What You’ll Learn Here

  • Considerations for Business Form Selection
  • Considerations for Business Name Selection
  • Business Issues in the Operation of a CSA
  • State Sales Taxes on Food
  • Business Occupation Licenses and Taxes: Agricultural Exemptions
  • Income Tax Issues
  • Other Resources for Operating a Direct Farm Marketing Business

So far, the Guide has considered different types of direct farm marketing business opportunities and looked at a number of the legal issues associated with them.  Regardless of which options you choose for direct farm marketing, you will have to consider a number of issues relating to the structure and operation of your business. You will face such questions as which type of business to form, for example, a corporation, partnership, or sole proprietor, and what business permits you need to operate? And of course, no one doing business in the U.S. can forget about state and federal tax laws. This chapter looks at a number of the business organization and operational issues involved in farm direct marketing. It also considers the possible need to have a business permit or license to operate, and examines several issues of federal and state taxation unique to direct farm marketing.

Considering the Type of Business Form to Select

When you decide to begin a direct farm marketing business there are several fundamental issues you will need to address.  These include:

  • what activities will your business conduct
  • what type of business is most appropriate for your plans
  • what government permits are needed before doing business
  • what are the tax obligations of the business

The choice of what business form to use to organize and manage your business is up to you.  There are a range of legal options available to you.  The following discussion sets out the most common options and their main advantages and disadvantages:

Sole Proprietership
This is the most common form of organization for small businesses, in part because it is the easiest to form and operate.  There is no special legal form to fill out or structure to create.  Instead, the business is personal to the operator which means all the income is taxable to the individual and all of the assets are at risk with the business.  One legal requirement in many states is that if the business is using a trade name or a fictitious name, the owners must register with the state or local government, so the authorities know who is actually running the business.
Partnership
This form is used when two or more people desire to be co-owners of a business.  State law will provide the legal rules for creating and operating a partnership.  Typically the best way to create one is to enter a written legal “partnership agreement” setting out the terms of the agreement.  However, it is important to note that in some situations courts have ruled the parties operated a business as partners, even without a written agreement.  This is especially important  to third parties with whom you may do business.  The most significant legal aspect of a partnership is the partners have joint ownership of both the profits and losses of the businesses, in otherwords they are personally liable for the gains and losses of the business.
Limited Partnership
Another form of partnership is known as a limited partnership.  The difference is that one party is the general partner, who typically runs the business and who has full liability, and the other partners are “limited partners” meaning they are liable only to the extent of the money or assets they invest in the business.  State law will provide the rules for creating such an arrangement.  Both forms of partnerships are taxed on the basis of the income received by the partners and are not taxed at the level of the partnership.
Corporation
A corporation is a business form created under state law, by filing the articles of incorporation with the state.  The law recognizes the business as a separate legal entity, owned and managed by the shareholders.  Corporations will vary as to the number of shareholders they have.  Some corporations, known as closely held corporations, may be small with just a few shareholders, and there is typically little market for the stock.  At the other extreme, publicly traded corporations may have thousands of shareholders and there is a regular public market for valuing and selling the shares or ownership interests.  The primary legal advantage of a corporation is that it offers the shareholders or owners limited liability, meaning they are only at risk for the amount of money they have invested in the business.   One of the possible disadvantages of corporations is that the income of the business may be taxed twice, once at the level of the business and again when it is distributed to the owners.  The tax laws do allow for the creation of corporations, such as those known as S corporations, limited to fewer than 36 shareholders, which allow for “pass through” tax treatment of the income.  This means the corporation does not pay taxes but the shareholders do.
Limited Liability Company (LLC)
Lawyers and business planners have developed a series of other business forms which provide owners with methods of dealing with the issue of limited liability and single taxation.  The idea is to obtain the limited liability treatment of corporations (or limited partnerships) and still have the single taxation at the owner level.  The unique tax rules and business guidelines will vary depending on the type of business form created.
Cooperative
Any people involved in agriculture are familiar with the cooperative form of doing business.  A cooperative is a form of corporation created under state law, which allows for a number of owners or shareholders to pool their funds to operate a business which will provide services to them.  Cooperatives are given special treatment under federal anti-trust and tax laws and are required to operate the business in special ways.  The business is to be operated for the benefit of the owners who actually use or patronize the business.  The cooperative does not experience profits but instead allocates the extra income it takes in to the account of each member based on the amount of patronage or business the member did with the cooperative.  This income is then divided between payments or “refunds” to the member and funds reinvested in the cooperative.  The member is responsible for taxes on all of the allocated patronage.

