmer Smith raises 40 goats and sells them live to

consumers for $200 each for a total of $8,000. Does Farmer Smith owe sales tax when she sells the goats?

• Answer: No. The sales are exempt from sales tax because Farmer Smith raised the goats.

• Farmer Smith raises goats and she buys and resells pumpkins from the farmer that raised them. Farmer Smith sells her raised live goats for $8,000, and sells the pumpkins for $5,000 that were bought from the farmer who raised them.

• Are any of the pumpkin sales taxable?

Example 2 Raised farm products are at least 50% of total sales

Example 2 Raised farm products are at least 50% of total sales• Answer: No, none of the

purchased pumpkins are taxable. Both the raised goats and purchased pumpkins are exempt from sales tax since the 50 percent test was met.

Farm Product Sales

Sales ofRaisedGoats$8,000Sales ofPurchasedPumpkins$5,000

Example 3Raised farm products are less than 50% of total sales• Farmer Smith’s raised

goat sales are $8,000 and she sells the pumpkins purchased from the farmer who raised them for $11,000…

• Are any of the pumpkin sales taxable?

Example 3Raised farm products are less than 50% of total sales

• Answer:

• All the sales of the purchased pumpkins ($11,000) are taxable because the 50 percent test was not met.

Farm Product SalesSales ofRaisedGoats$8,000Sales ofPurchasedPumpkins$11,000

Example 4Resold farm products were not purchased from the farmer who raised them• Farmer Smith’s raised goat sales are $8,000. Farmer Smith

bought pumpkins from a broker and resold them for $7,000…

• Are any of the pumpkin sales taxable?

Example 4Resold farm products were not purchased from the farmer who raised them

• Answer:• All the sales of the purchased pumpkins ($7,000) are

taxable 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.

Example 5Sales of value-added products

• Farmer Smith takes her goats to a USDA-inspected processor, gets a TDA retail meat permit and starts selling meat from her raised goats. During processing seasonings are added.

• She sells $5,000 of meat products. Should Farmer Smith pay sales tax on these sales?

Example 5Sales of value-added products

• Answer: Since the meat contains seasonings(something other than farm-raised products, salt, water, sugar, pectin and preservatives), the meat is not considered an exempt farm-raised product and sales of the meat are subject to sales tax.

Registering with Tennessee Department of Revenue for Sales Tax

• If Farmer Smith owes sale tax, she should complete an Application for Registration with Tennessee Department of Revenue.

• Go to www.tn.gov/revenue/article/sales-and-use-tax-registration to access the Online Tax Registration page or the Application for Registration form.

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 20th of the month following the period for which tax is due.

Documents Business Will Receive

Upon registering, a business will receive

Certificate of Registration

Blanket Certificate of Resale (if qualified to make purchases for resale)

Thresholds When Sales Taxes Become Due(Only if sales tax has been paid to the supplier of the inputs or product.)

• Taxable product sales are more than $4,800/year

• Taxable services (i.e., entertainment, hunting, agritourism) are more than $1,200/year

Note: A business liable for sales tax is responsible for paying the sales tax to Tennessee Department of Revenue whether or not it collected the tax from the customer.

Sales Tax Rates

• State rate for most items: 7%• Exception: unprepared food is taxed at 5%

• Local rate varies from 1.00% to 2.75%

• Maximum combined state and local tax rate for most items is 9.75% (7% plus 2.75%)

• For unprepared food the maximum combined rate is 7.75% (5% plus 2.75%)

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 farmer must both raise and sell the farm product if the sale is to be considered a raised farm product exempt from sales tax.

Take Home Messages

• If a farmer sells farm products that were purchased from another farmer, the reselling of the farm products is sales tax exempt as long as: 1) the products were purchased from the farmer who raised them, and 2) raised farm product sales are at least 50% of total farm product sales.

• Farmers with taxable sales of products should complete an Application for Registration and remit sales tax.

Business Tax

Business Tax Topics

• General Rules

• When a Business Tax Return Must Be Filed

• Exemption for Farmers

• How to Get a Business License

• Paying Business Tax

General Rules - Who Does Not Need a Business License?

• Any person in business for profit or gain who has gross annual sales of $3,000 or less does not need a business license.

General Rules - Who Needs a Minimal Activity 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.

General Rules - 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.

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.

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/classification3.shtml

Exemption from Business Tax for Farmers

• “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.”

From Tennessee Department of Revenue’s Business Tax Guide

• Tennessee Code Annotated Section 67-4-712

Sales of Farm Products by the Farmer Who Raised Them

• “Products of the farm sold by the farmer who raised them” are exempt from business tax.

• Livestock• Nursery Stock• Fruits• Vegetables• Poultry

Sales of Farm Products by the Farmer Who Raised Them

• The farmer who raises the product may be:• Individual• Entity

• The same farmer must both raise and sell the farm product if the sale is to be considered a raised farm product exempt from business tax.

Sales of Farm Products by the Farmer Who Raised Them

• To any buyer

• At any location

• No special registration as a farmer is needed

Is There An Exemption for a Farmer’s Sales of Purchased Products?• There is no exemption

from business tax rules for a farmer’s sale of purchased products.

