Keeping the Wolves at Bay Be Informed About Liability Insurance and Sales Taxes Farmers Market Boot Camp Program 2013 Hal Pepper Financial Analysis Specialist Center for Profitable Agriculture Overview Introduction to risk Using liability insurance to manage risk Sales taxes on the sale of farm products 1
Objectives Increase awareness of tools to manage liability risk Increase understanding of sales tax rules and exemptions that apply to farmers who sell farm products Risk is The uncertainty regarding likelihood or magnitude of loss, damage or injury 2
Types of Risk 1. Legal Laws/regulations Injury to customers or employees 2. Human Resources Death, divorce, disability and disagreement Employee turnover 3. Business Interruption Weather, natural disasters, other 4. Production Weather, disease, pests, errors 5. Marketing Ability to entice customers Increased competition 6. Financial Ability to meet cash flow, obtain affordable credit, grow equity Damage or loss to personal property Risk Management Methods 1. Avoid Risk Choose not to engage in a specific activity 2. Reduce Risk Implement preventative measures/procedures, safety plans, safe handling procedures 3. Transfer Risk Transfer to another party typically with insurance 4. Accept Risk Prepare for loss or damages create emergency fund 3
Obtain insurance Example Methods to Transfer Risk Property, liability, health, disability, life, crop, etc. Learn and follow insurance requirements and claim procedures Liability Insurance Liability insurance is a way of protecting your business in case someone gets ill from eating products you sold them. You could be financially responsible if you are sued by them. 4
Liability Insurance Every business, whether large or small, is at risk of being sued for negligence causing property damage or bodily injury and legal fees from claim settlements are always increasing. Liability Insurance Insurance policies are complicated. Read the policy and understand what it covers. Understand the exclusions. Deal with an agent who understands the policy and your situation. 5
Liability Insurance Insurance should be treated like any other business expense. Know what you re paying for. Don t just hope you re covered. Insurance Coverage Options General Farm Liability Insurance Policy Commercial Business Liability Insurance Product Liability Insurance Policy Product Recall Insurance Policy Accidental or Product Contamination Policy Malicious Tampering Insurance Combination Policies Excess/Umbrella/Surplus Lines of Insurance 6
General Farm Liability Insurance Policy Protects against claims for bodily injury and property damage that occur on the farm premises or as a result of farm operations Accidents that affect farmers, employees, guests and customers Covers activities considered farming One definition of farming: the ownership, maintenance or use of premises for the production of crops or the raising or care of livestock, including all necessary operations Commercial Business Liability 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 7
Caution Note: 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. In many situations, it may not! Caution The sale of produce that you purchased from another farmer is likely not covered under a general farm liability policy. 8
If you are selling processed products (like jams or meat) you may need more than a general farm liability insurance policy. Bodily injury does not include: Exclusions 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; or Emotional distress, humiliation, or other mental injury to a person unless it arises out of an actual physical injury to that person 9
Product Liability Insurance Policy Protects against claims of injury from fresh or processed food products that cause foodborne illness Covers products and completed operations General farm liability policy and commercial business coverage may be combined with a homeowner s policy Combination Policies 10
Excess/Umbrella/Surplus Lines of Insurance Provide catastrophic loss protection when the underlying insurance is inadequate Coverage and exclusions vary from company to company. The insurance company may place limits on retail sales that are considered farming or it may consider them to be a business that is not defined as farming. Does your policy include product liability coverage? Considerations 11
But I m only selling to friends and family I trust 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. 12
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 do I need? Consider the value of your assets. Consider the dollar amount of potential claims. Buyers of your product (grocery stores) may require a minimum amount of product liability insurance (Whole Foods $2 million) Discuss your particular situation with your insurance agent to verify coverage & needs. Reevaluate your coverage annually. 13
Make sure the proper business entity is insured. Premiums often are based largely on product sales and hazards involved. Provide annual sales updates to your insurance agent. 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 14