This is a very simplified discussion of the attributes of different legal forms of doing business.  It only begins to consider the various attributes of these different legal forms, in particular the income tax ramifications, which can be one of the most important considerations in choosing a business form.  Your attorney or other business advisor will be able to help answer questions you might have in this regard.  In addition, you might want to obtain a book, written for non-lawyers explaining these business issues.   For information about other valuable books to consult, see the sidebar.

Questions to Consider in Choosing a Type of Business Form

When thinking about the type of business organization which fits your needs, there are several important ideas to keep in mind.

First, the form of business you choose should serve you rather than the other way around.  In otherwords, you should consider the costs and legal requirements which will accompany the business form you chose.  You don’t want a business form which will be too complicated or too complex for what you need.  Also remember that at some point in the future you might want to sell or otherwise dissolve the business, which can be difficult if it is too complicated.  For most families, the simplest and most flexible form of business will be a sole proprietorship, which is an unincorporated personal business.

Second, certain business forms involve technical legal requirements for operating the business, such as the need to hold regular corporate meetings and require considering such issues as who has the authority to make decisions.  It is important to remember that for some forms of businesses, for example a corporation, you can’t just form it on paper and then continue to operate the business as if nothing has changed.  To help you consider which type of business organization might be best for you, the accompanying box lists eight questions you should ask.

Eight Questions to Consider in Deciding What Type of Business is Right for You
1. How large is the business (or how large do you hope it will become) in terms of sales, employees and capital needs?  The larger and more complicated the business becomes, the easier it will be to justify the expense of forming a corporation and such a form may be needed to help organize and manage the business.

2.  How many people are involved in the ownership and management of the business?  The fewer people involved the less need there is for a formal business structure, beyond a sole proprietorship or partnership.  The more people or family members involved in managing and owning the business, the more valuable it may be to use some form of business structure, such as a corporation, to help allocate ownership interests and decision making.

3.  What is the relation of the people involved, are they family, unrelated business partners or employees?  The number of people involved in the business and their relation to each other can influence whether some business other than a sole proprietor may be needed. If the parties are unrelated and are contributing capital or other assets to the business, then a partnership or some form of corporation may be needed.

4.  Do you intend to transfer or sell part of the business to family members or employees?  If the future existence and ownership of the business is a concern, then it is worth considering a business form which may make it easier to transfer interests and continue the life of the enterprise after you retire.  One benefit of incorporation is that the assets can be represented by shares which can be divided and transferred among the owners, more easily than other assets, such as land and equipment.

5.  Do you intend to be liable for the debts and obligations of the other owners or do you want to limit each party’s risks?   One main reason to use a business organization is the issue of liability.  When people are general partners they share not only the profits and decision-making, but also the risks and obligations.  If you do not want this joint liability, then a business form such as a limited partnership or a corporation may provide limited liability.

6.  Do you have the time and money to spend on the legal paperwork and record keeping which some business forms require?  Creating a corporation means that  decision making and accounting for the business will become more complicated.  If you want to be able to run the business however you desire and not worry about holding meetings, keeping minutes, or getting the approval of other owners then a sole proprietorship or closely held corporation may be attractive.

7.  What are the potential risks or liabilities associated with the business and how serious might they be?  The greater the potential for large liabilities, such as borrowing large amounts, hiring numerous employees, conducting dangerous activities, or creating potential environmental risks, then the more important it may be to choose a business form which offers some form of limited liability to investors and owners.

8.  Do you have other businesses or do you have other personal assets you do not want to place at risk?  If all of your assets and efforts are tied up in the direct farm marketing business, it may not make much difference what type of business form you choose because everything you own may already be at risk.  However if you have other separate businesses or have other property or assets you do not want to put at risk, then you should consider choosing and operating in a business form which will limit your potential liability and exposure.

By considering the questions set out in the box and consulting other sources of information and your advisors, you should be able to make an informed choice about what type of business is best for you.  Once you have formed the business there will be other issues which you may have to consider.  The following discussion considers some of the operational issues you might face.

Choosing a Name for Your Direct Farm Marketing Business

The issue of how you describe your operation, from the name you choose for your farm to how you describe your products, are for the most part matters of free choice for you.  For example, selecting a name for your farm can be a very important personal and business decision.  The name you choose will reflect both the character of your operation and your aspirations.  There are many very colorful and descriptive names used by direct farm marketers.  Our farm is named Sunstead, a name taken from the farm of Gove Hambidge, a former USDA employee, who wrote the 1935 book Enchanted Acre, about the joys of operating a small farm.  One of my favorite farm names is the Full Belly Farm run by Dru Rivers and Paul Muller in California.

