Business and Financial
Written by: Ellen Essman and Chris Hogan, Law Fellows, OSU Agricultural & Resource Law Program
Part One
Ohio’s 131st General Assembly came to a close in December of 2016. In Ohio, a legislative session (also known as a General Assembly) lasts for two years. A bill fails to become law if that bill was introduced during a legislative session but did not pass by the end of the session. Below is a summary of bills related to agriculture that failed to pass during Ohio’s 2015-2016 legislative session. Time will tell whether our legislators will revive and reintroduce any of these proposals in the new 2017-2018 legislative session.
Nutrient Management
Application of Fertilizer and Manure and Senate Bill 16
Nutrient management remained a topic of discussion in Ohio throughout 2015 and 2016. Most notably, in July of 2015, SB 1 passed and became law. SB 1 placed restrictions on the application of nutrients in the Lake Erie Basin. For example, SB 1 placed restrictions on the application of manure under certain weather conditions.
The 131st assembly considered a similar bill, Senate Bill 16, in February of 2015. SB 16 sought to regulate many of the issues that SB 1 now regulates. SB 16 failed to pass and did not become law. Notwithstanding SB 16’s failure to pass, nutrient management was a popular topic for the 131st General Assembly.
To read SB 16, visit this page. The Ohio Legislative Service Commission’s analysis of SB 16 is available here.
House Bill 101 and the Response to Algal Blooms
House Bill 101 was introduced on March 4, 2015. The bill would have enacted a number of sections into the Ohio Revised Code that would have addressed algal blooms in Ohio waterways. First of all, under the language of HB 101, owners or operators of public water systems in areas at risk for harmful algal blooms, together with the directors of the Ohio EPA and ODNR, would have had the ability to develop emergency plans to combat the algal blooms. Secondly, the Directors of the Ohio EPA and the Department of Natural Resources were tasked with developing and circulating an early warning system for harmful algal blooms. Thirdly, the Ohio EPA would have had the responsibility to provide training to publicly owned treatment works and public water systems relating to monitoring and testing for “harmful algae and cyanotoxins in the water.” Finally, under HB 101, the Director of the Ohio Department of Natural resources would have had to study and report on the economic and environmental impacts of Canada geese and zebra mussels on Lake Erie.
The bill was referred to the House Committee on Agriculture and Rural Development on March 4, 2015 and was never acted upon.
To read HB 101, visit this page. The Ohio Legislative Service Commission’s analysis of HB 101 is available here.
Agricultural Operation and Management Plans and Senate Bill 224
Currently, operation and management plans are a voluntary measure for Ohio farmers. In Ohio, an owner or operator of agricultural land or an animal feeding operation may implement a plan which incorporates pollution abatement practices and best management practices for the operation. But, the 131st General Assembly considered a bill which would make such plans mandatory for operators who operate farms of 50 acres or more.
The proposed bill, otherwise known as Senate Bill 224, would have required operation and management plans to include certain standards for applying fertilizer or manure. The bill also gave the Ohio Director of Agriculture authority to enforce corrective actions against farm operations and to assess civil penalties for non-compliance. However, SB 224 did not pass in the Senate and was not signed into law.
To read SB 224, visit this page. The Ohio Legislative Service Commission’s analysis of SB 224 is available here.
Business
Series LLCs and House Bill 581
Ohio permits the formation of Limited Liability Companies, otherwise known as LLCs. LLCs offer many attractive benefits for a farming operation. Namely, LLCs provide liability protection to the members or owners of that LLC.
Some LLC farming operations have become more complex in recent years. As a result, some farming operations choose to have multiple LLCs across an entire farming operation. For example, a farm operation may have one LLC which owns only farm property and a second and entirely separate LLC that owns only farm machinery. But, multiple LLCs create additional complexity which may complicate a farming operation.
One proposed solution is the series LLC. The 131st General Assembly proposed the introduction of series LLCs in House Bill 581. A series LLC would allow a single LLC to create multiple series within the LLC without the need to create an entirely new LLC for each series. Under HB 581, a LLC organized as a series LLC would be able to limit the power of managers or members in different series within the series LLC. A series LLC would also be able to place different assets and obligations into different series within the LLC.
