Sales Tax, Business Tax and Product Liability Insurance

Transcription

1 Sales Tax, Business Tax and Product Liability Insurance 2015 Tennessee Small Ruminant Conference Knoxville, TN July 31, 2015 Hal Pepper Financial Analysis Specialist

2 Overview Sales taxes on the sale of farm products Business license and business tax on the sale of farm products Product liability insurance

3 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

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

5 Sales Tax

6 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

7 True or False? Farmers are always exempt from sales tax on products they sell.

8 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 can be requested for unique situations.

9 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

10 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

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 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.

13 Sales of Farm Products by the Farmer Who Raised Them To any buyer At any location No special registration as a farmer is needed

14 Sales of Purchased Farm Products By a Farmer 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 Sales of Purchased Farm Products: 1. The products must be purchased from the farmer who raised them, and

16 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 Products Sales of Raised Farm Products Sales of Purchased Farm Products

17 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 farmraised product exempt from sales tax as long as the only added non-raised ingredients are: Salt Water Sugar Pectin Preservatives

18 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.

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

20 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 of Raised Goats $8,000 Sales of Purchased Pumpkins $5,000

21 Example 3 Raised farm products are at least 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?

22 Example 3 Raised 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 Sales Sales of Raised Goats $8,000 Sales of Purchased Pumpkins $11,000

23 Example 4 Resold 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?

24 Example 4 Resold 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.

25 Example 5 Sales 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?

26 Example 5 Sales 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.

27 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 to access the Online Tax Registration page or the Application for Registration form.

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29 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.

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

31 Thresholds When Sales Taxes Become Due (Note that sales tax must have been paid to the supplier of the product.) Taxable product sales are more than $4,800/year Taxable services (i.e., entertainment, hunting, agritourism) are more than $1,200/year

32 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.

33 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 up to 2.75%) For food the maximum combined rate is 7.75% (5% plus up to 2.75%)

34 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.

35 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.

36 Business Tax

37 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

38 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.

39 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 (new in 2014) 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.

40 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.

41 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.

42 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 ification3.shtml

43 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

44 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

45 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.

46 Sales of Farm Products by the Farmer Who Raised Them To any buyer At any location No special registration as a farmer is needed

47 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.

48 Selling at Farmers Markets A farmers market must collect a $1 fee per day from vendors who do not have a business license selling non-raised farm products and submit the fees collected to local tax officials. Vendors have the option of either obtaining a business license or remitting the $1 per day to the farmers market. If the city also has a business tax the fees will total $2 per day.

49 Example 1 revisited Business 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.

50 Example 2 revisited Business 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? Answers: 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.

51 Example 3 revisited Business 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.

52 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.

53 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.

54 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 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.

55 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.

56 Threshold When Business Tax Becomes Due Taxable product sales are more than $10,000/year

57 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.

58 Business Tax Rates CLASSIFICATION RETAIL WHOLESALE TAX PERIOD DUE DATE Class 1A Taxpayer s fiscal/federal tax year 15 th day of 4 th month following end of year Class 1B & 1C Same as above Same as above Class 1D Fuel N/A Same as above Same as above Class Same as above Same as above Class Same as above Same as above Class N/A Same as above Same as above Class Same as above Same as above

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

60 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.

61 Product Liability Insurance

62 Introduction to Risk

63 Risk is the uncertainty regarding likelihood or magnitude of loss, damage or injury

64 Assessing Risk

65 Managing Risk Avoid Risk Reduce Risk Transfer Risk Accept Risk

66 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.

67 Using Liability Insurance to Manage Risk

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

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

70 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?

71 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 processed farm products.

72 Transferring Risk with Insurance Make sure the policy covers sales at: Roadside stands Farmers markets Restaurants Other points of sale

73 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?

74 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.

75 Commercial General Liability (CGL) 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

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

77 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.

78 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

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

80 Safe Haven??? No need to worry I only sell to friends and family.

81 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.

82 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.

83 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.

84 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.

85 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.

86 Sources of Product Liability Insurance C. L. Butcher Insurance Agency 401 Hotel Avenue Knoxville, TN (865) Food Liability Insurance Program 260 South 2500 West, Suite 303 Pleasant Grove, UT (888)

87 Sources of Product Liability Insurance Gilley McCready & Sneed Insurance 607 Holston Avenue Bristol, TN (423) John W. Pickard Webb Pickard Insurance & Invest. Services, Inc Murfreesboro Road LaVergne, TN (615) Office (615) Cell

88 Sources of Product Liability Insurance Larry Spilker Campbell Risk Management (offers insurance for farmers markets) 9595 Whitley Drive #204 Indianapolis, IN (800)

89 Resources Sales Tax in Tennessee on the Purchase and Sale of Farm Products PB 1806 available online at /PB1806.pdf Agricultural Tax Guide, Sales and Use Tax Guide, and Business Tax Guide available online at

90 Resources Tennessee Department of Revenue Submit a question to Revenue Help online at (800) TN.revenue@TN.gov

91 Contact Us Hal Pepper Financial Analysis Specialist Center for Profitable Agriculture (931)