The ability of direct marketers to post signs for operations will depend on a number of matters: state law on highway signage, application of federal highway beautification laws, local land use ordinances and sign regulations.  Several states have laws which protect the ability of producers to post signs for roadside stands.  In California, the law protects the right of farmers to use the name of their farm in advertising and gives them the right to post a sign on the adjacent roads noting the existence of the farm.  This right exists regardless of other state and local restrictions on the use of signs and billboards.  The California agriculture director has the power to enact regulations to allow displays “which identify the location of a farm produce outlet where farmers sell directly to the public only those farm or ranch products they have produced themselves …”  The signs may be placed within 660 feet from the edge of the right-of-way and the signs cannot be larger than 150 square feet and may not list the price of the products.  [See, Calif. Bus. and Prof. Code §5405.5.]Many direct marketers invest a great deal of time and money in developing goodwill and name recognition for their operations.  Using trademark law is the typical way a company obtains a legal right to exclusive use of a name or brand.  A California law of interest to direct marketers provides:  “Any person selling or marketing the products grown on a farm may use the name of the farms as a trade-mark on the products of the farm, in the same manner as provided for other trade-marks, and subject to the same rights and duties, as provided in this code.”  [See, Calif. Bus. and Prof. Code §14462]  Trade names and what steps are required to protect them are generally questions of state law.
State Laws on Farm Names
Producers who are interested in protecting their right to use a name they have adopted for their farm or business should determine if state law provides for doing so. Some states, such as Iowa, have laws which provide a method for selecting and registering the name of your farm, so that it cannot be copied. In Iowa farmers can register both the name of their farm and any trade names they choose for their business.

 Iowa Code Section 557.22

Any owner of a farm in this state may have the name of that farm together with a description of the owner’s lands to which said names applies, recorded in a register kept for that purpose in the office of the county recorder of the county in which said farm is located.
Once a farm name is recorded the owner of the name has a vested interest in that name and it can not be claimed by any other farm in the county. When the farm is sold the name may be transferred with it.

The issue of using a trade name is somewhat different. Many states require that you can not operate a business under a trade name or assumed name unless you have first recorded that trade name with the state or county. For example:

 Iowa Code Section 547.1

A person or co-partnership shall not engage in or conduct a business under a trade name or an assumed name of a character other than the true surname of each person owning or having an interest in the business, unless the person first records with the county recorder of the county in which the business is to be conducted a verified statement showing the name, past office address, and residence address of each person owning or having an interest in the business, and the address where the business is conducted.
The Iowa law makes failing to record a trade name a simple misdemeanor, each day being a separate violation. The purpose of the law is to create a record so government officials or customers can contact the operators of the business if the need should arise.

Business Organization Issues in the Operation of a CSA

Two questions which producers who are interested in forming a CSA or a subscription farm have to answer are: what business form to use and what form of agreement or contract to use with their members.  As to the business form, there is no particular reason why operating a CSA would require using a different form than the one already in place.  Typically CSAs are not created as separate legal entities but instead are part of the operator’s business.  However, there may be two exceptions to this.  The first is in situations where the land for the CSA is owned by some group other than the farmer, such as where local land trusts own farmland being run as a CSA.  The second exception, could be when the CSA is operated by a group of farmers with each providing some of the food being sold.  In this situation, the parties will need to have some type of agreement concerning how the CSA will be operated and how the income will be divided.  While the parties would not need to create a separate business entity to do this, they could consider forming some type of cooperative or other business structure to manage the operation.  There are a number of excellent sources of information about organizing and operating a CSA.  See the accompanying sidebar for a list of several valuable CSA resources.

On the issue of agreements or contracts with the CSA participants, practices will vary depending on the experience of the farm operators.  The community or family aspect of many CSAs means there is little need to have a formal membership agreement, or if one is used it is often relatively simple.  There is nothing wrong with this approach, although whenever people enter a business arrangement which includes obligations to provide services it is good advice to have something in writing.  The main purpose of using a written agreement is so the parties have a clear understanding of what they are agreeing to do.  For a CSA, the agreement could cover terms such as the share price, the number of deliveries expected during the season, how or where the weekly deliveries will be made, and what happens if there is a crop failure.  Also, if the relationship includes any special member obligations or expectations, for example that each member will work a certain number of hours, these terms should be included.  An example of an agreement once used by an Illinois CSA is set out in the box below.