Under HB 581, the debts and obligations of a particular series within an LLC would have been limited to that series only. But, HB 581 did not pass during the 131st General Assembly. Therefore, series LLCs remain non-existent in Ohio.
To read HB 581, visit this page. The Ohio Legislative Service Commission’s analysis of HB 581 is available here.
Food
Donation of Food and House Bill 111
House Bill 111 was introduced on March 10, 2015. This bill would have allowed food service operations to apply for a rebate from the Director of Health if they donated the food to a nonprofit organization. The rebate would have been ten cents per pound of perishable food donated. HB 111 was referred to the House Ways and Means Committee on March 16, 2015 and no further action was taken.
To read HB 111, visit this page. The Ohio Legislative Service Commission’s analysis of HB 111 is available here.
Tags: Ohio legislation, Ohio 131st General Assembly
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Update: For a full explanation of the rule, refer to our new Law Bulletin, The New FAA Rule for Using Drones on the Farm
Part 2: Rules for Operating Drones
The FAA’s long awaited rule for drones or “small unmanned aircraft systems” (sUAS) weighing less than 55 pounds will be effective on August 29, 2016. Our previous post explained the rule’s process for obtaining certification as a Remote Pilot in Command (Remote PIC) that will apply to those who operate a sUAS for commercial uses or incidental to a business, such as for farming purposes. In this post, we focus on the new rule's operational requirements and limitations. Farmers who want to use a drone in the farm operation need to understand and comply with these provisions.
Pre-flight requirements
- Registration. A person may not operate a sUAS over 0.55 pounds unless it is registered with FAA. An online registration is available at https://registermyuas.faa.gov/
- Pre-flight inspection. The Remote PIC must inspect the sUAS prior to a flight to ensure that it is in a condition for safe operation, which includes inspecting for equipment damage or malfunctions. The FAA advises operators to conduct the pre-flight inspection in accordance with the sUAS manufacturer’s inspection procedures and provides a list of the elements to address in a pre-flight inspection in section 7.3.4 of this guideline.
- Pre-flight information. The Remote PIC must make sure that all persons directly involved in the flight are informed about roles and responsibilities, operating conditions, emergency and contingency procedures and potential hazards.
- Flight operators. Only a Remote PIC may fly the sUAS, or someone under the direct supervision of a Remote PIC if the PIC is easily able to gain control of the sUAS. A Remote PIC may only operate or observe one drone at a time.
- Airspace. Flights of sUAS are allowed in Class G airspace, the airspace that is not controlled by Air Traffic Control (ATC) communications, which encompasses a majority of agricultural lands. A flight in Class, B, C, D and E controlled airspace requires permission from the appropriate ATC prior to flight. The FAA will establish a web portal that will allow an operator to apply for ATC permission online.
- Waiver process. The operator may apply for a “certificate of waiver” that allows deviation from some of the operational requirements if the FAA determines that the flight would be safe. The operator must receive the waiver prior to the flight, so should file the request about 90 days in advance of the proposed flight. The FAA will post the waiver applications, which are not yet available, at http://www.faa.gov/uas/.
Operating rules during flight
- Weather visibility. There must be a minimum visibility of three miles from the sUAS control station.
- Visual line of sight. The Remote PIC or the authorized person operating the drone must maintain a constant visual line of sight with the sUAS, without the aid of a device other than glasses or contact lenses. The operator may use a visual observer to help maintain the line of sight, but using an observer cannot extend the line of sight.
- See and avoid. The operator must yield the right of way and avoid collision with another use of the national air space.
- Height. The sUAS may not fly more than 400 feet above ground level.
- Time of day. Flights may occur only during daylight hours or no more than 30 minutes before official sunrise or after official sunset if the sUAS has anti-collision lighting.
- Speed. The sUAS speed may not exceed 100 miles per hour.
- People. A flight may not occur over persons who are not involved in the flight or are not under a covered structure or inside a covered stationary vehicle.
- Base of operation. Operation of the sUAs may not occur from a moving aircraft. Operation from a moving land or water vehicle is permissible if in a sparsely populated area and not transporting property for hire.
