Today I attended a tax class for farmers put on by the North Carolina Cooperative Extension. It was taught in Silk Hope by Guido Van Der Hoeven of NC State. Taxes can be infuriating to deal with but as an unintended benefit, reading or learning about them can put you right to sleep. Frankly that was my thought as I drove to Spring Hope, that I would spend the afternoon trying to stay awake however Guido did an excellent job of making the topic interesting and the crowd of nearly 50 people certainly had a lot of questions on all the topics. Guido ended up having to hurry up the last bit of the schedule just to make up some time because there were so many question.
Guido covered the recent changes to farmers sales tax exemptions from stem to stern. Luckily we had already figured out how to apply for our new exemption number so the issue was moot for our farm. However for a surprising number of folks it sounded like they had not even made application to the NCDOR for a new number. That was troubling since the old number will expire by law on October 1st, 2014, just a few days from now.
Next we covered what items were exempt from sales tax for farmers. Here is a quick list:
- Pesticides (no need for us)
- Baby chicks and pullets (I know I’ve paid tax on them, not knowing)
- Commercially built facility and building materials for raising or feeding of animals
- Bulk tobacco barns, racks or accessories to cure or dry tobacco
- Fuel or electricity (must have a separate meter)
- Fertilizer, plastic mulch, seeds, lime, land plaster (this includes organic fertilizer)
- Farm machinery, repair parts and lubricants
- Containers
- Grain, feed, soybean storage facility and parts
This was just a partial list of the items exempted from sales tax for purchase by a qualified farmer.
Guido also covered charging sales tax as a farmer. This topic covered a lot of detail as each product can have no tax, or a variety of taxes. For example, flowers you grew and offered for sale are not taxed. But flowers arranged as a bouquet are taxed. Even putting a ribbon on flowers instead of a rubber band to hold the bunch together causes them to be taxed. This is just one example of the byzantine tax code for collecting tax as a farmer.
Two big takeaways I had from this section was:
- If 50% of your farm sales are from items you purchase off farm, then ALL of your sales have to collect tax.
- Any items you buy from another farmer and sold by you must collect tax, even if it would otherwise not be taxed. In other words, if you sell peaches from your farm then you don’t have to charge sales tax. If however you get peaches from your farmer friend to supplement your sales, you have to charge sales tax on your farmers peaches.
Basically any resale item has to be taxed no matter what, and if your resale amount exceeds 50% of total sales, then everything gets taxed. Of course, for us it’s not that big of a deal because all of our meat is taxed at 2% no matter what. However The Princess keeps asking me to build her a farm stand where she can work. In order to make it work, I’d need to add in produce and value add items. Suddenly all these distinctions become very important.
The last big item covered by Guido was how to file a Schedule F tax form and a form 4797. The schedule F was pretty straightforward but I learned something I didn’t know on the 4797. It turns out that there is a big distinction on selling breeder animals from your farm vs. selling traditional animals. Selling a grass-fed beef from our farm is treated as ordinary income, however when we cull a brood cow from our herd, the sale is treated differently. The income is treated as capital gains and taxed at a lower rate. There is also no social security tax charged on the income. For someone like us operating a cow/calf operation, culling brood cows is a normal and regular event.
All in all it was a good class and I learned some things that will change our tax strategies and operations.