Are My Crops Subject to Sales Tax?
- Apr 13, 2016 | Jessica Sillers
Selling fresh vegetables, seedlings, eggs, and baked goods at a market stand is a popular source of income for farmers. But how do you know when to collect sales tax?
Whether you harvest, butcher, or bake, you may face a perplexing set of rules about which products carry a sales tax burden. Start planning your season with this introduction to farmers market sales.
Sausage and Sales Tax
While state guidelines vary widely, there are a few things that are always almost taxable. Tangible personal property, like handpainted flower pots, dog biscuits, or homemade soap, tends to be taxed wherever you go.
Prepared food is another taxable treat. In states like New York, that can mean that a pack of raw brats and a bag of fresh rolls are tax free, but a sizzling sandwich off the grill isn’t. Food preparation doesn’t need to involve a lot of cooking. In Nevada, a little heat makes the difference between exempt and taxable food. Double-check your tax code before you warm up that cookie for a customer.
One of the most straightforward exemptions is sales to tax-exempt organizations. The most common are 501(c)(3) organizations, usually religious or charitable groups. But you may run into several other types of exempt organization at the market, or you may even qualify yourself. Social welfare (501(c)(4)), agricultural (501(c)(5)), and business league (501(c)(6)) groups may qualify for exemptions. If you hold one of these statuses, materials used to promote the market or run activities like cooking demonstrations could be tax-free.
To Tax or Not to Tax
Sales tax exemptions are where the farmers market gets tricky. States use very different criteria to decide what gets a pass. Like New York, states like Colorado and California don’t tax food meant to be eaten at home, but add the tax for onsite snacks. In Tennessee, your tax obligations depend on who raised the crops. A farmer’s own crops are tax-free. If you buy produce to sell from other farms, you’ll be taxed on those crops if they make up more than 50 percent of your farmers market sales.
Sales of plants and hay are common gray areas. For plants, it can come down to whether the state views them as property or food (or, I suppose, food-to-be). Food-bearing plants may be tax-exempt if they’re purchased through WIC or a food stamp program. Hay and other farming supplies may be taxable unless you sell to a qualifying farmer. For these sales, you may need to verify the buyer’s tax-exempt certification.
Sound confusing? Just remember, you don’t need to memorize the nuances of each state. At the beginning of the season, map out your market stands. If you’re crossing state lines, it’s smart to check whether your items will be taxed differently on either side of the border. A good place to start is items like candy, which may be defined as food (generally exempt) or property (taxable).
The Barter Economy
Not all exchanges at a farmers market happen between vendors and customers. There may not even be any cash involved. Vendors may connect with each other to trade crops, crafts, or other goods. In a barter exchange, participants set up an organized system and contract one another to swap goods and services. Neighboring stands may also set up more informal swaps.
Technically, the IRS wants you to report all income, whether it comes in the form of cash or fresh eggs. Whether that happens is another story. Chances are, some kohlrabi and strawberries are changing hands under the table. You need to decide for yourself whether your barter income is substantial enough to warrant a 1099. Keep in mind that participating in a barter exchange may be more susceptible to IRS attention. If you’re concerned about an audit or lean toward safe rather than sorry, this may be one area to play by the books.
Spotting every difference between states’ sales tax laws can feel tougher than telling parsley from cilantro. Fortunately, once you get the rules straight, you can get back to digging into what you really love.