- External load and towing. A sUAS may carry or tow an external load if the load is securely attached, does not affect control of the aircraft, is not a hazardous substance and the combined weight of the sUAS and its load does not exceed the 55 pound weight limit.
- Aerial applications. Use of a sUAS for dispensing herbicides, pesticides and similar substances must also comply with the “agricultural aircraft operation” regulations in 14 CFR 137.3.
- Dropping objects. An operator may not create an undue hazard that poses a risk of injury to persons or property when dropping an object from a sUAS.
- Careless or reckless operation. A person must not operate a sUAS carelessly or recklessly. The FAA provides the example of failing to consider weather conditions when flying near structures, trees or rolling terrain in a densely populated area as an example of careless or reckless operation.
After-flight requirements
- Production of records and vehicle. If requested by FAA, a person must make the sUAS or its records available for testing or inspection.
- Accident reporting. Within 10 days of occurrence, a Remote PIC must report to the FAA a flight operation that results in loss of consciousness or serious injury to a person or creates property damage of at least $500. Reporting can occur online at www.faa.gov/uas or by telephone to the appropriate FAA field office or regional center.
Penalties for noncompliance with the rule
The FAA will have enforcement authority over the new regulations. Depending upon the type and violation, civil penalties could be up to $27,500. An operator could also be subject to criminal penalties for violations that are reckless, destroy property or threaten public safety; those penalties could be up to $250,000.
Learn more about the sUAS rule at http://www.faa.gov/uas/
Tags: drones, sUAS, FAA, part 107
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The Ohio General Assembly has enacted a law that raises the monetary limit for cases handled through Ohio's small claims court system. The new maximum amount of $6,000 for a small claims case will replace the current limit of $3,000 when House Bill 387 becomes effective in late September. Under the new law, a defendant in the case may also file a counterclaim for up to $6,000. Governor Kasich signed the bill on June 28, 2016.
Ohio law requires every county and municipal court in Ohio to establish a small claims division to handle minor disputes involving only the recovery of money. A small claims court cannot hear cases for slander, libel, malicious prosecution, abuse of process, return of personal property, punitive damages or other cases seeking remedies other than money. A person may file a small claims complaint and present the case in court without the assistance of an attorney, but may have legal representation if desired. The court may appoint a magistrate, who must be an attorney, to oversee the case and render a decision. The court also has the authority to enforce a monetary judgment against a party. Because small claims cases tend to be simple, they are resolved in less time and with less expense than cases heard by other courts.
The increased monetary limit for small claims cases will allow farmers and agribusinesses to address more disputes quickly and without the expense of an attorney. Operators and landowners owed money for products or services in excess of the current $3,000 small claims maximum often express frustration that it could be too costly and time consuming to address the matter through municipal or county courts. The new higher limit of $6,000 should capture many of these cases and offer an opportunity to recover such losses through the small claims process. According to the bill's sponsor, Rep. Lou Terhar (R-Cincinnati), the change will "bring Ohio in line with surrounding states and make Ohio a better place to do business and generate jobs."
To learn more about using the Ohio small claims court process, visit this webpage. House Bill 387 is available here, and Ohio's laws on small claims courts are here.
Tags: Ohio small claims court, small claims, hb 387
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Governor Kasich has signed legislation to create a new “Ohio Farm Winery Liquor Permit.” While wine makers in Ohio may currently obtain a general liquor permit to make and sell wine on a farm, the general permit does not distinguish the source of the wine. The new Ohio Farm Winery Permit legally designates the wine as being made from grapes grown on the wine maker’s farm. Sponsors and supporters of the legislation claim that the special designation will help consumers know a wine’s localized nature, bring recognition to Ohio’s wine growing regions, keep Ohio competitive with other states that designate farm-produced wines, and ensure that farm wineries continue to receive property tax treatment as agricultural operations. Wineries that qualify for the new permit would "be able to present themselves as true farming operations," according to sponsor Ron Young (R-Leroy Township).