Prairieland CSA Contract Agreement Between Consumer and Producers
The Consumer, __________, subscribes for ______ shares of the fresh produce planted, grown, and harvested for sharers in Prairieland Community Supported Agriculture (PCSA) during a 24 week period that begins May 30, ____ and ends November 7, ____ (Production Period). The consumer agrees to pay the producers $340.00 for each share subscribed; $4 of which will go for outreach, newsletters, etc. The total amount may be paid in full when a signed copy of this agreement is sent to the Producer, or may be paid in three installments:

$100.00 by April 1; $120.00 by May 15; $120.00 by June 15

The Producers, ____________ agree to plant, grow, harvest, and deliver the fresh produce paid for by the consumer.  The approximate division of weekly production will be as follows: (allocation of the fee between producers).  Although not certified organic, the Producers will use organic farming practices.  No herbicides, synthetic pesticides, or commercial fertilizers will be used.  The Producers plan to grow enough crops to provide, for each share subscribed by the Consumer, a weekly supply of produce that would retail for an average of $14.00.  The crops planted and the harvest schedule will roughly follow the attached chart.

The Consumer and Producers agree that delivery and distribution of the fresh produce will be coordinated by PCSA and handled in the following manner:

– The Producer will deliver the Consumer’s produce to _______ by 4:00 p.m. each Tuesday during the Production Period.

– If inclement weather or other factors prevent Tuesday delivery, the Producers will contact a person designated by PCSA to reschedule delivery that week and the PCSA designated delivery person will notify the  Consumer that delivery has been rescheduled.

– The Consumer will pick up produce at ____ on the day of delivery between 4:00 p.m. and 7:30 p.m.  If the Consumer does not pick up produce on the day of delivery AND does not contact ____ to arrange for pickup at another time, PCSA will classify the produce as surplus and donate it to the Common Ground Food Co-op.

As partners, the Producers and Consumer will share the risks of planting, growing, and harvesting enough fresh produce to provide an adequate amount and variety of vegetables during the Production Period for each share subscribed by the Consumer.  It is possible that some crops will wholly or partially fail.  Hopefully, other crops will do better than expected, making up for the failures.  In the event that everything goes according to plan, and the experiment is successful, the Consumer and Producers agree to share the credit for this achievement.

_______________________
Consumer signature and date

Circle A Payment Plan:  One payment/ 3 Installments

Instructions: Fill in the blanks and send with your first payment or full payment to: _________________________

Q. As a lawyer what do you think of this CSA agreement?

The agreement does a good job of describing the relation between the parties.  There are several points that are left somewhat unresolved.  For example the agreement notes that the crops might fail and the deliveries may be smaller than anticipated.  It notes other crops might make up the difference, but it does not clearly state the consumers have no recourse against the producers if the crops fail.

The major legal concern any lawyer would have with this agreement is the use in the last paragraph of the phrase “As partners, the Producers and Consumer will share the risks…”  While the intent of the clause is to highlight the shared risk between them, the use of any language describing the relation as “partners” is dangerous.  It is doubtful that any of the people signing this agreement intend it to be a legal partnership – especially if that means each party would be liable for the other’s debts and obligations.  While it is doubtful a court would find the parties intended to create a partnership, a written agreement stating that is the parties’ relation is strong evidence.  This agreement is a good example of how people may unintentionally use terms which have specific legal meanings.  The agreement being used by this CSA for 2014 has been updated. For more information you can visit their website.

State Sales Taxes on Food

Perhaps the most common business operation issue you will face in your direct farm marketing business is the question of whether you need to collect state and local sales tax on the products you sell.  The answer to this question will depend on two factors: where you are located and what you sell.  Many states have exemptions from the collection of state and local sales tax for the sale of food.  If you reside in such a state, the sales tax exemption makes the process of direct farm marketing easier.  First, you do not have to apply for and receive a state sales tax permit.  Second,  you do not have to collect the tax when making sales.  Third, you do not have to file periodic reports and make sales tax payments to the government.  Conversely, if you reside in a state which imposes sales tax on food then you will have to meet these steps, unless some other state exemption applies specifically to food products sold by the farmers raising them.  To find out if your state has a sales tax exemption for food and to determine what licensing procedure applies if it does not, you should contact the State Revenue Department in the state capital.