• If a farmer purchases farm products to resell, when he/she sells those purchased products they are subject to business tax rules.

Example 1 revisitedBusiness tax rules and raised farm products• Farmer Smith raises 40 live goats and sells them to consumers for

$200 each for a total of $8,000. Is Farmer Smith subject to the business tax rules when she sells the goats?

• Answer: No. The sales are exempt from business tax because Farmer Smith raised the goats.

Example 2 revisitedBusiness tax rules and purchased products

• In addition to the goats she raised and sold for $8,000, Farmer Smith buys pumpkins and sells them for $5,000. Does Farmer Smith need a minimal activity license?

• Answer: • Yes, she needs a minimal activity license since sales of non-raised

products are between $3,000 and $10,000. This is true even if the sales occur on her farm. If the sales occur within a city with a business tax, a minimal activity license from the city will also be required.

• Note: There is no 50% test with business tax.

Example 3 revisitedBusiness tax rules and purchased products

• In addition to the goats she raised and sold for $8,000, Farmer Smith buys pumpkins and sells them for $11,000. Does Farmer Smith need a business license? Does she owe business tax when she sells the pumpkins?

• Answers: • Yes, she needs a business license since sales of non-raised

products are over $10,000. The city may require a business license as well.

• Yes, the pumpkin sales are subject to business tax because her sales of non-raised products are over $10,000.

Who Administers Business Tax?

• 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.

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.

• If the business conducts sales in multiple counties, the business must register with the respective counties and cities.

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) must be filed. A list of the tax forms for each business tax classification is available at https://www.tn.gov/revenue/article/forms-business-tax.

• 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.

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.

Threshold When Business Tax Becomes Due

• Taxable product sales are more than $10,000/year

Business Tax Classifications

• There are five classifications of businesses.• Each of these classifications is subject to a different rate.• Rates within some classifications also vary according to whether the

sales are made at wholesale or retail.• The dominant business activity determines the classification.• A farmer making retail sales of non-raised farm products over $10,000

would be in Classification 4.

Business Tax RatesCLASSIFICATION RETAIL WHOLESALE TAX PERIOD DUE DATE

Class 1A 0.001 0.00025 Taxpayer’s fiscal/federal tax year

15th day of 4th month following end of year

Class 1B & 1C 0.001 0.000375 Same as above Same as above

Class 1D – Fuel 0.0005 N/A Same as above Same as above

Class 2 0.0015 0.000375 Same as above Same as above

Class 3 0.001875 0.000375 Same as above Same as above

Class 4 0.001 N/A Same as above Same as above

Class 5 0.003 .003 Same as above Same as above

Calculating the Tax

• 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.

• For example, if sales subject to business tax are $30,000, the tax is $30 ($30,000 x .001).

Take Home Messages

• Farmers with sales between $3,000 and $10,000 of non-raised products are required to get a minimal activity license from the local county clerk. The city may require a minimal activity license as well.

• Farmers with sales of $10,000 or more of non-raised products must get a business license from the local county 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.

Product Liability Insurance

Introduction to Risk

Risk is…

the uncertainty regarding likelihood or magnitude of loss, damage or injury

Assessing Risk

Managing Risk

Avoid Risk Reduce Risk

Transfer Risk Accept Risk

Even with local foods, food safety is an issue!

While complying with preventative food safety measures helps minimize the risk of foodborne illnesses, a producer still faces risks in the form of legal actions from consumers who seek financial compensation after contracting a foodborne illness.

Using Liability Insurance to Manage Risk

Transferring Risk with Insurance

• Obtain insurance

• Learn and follow insurance requirements and claim procedures

Transferring Risk with Insurance

• Start with a visit to a qualified insurance agent—preferably one who is familiar with how direct farm businesses operate.

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 modify an existing farm liability policy to provide the protection needed?

Transferring Risk with Insurance• Proof of product liability

insurance may be required in certain markets.

• Make sure the policy includes coverage for product liability arising from any processed farm products you are selling.

Transferring Risk with Insurance

• Make sure the policy covers sales at:

• Roadside stands

• Farmers markets

• Restaurants

• On the farm

• Other points of sale

Transferring Risk with Insurance• Make sure the policy contains

product liability coverage.

• Does the policy cover sales of:

• Products you raised?

• Products you purchased for resale?

• Processed products?

Might You Be Covered Under an Existing Farm Liability Policy?

• 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”.

• Some insurance policies limit the definition of farm activities to production activities.

• The sale of farm products purchased from another source is likely NOT covered under a general farm liability insurance policy.

Commercial General Liability (CGL)

• Some CGL policies that contain product liability provisions may protect farmers from direct marketing liability.

• May cover 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.

Some points to consider…

• Insurance policies are complicated contracts.

• Know what you’re paying for.

• Understand the exclusions (what the policy does NOT cover).

Exclusions• Some policies limit the scope of bodily injury.

• For example, a policy might say:

“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.”

Products Liability Insurance Policy

• Specifically designed to protect the producer or manufacturer of goods against loss by reason of injury to the person or property of others caused by use of his products.