Ohio’s Division of Liquor Control may issue an Ohio Farm Winery Permit only to wine makers who meet two requirements: the manufacturer produces wine from grapes, fruit or other agricultural products grown on the manufacturer’s property, and the property qualifies as “land devoted exclusively to agricultural use” under Ohio’s Current Agricultural Use Valuation (CAUV) program, which requires that the land be used for commercial agricultural production and be at least 10 acres in size or, if less than 10 acres, generates a minimum average of $2500 in gross income.
Under the new law, an Ohio Farm Winery Permit holder may sell its wine products for consumption on the premises where manufactured, for consumption off the premises in sealed containers, or to a wholesale permit holder. An Ohio Farm Winery Permit holder may also manufacture, purchase and import brandy for fortifying wine and may import and purchase wine for blending purposes, but the total amount of wine used for blending cannot exceed 40% of all wine manufactured by the wine maker.
H.B. 342, which will be effective in late September, is available here.
Tags: farm winery, ohio farm winery liquor permit, hb 342
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By Larry R. Gearhardt, Assistant Professor and Field Specialist in Taxation, OSU Extension
Farmers have enjoyed an exemption from the Ohio and county sales tax for many years. Historically, obtaining the exemption from the sales tax was relatively simple. The farmer merely filled out a post card sized exemption form at his local agricultural retailer, checked the box that he was involved in “agriculture,” and most of his subsequent purchases from that agricultural retailer were exempt.
More recent, agricultural retailers seem increasingly reluctant to give farmers the agricultural exemption. Numerous questions have arisen regarding why sales tax is being charged on certain items of tangible personal property that the farmer feels should be exempt.
Much has already been written on the subject of the agricultural exemption from sales tax. For a good overview of the agricultural sales tax exemption, see OCES Bulletin 761, written by Paul L. Wright, Douglas E. Sassen, and Nan M. Still, (November 1987), and Fact Sheet OAM-2-12, written by Chris Bruynis, PhD (2012). Both of these documents remain good resources.
However, to fully understand why sales tax is now being charged on items that once appeared to be exempt, one must delve deeper into the Ohio law and its practical application to purchases. The Ohio Revised Code, the Ohio Administrative Code, legal cases that further interpret those codes, the Ohio Department of Taxation, and the sales tax collection process all have a bearing on the agricultural exemption from sales tax.
ALL SALES BEGIN AS TAXABLE
Initially, all sales are taxable. Ohio Revised Code section 5739.02 states: “. . . an excise tax is hereby levied on each retail sale made in this state.” ORC sec. 5739.02(C) expands this requirement by stating: “(C) For the purpose of the proper administration of this chapter, and to prevent the evasion of the tax, it is presumed that all sales made in this state are subject to the tax until the contrary is established.” The effect of this statement is to place the burden of proving that a sale is exempt on the purchaser. As a general legal principle, exemptions from tax are narrowly construed.
HOW DO SALES BECOME NON-TAXABLE?
There are two ways that sales become non-taxable. One way is for a sale to be “excepted” from the definition of a sale by statute. The other way is for a sale to be “exempted” from the sales tax requirement.
A sale is non-taxable if it is specifically excepted from the definition of a “sale.” Ohio Revised Code section 5739.01(B) provides the definition of “sale” and the act of “selling.” One can find an extensive list of transactions that are considered to be a “sale” or the act of “selling” in this section. Also contained in this list are specific exceptions for transactions that are not considered to be sales or the act of selling within the legal definition.However, more important for our discussion, the agricultural sales tax exemption is an “exemption” from sales tax, not an “exception.” Therefore, this paper focuses on Ohio Revised Code section 5739.02 which provides a list of goods and services that are specifically exempted from the Ohio sales tax.
AGRICULTURAL SALES TAX EXEMPTIONS IN THE OHIO REVISED CODE
ORC section 5739.02(B) provides a list of 53 items that are specifically exempted from the Ohio sales tax. Several items apply to agriculture:
(B)(13) building and construction materials sold to construction contractors for incorporation into a horticulture structure or livestock structure for a person engaged in the business of horticulture or producing livestock. This exemption was later expanded by section (B)(36) to include sales to “persons” in addition to contractors.