Tennessee Sales Tax Regulations on the Sale of Farm Products Sales Taxes on Sales of: Raised Farm Products Purchased Farm Products Sales Tax Topics Sales Tax Liability and Registering with Tennessee Department of Revenue 15
Question A man is driving 65 miles per hour on Hwy 64. Is he breaking the law? Some points in the Law (Title 67 of Tennessee Code) are clearer than others. Consult Sales and Use Tax Guides For specific situations, consider requesting a Letter Ruling 16
Atax that permits you to engage in the business of: Sales Tax Selling tangible personal property at retail Selling certain services at retail Charging admission to events Exemptions Exist 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 17
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 a person or an entity. When we talk about sales of farm products by the farmer who raised them we mean that the person or entity who sells the farm products to the consumer is the same person or entity who raised them. 18
Sales of Farm Products by the Farmer Who Raised Them Any Buyer Any Location No special registration needed. Certain Sales of Purchased Farm Products A farmer can buy farm products and sell them. When the farmer sells these purchased farm products, the sale is exempt from sales tax if two conditions are met. 19
Conditions for Tax Exempt Sales of Purchased Farm Products 1. The products must be purchased from the farmer who raised them, and Conditions for Tax Exempt Sales of Purchased Farm Products 2. The total 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 20
Example 1: Raised Farm Products 100% of Total Farmer Smith raises 1,000 pumpkins and sells them to consumers for $8.00 each for a total of $8,000. Does Farmer Smith owe sales tax when he sells the pumpkins? Answer: No. The sales are exempt from sales tax because Farmer Smith raised the pumpkins. Example 2: Raised Farm Products 50% or more of Total Farmer Smith raises pumpkins in a calendar year and sells them for $8,000, and sells pumpkins to consumers for $5,000 that were bought for resale from the farmer who raised them in the same calendar year. Are any of the pumpkin sales taxable? 21
Example 2: Raised Farm Products 50% or more of Total Answer: No, none of the pumpkins are taxable. Both the raised pumpkins and purchased pumpkins are exempt. Pumpkin Sales Sales of Raised Pumpkins $8,000 Sales of Purchased Pumpkins $5,000 Example 3: Raised Farm Products Less than 50% of Total If Farmer Smith s raised pumpkin sales are $8,000 and the pumpkins purchased from the farmer who raised them are sold to consumers for $10,000 Are any of the pumpkin sales taxable? 22
Example 3: Raised Farm Products Less than 50% of Total Answer: The raised sales of $8,000 are exempt. The sale of the purchased pumpkins ($10,000) are taxable. Pumpkin Sales Sales of Raised Pumpkins $8,000 Sales of Purchased Pumpkins $10,000 Example 4: Farm Products Purchased from Others If Farmer Smith s raised pumpkin sales are $8,000 and pumpkins are purchased from a broker and resold to consumers for $7,000 Are any of the pumpkin sales taxable? 23
Example 4: Farm Products Purchased from Others Answer: 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. Registering with Tennessee Department of Revenue Farmer Smith should complete an Application for Registration with Tennessee Department of Revenue. Application for Registration may be completed and submitted online at http://www.tn.gov/revenue/forms/sales/index.shtml 24
Remitting Sales Taxes When the Application for Registration is completed, the business is given option of filing online or on paper. 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. 25
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 Thresholds when sales taxes become due: Taxable product sales are more than $4,800/year Taxable services (i.e., entertainment, hunting, agritourism) are more than $1,200/year Business is liable for sales tax, even if it doesn t collect from customer. 26
Sales Tax Rates State rate 7.00% Food (fruits and vegetables) taxed at lower rate of 5.25% Candy & prepared food taxed at 7.00% Local rate varies from 1.00% to 2.75% Maximum combined tax rate 9.75% (food 8.00%) Take Home Messages A farmer s sales of raised farm products ( products of the farm sold by the farmer ) are exempt from sales tax. The same business entity must raise and sell the farm products if the sale is to be tax exempt. 27
Take Home Messages Farmers may sell 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. Business with taxable sales of products (>$4,800) or services (>$1,200) should complete Application for Registration and remit sales tax. Resources Sales Tax in Tennessee on the Purchase and Sale of Farm Products PB 1806 https://utextension.tennessee.edu/publications/documents/pb1806.pdf Agricultural Tax Guide http://www.state.tn.us/revenue/taxguides/agricultural.pdf Sales and Use Tax Guide http://state.tn.us/revenue/taxguides/salesanduse.pdf Tennessee Department of Revenue (800)342 1003 http://www.tn.gov/revenue/index.shtml Email TN.revenue@TN.gov 28
Special Thanks to Tennessee Department of Agriculture Contact Us Center for Profitable Agriculture https://ag.tennessee.edu/cpa Hal Pepper s E mail hal.pepper@utk.edu (931) 486 2777 29