Farmers Markets Want Sales Tax Rule Dropped

A revision of sales tax regulations in 2006 has managers of farmers markets across the state worried about losing smaller vendors in the upcoming season.

At issue is GR-41, which was revised in 2006 to specifically state that farmers markets are considered “established businesses” and as such must remit state and local taxes on the sale of raw produce.

According to Tom Atchley of the Department of Finance and Administration, vendors who sell at farmers markets have always been required to pay sales taxes and that the 2006 revision of the regulation did not remove a previous exemption.

Managers of both the Springdale and Fayetteville farmers markets said smaller vendors have told them they either won’t set up at the market, will sell from the roadside or not sell any product at all if they have to keep up with sales tax reports to the state.

“Enforcement will shut down farmers markets across the state,” said James Phillips, manager of the Fayetteville Farmers Market, which celebrates its 35th anniversary this April. “They will see it is more profitable to sell on the side of the road. Every farmers market collects booth rentals to pay operating costs. So farmers will either have to pay a commission and sales tax or set up by the side of the road.”

Atchley said that roadside sales are also subject to sales tax, illustrative of the difference of opinion between the DFA and vendors over what constitutes an established business.

“There is no sales tax on farmers selling from a roadside stand or their farms,” Phillips said. “It’s not an established business.”

Jim McGuire, manager of the Springdale Farmers Market, said a DFA auditor visited the market a couple years ago after receiving a complaint but he has not heard from the DFA since.

McGuire said his understanding is that the DFA is not making enforcement of the sales tax from farmers markets a priority, but Atchley said no such guidance has been given.

“Vendors are expected to register and license like all businesses,” Atchley said. “They must follow the requirements.”

McGuire, who is trying to build up the Springdale Farmers Market from its current 15 regular vendors (compared to 94 in Fayetteville), said fledgling markets around the state will “suffer a great deal” if they lose their smaller vendors.

“Many of the vendors are home gardeners,” McGuire said. “They produce only to sell at farmers market. They’re not trying to make it their business or livelihood. Many are senior citizens who like to garden and have something to keep busy at.

“They have told me, ‘I won’t bother. I won’t come and sell if I have to collect sales tax.'”

That, said Tim Ellison of the Arkansas State Plant Board, will be a loss for all markets.

“The strength comes from diversity,” Ellison said. “This is not helping recruit folks to the markets.”

Bills introduced in both the House and Senate of the Arkansas General Assembly intend to explicitly exempt vendors at farmers markets from sales tax.

Key to Victory
On Feb. 23, Sen. Johnny Key of Mountain Home introduced SB-442, which would specifically exempt farmers market vendors from paying sales taxes on their raw produce. Sales of crafts and prepared foods at farmers markets have always been subject to tax and would remain so.

The bill has already attracted six co-sponsors, including Sen. Sue Madison of Fayetteville.

Phillips said the Arkansas Farmers Market Association is spearheading the effort in Little Rock to get the bill enacted. If passed in March, it would take effect May 1.

“We’re very optimistic about it,” Phillips said. “It’s a common sense issue. No one wants to see these farmers’ margins cut even more.”

The success of the Fayetteville Farmers Market has drawn scores of imitators, Ellison said, as cities around the state look for ways to draw citizens downtown. An increasing focus on naturally grown and organic produce, and the sustainability of buying local are making the events increasingly popular.

“Look at Fayetteville,” Ellison said. “It’s musicians, craft people, entertainment. It’s a reason to come downtown, not just to pick up produce.”

Losing vendors by forcing them to collect sales tax, fill out monthly or quarterly reports and send them to the state “creates a barrier” Ellison said.

It is also possible that any revenue the state isn’t receiving from farmers market sales could be offset by sales taxes collected at other businesses visited by people who would not have come downtown otherwise.

“The benefit is on both sides of the aisle,” Ellison said. “Farmers markets also benefit the community as a whole.”

McGuire said he found it hard to imagine the potential sales tax revenue from farmers markets being worth the DFA trying to enforce the regulation.

“If they enforce it at one farmers market, they will have to enforce at all farmers markets,” he said. “The probability is that the amount of sales tax funds they would collect is not large enough to warrant putting forth a lot of expense to try and collect it.”

Phillips said he believes Gov. Mike Beebe supports the exemption for sales at farmers markets, a logical extension of his campaign promises in 2006 to eliminate the grocery tax.

In the 2007 session, the Arkansas General Assembly lowered the grocery levy from 6 percent to 3 percent. It could be further lowered to 2 percent this session.

Reaching Beebe’s goal of eliminating sales taxes on food would obviously extend to raw produce sold at farmers markets.

“Without his support on this issue, it would run counter to his campaign platform,” Phillips said.

‘Arkansas Grown’ Label Grows in Popularity
In addition to teaming up to fight for the sales tax exemption for vendors, the Arkansas Farmers Market Association and the Arkansas Agriculture Department are also helping those growers better market their products.

In September, the “Arkansas Grown” label was introduced and made available to Natural State producers of all goods raw and finished.

So far, according to Tim Ellison of the Arkansas State Plant Board, around 30 producers are participating in the “Arkansas Grown” project and applications keep coming in every day.

Some of the finished products approved so far include soap and lip balm, Ellison said. Five Northwest Arkansas producers have signed up with goods including fruits, vegetables, grass-fed cattle, eggs, herbs and flowers.

Producers certified as “Arkansas Grown” may use the logo in branding and marketing their products. Ellison said he’s seen the logo on cantaloupe, PLU stickers, tomato display boxes, twist ties bundling greens and on shelves at Wal-Mart.

Wal-Mart has made a large national push toward sustainability and locally focused store offerings such as produce, Ellison said.

“Many of our farmers, even those at farmers markets who are from that county still want to use the logo and remind people of the local connection,” Ellison said. “I’ve been really impressed at the lengths that Wal-Mart has been willing to go to promote local growers. They are really the most aggressive as a company.”

Jim McGuire, manager of the Springdale Farmers Market, said he recently applied for “Arkansas Grown” status for his variety of tomatoes, greens, berries and apples.

“People like to be able to come and meet the person who grew this and know it was grown locally,” McGuire said. “So having a brand on your product that says Arkansas Grown, is an advantageous promotion. We’ll see a lot more of it.”

(To see the largest agricultural products by county, click here.)