(B)(30) land tile
(B)(31) portable grain bins
The subsection that applies most often to agriculture is (B)(17). This subsection states:
(B)(17) Sales to persons engaged in farming, agriculture, horticulture, or floriculture, of tangible personal property for use or consumption primarily in the production by farming, agriculture, horticulture, or floriculture of other tangible personal property for use or consumption for sale by farming, agriculture, horticulture, or floriculture; or material and parts for incorporation into any such tangible personal property for use or consumption in production; and of tangible personal property for such use or consumption in the conditioning or holding of products produced by and for such use, consumption, or sale by persons engaged in farming, agriculture, horticulture, or floriculture, except where such property is incorporated into real property.
In an attempt to better understand this subsection, let’s break it down into its requirements.
- The sale must be made to a person engaged in farming, agriculture, horticulture, or floriculture;
- It must be an item of tangible personal property;
- The item of tangible personal property must be used or consumed primarily (more than 50%) in the production of another item of tangible personal property that will eventually be sold;
- The item can be material or parts incorporated into tangible personal property for use or consumption in farming;
- The item can be for use or consumption in the conditioning or holding of products produced by a person involved in farming, agriculture, horticulture, or floriculture, for further use, consumption, or sale, EXCEPT where such item is incorporated into real property.
THE OHIO ADMINISTRATIVE CODE PROVIDES FURTHER CLARIFICATION
The Ohio Revised Code contains the laws passed by the Ohio General Assembly. In contrast, the Ohio Administrative Code contains the rules that agencies use to implement those laws. The rules in the Ohio Administrative Code are promulgated by the agency that is responsible to administer the program and those rules are then reviewed and approved by another agency called the Joint Committee on Agency Rule Review.
Ohio Administrative Code (OAC) rules have a more direct impact on the agricultural sales tax exemption because they are promulgated by the Ohio Department of Taxation and serve as the guidelines for collecting the sales tax.
OAC section 5703-9-23 expands the agricultural sales tax exemption provided in the Ohio Revised Code. This section first provides the definitions for “farming”, “agriculture”, “horticulture”, and “floriculture.” “Farming” is defined as the occupation of tilling the soil for the production of crops as a business and shall include the raising of farm livestock, bees, or poultry, where the purpose is to sell such livestock, bees, or poultry, or the products thereof as a business. “Agriculture” is defined as the cultivation of the soil for the purpose of producing vegetables and fruits and includes gardening and horticulture, together with the feeding and raising of cattle or stock for sale as a business.
Note that the definitions of “farming” and “agriculture” include tilling the soil and cultivation of the soil. Therefore, taking all of the requirements together, the agricultural sales tax exemption has been allowed only for those items that are used directly and primarily in the tilling or cultivation of the soil, used in the propagation of plants, or the care and raising of livestock. Timber is not included, nor is a utility vehicle or a chain saw if the technical definition is strictly followed.
OAC section 5703-9-23 further expands what “sales” are tax-exempt. Most of those sales are items that are incorporated into, or used or consumed, producing other tangible personal property for sale.
OAC section 5703-9-23 concludes with three very important statements:
- Exemptions do not apply to any article which is incorporated into real property
- The tax or non-tax of a sale is determined by the use of the item sold. An article of tangible personal property that appears to be agricultural in nature must also be used for a non-taxable purpose. For example, a pitch fork used in my barn may be tax-exempt, but taxable if primarily used in my garden.
- Sales of materials such as lumber, nails, glass and similar items to be used in the construction or repair of buildings shall be subject to the tax.
CASE LAW PROVIDES THE FINAL DETERMINATION
Even with the foregoing analysis of the laws and rules, it is impossible to list every item of tangible personal property that is exempt from sales tax. Certain items are clearly used in agriculture and are exempt. On the other hand, some items are clearly not exempt. Some items fall somewhere in the middle and are difficult to tell whether they are tax-exempt, either because the item is used for a personal use a majority of the time or the items could be used for a taxable purpose.
Occasionally, courts are asked to determine the taxability of a particular item. This is most often seen where the resulting sales tax is large enough to warrant spending the money to go to court, such as a manufacturer that is going to produce or purchase mass quantities of that item. Individuals rarely can warrant going to court over a sales tax dispute.