It is important to note that even in states which exempt the sale of food products from sales tax, the exemption may not apply to everything that you sell.  For example, in Iowa the exemption applies to foods such as fresh produce and fruit, but it does not apply to flowers.  This means that farmers selling at farmers markets are still required to collect sales tax on flower sales.  In most states the sales tax exemption for food does not apply to ready-to-eat foods, such as sandwiches.  In application this can create confusing situations, such as the administrative ruling from Indiana, which held:

The selling of whole watermelons by a farmer from a stand located on his property is not subject to sales tax.  However, the selling of watermelon by the slice is subject to sales tax since the food is sold for immediate human consumption.

It is important to recognize the exemption of food from sales tax is not the same issue as the possible application of other state and local taxes – for example – business and occupation taxes, which may apply to farmers engaged in direct farm marketing.  The possible application of these laws and the exemptions which are commonly found in them for farmers, are discussed in the next section.

One final point about sales taxes and agriculture concerns the exemption that some states provide to farmers from paying sales tax for products purchased for use on the farm.  If your state has enacted such a law, the state department of revenue will most likely have a set of regulations identifying which purchases made by farmers are exempt.  The regulations will also contain any limitations on who can claim such exemption.  For example, in Indiana the sales tax exemption contains a provision limiting its availability to people who operate a farm for profit.

Indiana Admin. Code Title 45 §2.2-5-4
(a) Agricultural exemption certificates may be used only if the purchaser is occupationally engaged in the business of producing food or commodities for human, animal, or poultry consumption for sale or for further use in such production.

(b) The department has determined that persons occupationally engaged in producing food and commodities as used in the Indiana sales and use tax act, shall mean and include only those persons, partnerships, or corporations whose intention it is to operate a farm at a profit and not those persons who intend to operate a farm for pleasure as a hobby. Operations similar to those of a pony farm, riding stable, or the production and raising of dogs and pets, are not classified as farms for the purpose of the state gross retail tax act.

The rule goes on to provide a londg list of specific items that are not considered exempt as well as a list of specific items that are exempt.

The existence of a limitation on the intent of the person to operating the farm apparently means the department has some test for determining when someone is farming for profit as opposed to doing it for pleasure as a hobby.  One problem with such provisions is how they create arbitrary distinctions and reflect value judgments concerning who is really a farmer.  It seems logical that the best test is whether you raise items for sale.

Business Occupation Licenses and Taxes: Agricultural Exemptions

A business issue most direct farm marketers will have to address concerns the possible application of state or local requirements to obtain a business or occupation license and pay a tax on your business activities.  This is not a sales tax or an income tax but instead is a tax on the existence of the business.  There are three primary reasons why local governments may use these licenses or permits as a way to regulate business activities.  First, by requiring people to obtain a license to engage in some conduct the government can impose minimum standards for how the business is conducted.  For example, if you are going to do business with the public the licensing requirements may require you to have a bond or to be insured, in order to protect those with whom you do business.  Second, the licensing requirements create a mechanism for the state to keep track of business activities.  Once the state has the address of business it can visit it and make periodic inspections if necessary and it can communicate with the business about new standards or other requirements.  Third, the primary reason for requiring businesses to be licensed is to serve as a mechanism to generate revenues for the government through the imposition of taxes.  The idea is that businesses will pay modest fees or taxes on an annual or periodic basis for the opportunity to engage in commerce.  The revenue is, at least in theory, to be used to help provide the services, such as inspections, which the businesses may require.

The issue of business and occupation licenses and taxes is important for agriculture and for direct farm marketing, because many states have enacted laws which are designed to exempt farmers and some forms of agriculture from such requirements.  Whether you qualify for such an exemption will depend on the state in which you do business and the nature of your business.  The exemptions may only apply to certain activities, for example a state may exempt farmers from local taxes but still apply state taxes, as is the case in Washington.  To determine what the law is in your state you will need to contact the state revenue officials or the local business licensing agency, if one exists, or you can ask your attorney or other business advisor.  The following panels present several examples of state laws containing agricultural exemptions from business licensing requirements, and some of the issues which arise in trying to define what types of agricultural activities are exempt.

