Sales Tax and Ag Products – Avoid a painful and potentially costly lesson

The other day I got a call about a farmer being audited by the Virginia Department of Taxation, the caller was asking me about the “agricultural exemption” for the sales and use tax. It wasn’t an unfamiliar call; I usually get at least one or two a year about the tax and the production of farm products. That’s why I pulled together a handout we house on the Virginia Farm Bureau Resource page to help educate folks about it to help in running their operation. Virginia Cooperative Extension also updated their publication on the tax for the industry, theirs a link to it on our page as well. To some it’s confusing, but once you have a better understanding it makes a lot more sense.

In Virginia, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. Many think if you are a farmer you are exempt from paying the tax when buying products, but that is how the tax works.

When a farmer is buying something, items they buy used in the “producing an agricultural product for market” should qualify for the exemption, they buyer would file a Form ST-18 from the Virginia Department of Taxation with the retailer claiming the purchase met the exemption. The retailer would maintain the form on file. The same goes for farmers that sell products directly to consumers. If the farmer is selling to another farmer something that would be used in the production of an agricultural product for sale, then the buyer farmer would make sure he has completed and given the seller farmer Form ST-18 for him to maintain in their files in case they were audited.

Think it like this, the end user of a product pays the tax. When you buy a television, you pay the sales tax as you are the one buying the item for your use at home. In the case of a gallon of milk, every thing purchased to go into the production of that milk should qualify for a sales tax exemption (think input), and then when that milk is sold at the store to the consumer, they are the one that pays the tax.

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Extension article: Direct Marketers and the Virginia Sales Tax



By USDA

Spring has sprung, and soon farmers markets across the state will be buzzing with farmers selling their Virginia-grown products.

Virginia Cooperative Extension put out an excellent article in 2008 for farmers who direct market their products on collecting Virginia sales tax. We thought it would be helpful to post it here for those of you selling directly to consumers.

We’d like to note one update that has occurred since the article was published. During the 2011 Virginia General Assembly, legislation passed that states individuals who raise and sell agricultural products at local farmers markets and roadside stands do not have to collect sales tax if their annual income from their sales does not exceed $1,000. The seller is also exempt from collecting the litter tax if his annual income from such sales does not exceed $1,000, and that any container he provides to hold purchased items has been previously used.

Direct Marketers and the Virginia Sales Tax

Farm Business Management Update, April 2008 – May 2008
Bill Whittle (wwhittle@vt.edu), Extension Agent, Farm Business Management, Northwest District

Historically, farmers have not paid sales tax on many purchases used in agriculture production, nor have they been concerned with collecting sales tax because they have sold a commodity product to a wholesaler or middleman. Many Virginia farmers have entered into the realm of “Direct Marketing” by selling produce, meats, further processed foods, feed for pleasure animals, etc., directly to the consumer. When they sell retail or to the “end-user” they must collect sales tax on gross receipts from all retail sales. See Figure 1 for a flow-chart defining when sales tax must be collected.

Farmers are obligated to collect and remit the sales tax on all retail sales to each customer. Retail sales can be thought of as the sale to the end user as opposed to a wholesaler. There are no exceptions or special circumstances allowed for farmers selling their own production. The tax must be separately stated and added to the sales price or charge. The Virginia Department of Taxation is the state agency responsible for insuring that this occurs.

Individuals, partnerships, corporations, etc. must file for a Certificate of Registration if starting a business in Virginia or desiring to conduct business as a dealer by selling directly to the consumer. The farmer must register with the state by filing State Form R1, Combined Registration Application Form (http://www.tax.virginia.gov/taxforms/Business/Registration/R-1.pdf ), and must collect and pay the tax due on retail sales. Once registered, the farmer will be assigned a Virginia tax identification number that will be used when conducting business with the state. If your application indicates that you will be collecting sales tax, the department will send you a Virginia Certificate of Registration for sales tax. This certificate permits sales tax collection, and allows the farmer to issue and receive exemption certificates. The Virginia Certificate of Registration must be displayed at your place of business. The farmer should also apply for a Federal Tax Identification Number (FEIN) by going directly to the IRS (http://www.irs.gov/businesses/small/article/0,,id=98350,00.html).

Sales tax rates fall into two basic categories that farmers selling retail need to be aware of. These are food and non-food categories. The basic sales tax for non-food items is 5% of gross sales and is comprised of 4% for the state and 1% for the locality. Food sales are taxed at a total rate of 2.5% of gross sales, which is comprised of 1.5% for the state and 1% for the locality. Department of Taxation Bulletin 5-78 discusses the sale of eligible food items subject to the reduced state tax rate of 1.5% as are deemed eligible under the federal food stamp definition.

Many direct marketers also have the opportunity to sell to a wholesaler or further-processor in addition to their retail customers. The only way a farmer does not have to collect sale tax from someone purchasing product for resale is if that person provides the appropriate Certificate of Exemption.

The sales tax applies to regular or recurring sales of farm products by farmers or peddlers at public markets, roadside stands, farms, etc. There is a provision for the occasional sale where you do not collect sales tax, but this is intended for the truly occasional sale, defined as three or fewer separate transactions within one calendar year, providing the activity does not require a Certificate of Registration. Because sales at fairs, flea markets, etc. generally involve multiple individual sales they are not considered occasional sales.

The laws governing Sales and Use Tax are generally straightforward, i.e. “If you are selling retail, then you must collect sales tax.” However, an individual farmer often has unique questions specific to his operation. To address specific questions, the Department of Taxation suggests that you write the Tax Commissioner for a ruling. Complete information on Virginia Sales and Use Tax can be obtained at the Virginia Department of Taxation website: http://www.tax.virginia.gov/ and use the Business Link to reach the Sales and Use Tax.