THE PRACTICAL ASPECTS OF THE AGRICULTURAL SALES TAX EXEMPTION
Armed with the best legal information, a farmer may firmly believe that the item he is purchasing should be tax-exempt. However, the cash register rings up that the sale as taxable. Does he have to pay the sales tax? Yes, from a practical standpoint. There are two ways to look at each situation – the legal way and the practical way. From a practical point of view, the farmer may still have to pay the sales tax at the cash register even though he feels that the item is tax-exempt. However, if the farmer is erroneously required to pay the sales tax, he/she must file an application for a refund (ST-AR form) with the Ohio Department of Taxation.
Let’s take a closer look at the collection process. Both ORC section 5739.02(C) and OAC section 5703-9-03 state that all sales are presumed to be taxable until the contrary is established. Each vendor is required to collect from the consumer, as a trustee of the State, the full and exact amount of the tax payable on each taxable sale. To be tax-exempt, the farmer must provide to the vendor a fully completed exemption certificate. The vendor is required to keep this exemption certificate on file.
In discussions with some local retailers, I discovered that one large agricultural retailer receives a list of taxable and non-taxable items from its corporate office and the local store is required to collect the sales tax according to the list, notwithstanding the identity of the purchaser. Conversely, the local tractor store determines in-house which items are taxable or non-taxable and for items that may go either way, the store gives the exemption if the purchaser has a tax-exempt form on file. For other large retailers without an agricultural base, they do not recognize the agricultural sales tax exemption.
Exemption forms are available on the Ohio Department of Taxation’s website and may be reproduced. The farmer should use form STEC-U for a unit exemption or STEC-B for a blanket exemption if he is going to purchase numerous items from that vendor. If the farmer wants a refund of sales tax that he feels is erroneously paid, he should file form STAR with the Ohio Department of Taxation. Rather than receiving a cash refund of the sales tax erroneously paid, the farmer may apply the refund to any indebtedness that he owes the State, for example, income tax.EXEMPTION CERTIFICATES
As previously mentioned, exemption forms may be obtained from the Ohio Department of Taxation website. OAC section 5703-9-03(D) states that: “An exemption certificate is fully completed if it contains the following data elements:
- The purchaser’s name and business address,
- A tax identification (e.g. vendor’s license or consumer’s use tax account) for the purchaser issued by this state, if any,
- The purchaser’s type of business or organization,
- The reason for the claimed exemption, and
- If the certificate is in hard copy, the signature of the purchaser.
If any of these elements is missing the exemption certificate is invalid.”
There has been some confusion recently caused by some agriculture retailers advising farmers that if they want the sales tax exemption, the farmer needs to go to the county courthouse and obtain a vendor’s license. This is not correct. The retailer is trying to comply with the requirement found in subsection (D)(2) above where it states that the exemption certificate requires a tax identification number. However, the retailer’s advice ignores the last two words of that section – “if any.” Farmers are not required to obtain a vendor’s license because they do not sell at retail. I recommend that the farmer write “none required” or “not applicable” on the exemption form where it requests a tax identification number. Of course, then the farmer is burdened with explaining to the cash register attendee that a vendor’s license number is not required. Good luck with that.
ULTIMATE LIABILITY FOR SALES TAX
Many farmers believe that if they give a tax exemption form to the retailer, the farmer should not be ultimately responsible for the sales tax. However, both the purchaser and the vendor may ultimately be liable for the tax. Initially, the purchaser is responsible to pay the sales tax to the vendor. If the purchaser claims that the sale is non-taxable, he/she must provide an exemption certificate to the vendor specifying the reason that the sale is non-taxable (ORC 5739.03(A)).
A vendor that obtains a fully completed exemption certificate from a purchaser is initially relieved of liability for collecting and remitting tax on any sale covered by that certificate. If it is later determined that the exemption was improperly claimed, ORC section 5739.03(B)(1)(b) makes the purchaser liable for any tax due on that sale.If a vendor improperly fails to collect the sales tax, another section of the ORC makes either the purchaser OR the vendor personally liable for the sales tax. ORC section 5739.13 says that the tax commissioner may make an assessment against either the vendor or the purchaser as the facts require. An assessment against a vendor when the tax has not been collected shall not discharge the purchaser’s liability to reimburse the vendor for the tax. From a practical standpoint, the vendor would have to take steps to collect the unpaid tax from the purchaser.