Examples of State Laws Exempting Agriculture and Farmers from Occupational Business Licenses and Taxes

A review of state laws on business licensing reveals an array of different rules and exemptions applying to agricultural occupations.  If exemptions do exist, one issue is whether the exemption applies to all licenses – both state and local – or does it apply just to licenses or requirements which might be imposed by a county or municipality.  Some laws provide exemptions for farmer sales, but only if the sales occur on the farm where the produce is grown, while other states may exempt all direct sales by farmers and even protect their right to peddle their produce within cities.

A) Exemptions from Business Licenses and Taxes

Mo. Stat. §150.030
This Missouri law is a good example of a state exemption from local licensing and taxes.  It provides:

Any farmer residing in this state who shall grow or process any article of farm produce or farm products on his farm is hereby authorized and permitted to vend, retail or wholesale said products free from license, fee or taxation from any county or municipality, in any quantity he may choose, and by doing so shall not be considered a merchant; provided he does not have a regular stand or place of business away from his farm; and provided further, that any such produce or products shall not be exempted from such health and police regulations as any community may require.

It is important to note the exemption is limited to on-farm sales.

The Missouri law was the subject of a court case in which a city was trying to collect taxes from a farmer who operated a nursery and flower business.  [See Kansas City v. Rosehill Gardens, Inc., 542 S.W.2d 776 (Missouri Sup. 1976)]. The issue in the case concerned the effect of the farmer raising products on four different farms, but only selling from one location.  The court held the products raised and sold, such as bedding plants, would qualify as “farm products” – yet because the farmer used four different farms but had only one sales office, he did not qualify for the exemption on all the sales.  The court required local officials to determine how much of the products sold were raised on the farm where the sales occurred for purposes of determining the exemption.

One issue raised by the Missouri case can be critical in determining whether the business qualifies for the exemption or special tax treatment.  This is the question of whether the activity involved is considered to be “agricultural” for purposes of the law.  This was the issue in a Kansas case involving a state tax exemption for agricultural operations.   The issue was whether the “growing, cultivation, and selling of ornamental plants by a commercial greenhouse” was an “agricultural pursuit” under Kansas law.  The court in the case of  In re Matter of Masson, Inc., [909 P. 2d 673 (Kan. App. 1995)], ruled that the Kansas Dept. of Revenue had been wrong when it determined the production of ornamentals was not an agricultural pursuit eligible for tax exemption. If you are faced with an adverse ruling by state tax officials concerning whether your direct farm marketing activities are agricultural in nature, you may need to challenge their action.

Florida Stat. §205.064
Florida has also enacted a law which protects the right of producers to sell their products and which exempts producers from any “local business tax receipt” requirements.  The Florida law has been the subject of several state Attorney General Opinions and court cases.  The lawprovides:

(1) A local business tax receipt is not required of any natural person for the privilege of engaging in the selling of farm, aquacultural, grove, horticultural, floricultural, tropical piscicultural, and tropical fish farm products, or products manufactured therefrom, except intoxicating liquors, wine, or beer, when such products were grown or produced by such natural person in the state.

(2)  A wholesale farmers’ produce market shall have the right to pay a tax of not more than $200 for a receipt that will entitle the market’s stall tenants to engage in the selling of agricultural and horticultural products therein, in lieu of such tenants being required to obtain individual local business tax receipts to so engage.

The Florida law provides several important protections for farmers.  A 1944 Florida Attorney General’s opinion [233] concluded that a city ordinance which required a grower to acquire a city license before selling at retail his own produce, was invalid and unenforceable.  A 1950 opinion [269] reached a similar result, but did conclude that the farmer would have to comply with local zoning and highway regulations.  A 1984 opinion [84-42] concluded the section does not prohibit a county from imposing health and safety regulations on the sale of agricultural products grown or produced in the state, if the regulations are in the public interest or for the protection of the public, as long as they do not conflict with other state laws.  On the issue of allowing one unified license of no more than $200 for a farmers market, a 1975 Florida Attorney General’s opinion [075-184] concluded that this would not prohibit the requirement of multiple license taxes from a city and county with proper jurisdiction, and the sum of the licenses could exceed $200.

B) Exemptions for Farmers from Local Laws Regulating Peddlers

State laws exempting farmers from local regulations on peddling have been on the books for many years.   These laws were typically enacted when states and municipalities were trying to address the problem of itinerant peddlers who were competing with local businesses.  The issue for the states was whether to protect the right of farmers to market their products directly in town.  For example, the earliest version of the Louisiana law was enacted in 1896.

La. Rev. Stat. §33:4833
It shall be unlawful for any municipality with a population of less than twenty-five thousand persons according to the latest federal decennial census to enact an ordinance forbidding farmers or their employees to sell or peddle farm produce on the streets, avenues, and alleys and in public places located within the municipality.