• An effective product liability policy should include liability for someone getting a food borne illness from a product.

Safe Haven???

• “No need to worry… I only sell to friends and family.”

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.

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 subrogation.

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.

Ten Questions to Ask Your Insurance Agent

1. Does my farm liability policy cover my direct farm marketing sales, such as at my roadside stand, or are they excluded as a “separate business” for which I need to buy a commercial policy?

2. Is there a limit to the amount or type of direct farm sales I can make and still have them considered as incidental to my farming operation?

Ten Questions to Ask Your Insurance Agent

3. Even if my farm liability policy covers my direct marketing operation are there reasons why it would be better to obtain a commercial business policy?

4. Does my farm liability policy cover any sales made off the farm such as at a farmers market or direct deliveries to stores or restaurants?

5. If my farm policy does not cover sales at the farmers market then what type of policy should I buy for this purpose? Is product liability insurance available or necessary for what I sell?

Ten Questions to Ask Your Insurance Agent

6. As part of my direct marketing operation some customers pay to visit the farm to engage in recreation and other customers pick their own produce, does my farm liability policy apply or do these activities present special insurance needs?

7. As part of my direct marketing business sometimes I, other family members or employees make deliveries of produce to customers using farm vehicles. Does my automobile insurance cover such trips and if not what type of policy do I need?

Ten Questions to Ask Your Insurance Agent

8. When buying insurance for buildings and equipment, should I set the value at “replacement cost value” or “depreciated value?” Is there a “co-insurance” provision in my policy that requires me to pay part of any loss?

9. Is my policy a “claims and occurrences” policy and if so when does coverage end and what happens if I change insurers?

10. Are you a general agent working for one company or an independent agent?

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.

Take Home Messages

• Product liability insurance is a vital legal risk management tool for direct marketers.

• Carefully consider needs for coverage.

• Work closely with your insurance agent and communicate well and often.

Obtaining Coverage through the National Farmers Market Coalition

and Campbell Risk Management• Individual farmers can become members of the National Farmers Market Coalition

for $25. https://farmersmarketcoalition.org/joinus/membership/

• Members gain access to a policy through Campbell Risk Management.

• Vendor and Producer Liability Insurance Program provides $1,000,000 per occurrence in both general and product liability coverage with no deductible and a $2,000,000 annual aggregate limit.

• Extends coverage to all venue locations that the vendor/producer participates in.

• Vendors/producers can sell through any retail or wholesale distribution channel they choose.

• Cost starts at $275 per year depending on the state, types of products sold and estimated annual gross sales.

• Does not cover sales made on a personal farm location.

Sources of Product Liability Insurance

• Campbell Risk Management (Larry Spilker)

9595 Whitley Drive #204

Indianapolis, IN 46240

(800) 730-7475

Email lspilker@campbellrisk.com

http://www.campbellriskmanagement.com/contact-us

Obtaining Coverage through the Food Liability Insurance Program

• Food Liability Insurance Program offers similar benefits to the policy offered by Campbell Risk Management. http://www.fliprogram.com

• “Commercial farming” is excluded from coverage and prohibits a farmer who engages in commercial farming from being eligible for this program. Commercial farming is described as selling to consumers from the farm itself.

• Starts at $299 for vendors with annual gross sales of $50,000 or less annually.

Sources of Product Liability Insurance

• Food Liability Insurance Program260 South 2500 West, Suite 303

Pleasant Grove, UT 84062

(888) 568-0548

Email info@fliprogram.com

http://www.fliprogram.com

Sources of Product Liability Insurance

• C. L. Butcher Insurance Agency401 Hotel Avenue

Knoxville, TN 37918

(865) 689-5482

• Gilley McCready & Sneed Insurance607 Holston Avenue

Bristol, TN 37620

(423) 968-7181

Sources of Product Liability Insurance

• John W. PickardWebb Pickard Insurance & Invest. Services, Inc.

5258 Murfreesboro Road

LaVergne, TN 37086

(615) 793-9000 Office (615) 585-8801 Cell

Email Jpickard@webbpickard.com

Sources of Product Liability Insurance

• Clement LedbetterBattle Page Insurance Agency

1418 W Main Street

Franklin, TN 37064

(931) 698-5199 (cell)

• Chad WilliamsRedman-Davis Insurance, Inc.

410 W. 7th Street

Columbia, TN 38401

(931) 388-5387

Resources

• Sales Tax in Tennessee on the Purchase and Sale of Farm Products PB 1806 available online at https://utextension.tennessee.edu/publications/Documents/PB1806.pdf

• Agricultural Tax Guide, Sales and Use Tax Guide, and Business Tax Guide available online at https://www.tn.gov/revenue/article/tax-guides

Resources

• Tennessee Department of Revenue• Submit a question to Revenue Help online at

https://revenue.support.tn.gov/hc/en-us• (800)342-1003• https://www.tn.gov/revenue/• Email TN.revenue@TN.gov

Contact Us

• Hal Pepper

• Financial Analysis Specialist

• Center for Profitable Agriculture

• https://ag.tennessee.edu/cpa

• hal.pepper@utk.edu

• (931) 486-2777