To put additional pressure on a vendor to collect and remit the sales tax, ORC section 5739.33 states that if any vendor required to file (sales tax) returns for any reason fails to file the return or remit payment, any employee having control or supervision over the filing of returns and making payments, or any officer, member, manager, or trustee who is responsible for the vendor’s fiscal responsibilities shall be personally responsible. The amount due may be assessed against that person.
Because of this liability exposure, from both a corporate and personal standpoint, it is my opinion that the vendor is going to err on the side of collecting the sales tax if it is not clear that the item is non-taxable.
CONCLUSION
Even though it may appear from a legal standpoint that the purchase of an item should be tax-exempt, without a complete list of what items are taxable and non-taxable from the Ohio Department of Taxation, there is still room for confusion. The vendor initially determines whether the item is non-taxable at the cash register. The purchaser needs to provide a tax-exemption certificate to the vendor to receive the sales tax exemption. If the vendor collects sales tax on an item that the farmer feels is tax-exempt, the farmer should file a request for a refund with the Ohio Department of Taxation.
Ohio State University Extension will offer four Farmland Leasing Workshops throughout Ohio this February.
The three hour workshops will include topics of interest to both landowners and farm operators, such as factors affecting leasing options and rental rates, analyzing rent survey data and legal requirements and provisions for farm leases. The speakers will help attendees consider how to use data in negotiations and to apply legal information to leasing practices.
Workshop presenters include Barry Ward, Assistant Professor, OSU Extension and Leader, Production Business Management and Peggy Hall, Assistant Professor, OSU Extension and Director of OSU's Agricultural & Resource Law Program.
Topics included in the workshop are:
- Factors affecting leasing options and rates
- Evaluating cash rent survey data
- Farmland leasing options: fixed and flexible cash leases
- Creating a legally enforceable lease
- Legal provisions in farmland leases
- Analyzing good and bad leasing practices
Dates and Locations of Farmland Leasing Workshops:
February 4, 2015, 9:00 am—12:00 pm
Fairfield County Ag Center, Lancaster
Registration: Call OSU Extension at 740-653-5419. A program on the Farm Bill will follow the Farmland Leasing Workshop. $10 registration fee for both programs.
February 6, 2015, 1:00–4:00 pm
Kent State University Tuscarawas, New Philadelphia
Registration: Call OSU Extension at 330-339-2337. $15 registration fee.
February 11, 6:00–9:00 pm
Paulding County Extension Office, Paulding
Registration: Call OSU Extension at 419-399-8225. $20 registration fee if registered by February 4.
February 20, 9:00 am—12:00 pm
Greene County Career Center, Xenia
Registration: Call OSU Extension at 937-372-9972, x114. Call by February 16 for free registration.
Check the events calendar at https://farmoffice.osu.edu for workshop details.
Attorney Bill Bridgforth will present OSU's next webinar on "The 2014 Farm Bill: Guiding a Client through the New Law" on Friday, January 9 at 1 pm EST. Bridgforth is a senior partner in the Arkansas law firm of Ramsay, Bridgforth, Robinson & Raley, LLP who represents agricultural producers around the United States. He will explain the election decisions producers and landowners must make under the new Farm Bill and will provide examples of decision making impacts.
There is no registration or fee required for the webinar, which is accessible at https://carmenconnect.osu.edu. A recording of the webinar and a listing of additional webinars is available at farmoffice.osu.edu.
The Ohio Food, Agriculture & Environmental Law Webinar Series is an outreach project of OSU Extension's Agricultural & Resource Law Program.
Tags: farm bill, legal education
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Tax preparers and farmers who file their own farm tax returns have an opportunity to participate in OSU Extension's Agriculture and Natural Resource Tax Issues Workshop on December 19, 2013. The day long webinar-based workshop features Professor Phil Harris of the University of Wisconsin, a leading expert in farm and natural resource tax law. Harris will address issues specific to farm tax returns and will be available for a live question and answer session during the workshop. Attendees can view the webinar from home or office or at one of nine facilitated host locations around the state, and can receive continuing education credit for the workshop. Visit this site for more information.