Pa. Stat. 72 § 6190

Pennsylvania law contains a somewhat similar exemption.  The law specifically empowers every city, town, and township to enact ordinances to license and regulate each “transient retail business” including monthly fees of up to $300.  However, the law includes this exemption, “Nothing contained in this act shall be construed to apply to farmers selling their own produce…”  While laws such as these may have been enacted years ago, they maintain an important legal value because they can be used to prevent local governments from trying to license and tax farmers who are participating in farmers markets or who are involved in other forms of direct marketing within the city.

C) Exemptions to Protect Farmers’ Rights to Sell What They Grow

Washington state law provides an example of an exemption protecting the right of farmers to sell what they raise.

Wash. Stat. §36.71.090

It shall be lawful for any farmer, gardener, or other person, without license, to sell, deliver, or peddle any fruits, vegetables, berries, eggs, or any farm produce or edibles raised, gathered, produced, or manufactured by such person and no city or town shall pass or enforce any ordinance prohibiting the sale by or requiring license from the producers or manufacturers of farm produce and edibles as defined in this section. However, nothing in this section authorizes any person to sell, deliver, or peddle, without license, in an city or town, any dairy product, meat, poultry, eel, fish, mollusk, or shellfish where a license is required to engage legally in such activity in such city or town.

The Washington law, which was first enacted in 1897, is self-explanatory and can be seen as an important protection for direct farm marketers from unreasonable or burdensome local regulations.  The list of food products which are not exempt from local regulations, if they exist, was added by an amendment in 1986.  The Washington law has not been the subject of extensive litigation.  One 1930 case ruled the exemption did not apply to a baker because this did not fit the definition of being a manufacturer of farm produce or edibles.  [See, Hastings v. City of Bremerton, 159 Wash. 621, 294 P. 551.]But the fact Washington has exempted farmer sales from local licenses does not mean these sales are not subject to other taxes.  Washington state law specifically provides that farmers who make retail sales of produce they raise, or who sell agricultural products which they have not raised on their own land, are subject to the state’s business and occupation tax.  [See Washington Administrative Code, Title 458, Revenue Dept. Excise Tax Rules, Chapter 458-20-210 “sales of agricultural products by farmers.”]

The last example to consider of a state law exempting sales of farm products by farmers is that of Arizona.  This interesting law provides:

Arizona Rev. Stat. §§3-562 and 563

§3-562 Restrictions on sales of food producers prohibited

A.  The producers of food products on agricultural lands, farms and gardens shall never under any pretext be denied or restricted the right to sell and dispose of their products, except in the manner and to the extent provided in this article, and subject to inspection by lawful authority when the inspection is uniform as to the same product and without cost to the producer.

B.  The right to sell and dispose of food products shall extend to the producer in person, members of his family, his agents and all persons in his service, when the products are sold or disposed of on his behalf and for his benefit.

§3-563.  Tax, license or fee against producers prohibited

A.  No tax, license or fee shall be imposed, levied upon, demanded or collected from a producer for a sale of a food product as defined in this article and no penalty or punishment shall be imposed on account of the sale, except for violation of laws providing for inspection.

B. A municipal ordinance which seeks to impose or subject a producer to a tax, license or fee shall be void, except that all such products in common with similar products offered for sale by persons not the producers thereof shall be subject to inspection.  A municipal ordinance providing for inspection shall not be valid unless it applies in the same manner and terms to other persons offering similar products for sale.

The Arizona law is very interesting because of the strong protection it gives to producers to sell their products free of local regulations and taxes, other than inspections.  The law has been the subject of only one court case, which involved the issue of whether it would apply to the sales a dairy cooperative made on behalf of members.  [See, Arizona Tax Commissioner v. Dairy and Consumers Co-op Association, 70 Ariz. 7, 215 P.2d 235 (1950)].

Income Tax Issues and Direct Farm Marketing

As noted in the introduction, income tax issues are for the most part beyond the coverage of this Guide.  Most farmers have a good working relation with their attorney or other adviser who helps with tax preparation.  If you have questions about how your direct farm marketing business will be treated for tax purposes you should contact them.  Another good source of information could be the farm tax and business planning specialists with the state cooperative extension service.  Of course, you can always contact the IRS directly for information such as is contained in the IRS Farmer’s Tax Guide.

Below are videos in which CPA Poppy Davis answers some frequently asked questions about tax issues confronted by direct farm marketers.

The following brief discussion is designed to highlight just a few of the other tax issues you might encounter.

A) Payment of wages to your children and spouse

Children are often a very important part of the labor force in many direct farm marketing ventures.  One possible tax deduction which is available is for the wages you pay to your children or spouse.

RuralTaxes.org
This educational website contains information from University Extension agents and Certified Public Accountants.  It provides farmers and ranchers, other agricultural producers and Extension educators with a source for agriculturally related income and self-employment tax information that is both current and easy to understand.

In addition to online materials and webinars, you’ll find aTax Guide for Owners and Operators of Small and Medium Size Farms.”

“Reasonable wages paid by the farmer to his children are deductible if there is a true employer-employee relationship. [Rev. Rul 72-23, 1972-1 CB 43 (See IRC §151(c).]  The same is true of wages paid to a farmer’s spouse.  [Farmers Tax Guide IRS Pub. No. 225, 20-21 (1997].  (source, at L:2.45)

B) Status of Business as Farm for Tax Purposes

One issue you might need to consider, especially if you are involved in processing or “non-traditional” farm based activities, such as tourism, is whether you will still be classified as a farm for purposes of tax treatment.

“Farming business does not include the processing of commodities or products beyond the activities normally incident to the growing, raising or harvesting of such products.”  [Reg. §1263A-1(a)(3)(v) see, Temp. Reg. §1.263A-4T(c)(4)(i)(C)(1), prior to amendment by TD 8729 (Aug. 22, 1997).] (source, L:2.62[2])

This could be significant for direct farm marketing and processing.  If you are used to farm tax treatment you could either lose it or need to treat your direct marketing business as a separate tax entity.  This might not be significant in ultimate tax liability but it could certainly make tax preparation and accounting more complicated.

C) Taxes on the Value of Produce Consumed on the Farm

Most direct farm marketers also consume a great deal of farm raised food.  The tax laws provide special rules for the treatment of the value of this food and the expenses of raising it.

While farm produce raised and consumed by a farm family is not taxable, the expense of raising the food consumed by the family is also not deductible. Further, the taxpayer has the burden of showing a right to deductions, and such farmers must therefore be prepared to allocate the charges between deductible and non-deductible expenses for the food they raise. [Nowland v. Com’r, 244 F. 2d 450, 454 (4th Cir. 57).]

D) Reporting Income Received from Direct Farm Marketing Sales

All taxpayers are under an obligation to record and report the income they receive in their businesses.  While direct farm marketing is often a very cash oriented form of marketing, there is no reason to believe income reporting is any less diligent.  However, if you are considering not reporting income from direct sales of produce, let me conclude the section with one story from an English agricultural law colleague.  The story concerns how Inland Revenue, their version of the IRS, conducted a sting operation on farmers making direct or “over the gate” sales of potatoes.  The agency sent employees out to purchase potatoes in bulk and then compared the records of those sales with the actual tax returns filed by the farmers the next year.   Farmers who failed to report the income from any direct sales were confronted with the record of the sale to the tax officials and then were presented with tax bills based on the estimated quantities of potatoes they had sold.  The situation presented some farmers with an expensive lesson in the value of being honest, especially with the tax officials.

Information Sources for Operating a Direct Farm Marketing Business

Farmers interested in obtaining more information about opportunities in direct farm marketing have a growing array of sources of information.  In many states the department of agriculture has personnel who are responsible for working with producers on this issue. The names and addresses of these state officials are listed in the Appendix.  The Cooperative Extension Service has long been a leader in direct farm marketing in many states. In some states local cooperative specialists are recognized leaders in the provision of information and services to producers involved in direct farm marketing. The appendix contains the names and addresses of state extension officials involved in direct farm marketing.  One other excellent source of information on direct farm marketing or other topics of interest to producers is ATTRA, which was discussed in Chapter Three.

If you are interested in learning more about how to structure and operate your direct farm marketing business the best advice is to read and learn more about how others are doing it. The accompanying box provides information about some of the most valuable publications to help you learn more about this area.
FarmCommons
FarmCommons is a non-profit dedicated to providing legal services to “community-based” farmers. The website has model CSA agreements and business development resources.

If you are engaged in direct farm marketing you know how valuable timely information about markets, production, management and other practices can be.  Only a few farm publications make an effort to address the unique needs of farmers engaged in direct farm marketing.  You can find links to some of these publication in our Library.

 

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