OSU Extension's Larry Gearhardt, field specialist in taxation, organizes the workshop in concert with the OSU Income Tax Schools, a multi-day continuing education program for those who prepare federal tax returns. More information and the tax school schedule for this fall are available at http://go.osu.edu/taxschools.
Tags: farm tax law, farm tax returns, natural resource tax law
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Peggy Hall, Asst. Professor, OSUE Agricultural & Resource Law Program
The Ohio legislature has already addressed a legal issue that recently created discord on Ohio's Sixth District Court of Appeals. In its recent decision in Ohio Department of Agriculture v. Central Erie Supply & Elevator Association, the appeals court disagreed over how to interpret the statutory lien provisions in Ohio's Agricultural Commodity Handler's Law. The majority held that the statutory lien favors farmer claimants over all other interests while the dissent argued that the statute is "entirely silent" on the issue of priorities between farmers and competing parties who have security interests in the proceeds of a failed grain handler. Obviously attuned to the problem, the Ohio legislature revised the law just over a month ago to include language that removes any doubt on the matter.
Ohio's Agricultural Commodity Handler's law contains many provisions designed to protect farmers from the risks of doing business with a grain elevator or other grain handler. If a handler suffers financial distress before paying farmers who've deposited grain with the handler, the law establishes an automatic statutory lien on behalf of the farmers. The law grants the Director of the Ohio Department of Agriculture power to enforce the statutory lien against the grain handler and distribute lien proceeds among the unpaid farmers. The law also states that the commodity handler's law takes precedence over any conflicting provisions for secured transactions in another section of Ohio law, Ohio Revised Code section 1309.
In the Central Erie Supply case, the question before the court was whether the statutory lien for the farmers had priority over a $425,691 security interest established by Citizens Banking Company, a creditor of the failed grain handler. The panel of judges examined the commodity handler's law and reached opposite conclusions. The majority concluded that the law conflicted with R.C. section 1309 and thus took precedence over the bank's security interest that was established under section 1309. The dissent argued that the language about conflicts between the different laws referred only to the issue of how to distribute proceeds between farmers and did not pertain to other security interests established under R.C. section 1309. Both sides did agree, however, that the issue of priority between farmers and other security interests is a matter for the legislature, not the courts. "Yet, unless and until the legislature acts, we are bound to interpret the law as it is currently written, not as we wish it to be," stated dissenting Judge Yarbrough.
The Ohio legislature did act on the matter--and did so before the court had even issued its ruling. In late June of this year, the legislature approved S.B. 66 (see our earlier post) and added this language to the commodity handler's law: “The lien established under this section shall have priority over all competing lien claims asserted against the agricultural commodity assets.” The legislation ascertains that upon its effective date of October 11, 2013, a statutory lien established under the commodity handler's law will be first in line ahead of all other liens claimed against the assets of a failed grain handler. Until October 11, the Central Erie Supply decision bolsters an argument seeking the same order of priority stated in the new law. Based on the recent actions of the legislature and the court of appeals, the commodity handler's statutory lien now has a few more teeth.
Read the Central Erie Supply decision here, S.B. 66 here and the Agricultural Commodity Handler's Law here.
Erin Porta, OSUE Agricultural and Resource Law Extern and Peggy Hall, Asst. Professor, OSUE Agricultural and Resource Law Program
Like much of the business world, many Ohio farmers are choosing to operate as Limited Liability Companies (LLCs) to gain personal liability protection for LLC members and ample estate, tax, management and business succession advantages.
Under Ohio’s LLC statute (ORC § 1705), an LLC is treated as a separate legal entity apart from its owners. Thus, the general rule places the debts, obligations, and liabilities of an LLC, whether arising in contract, tort, or otherwise, solely on the shoulders of the LLC—not its members or managers. LLC members and managers stand to lose only the money they've invested in the LLC, not their own house, car or other personal possessions.
Increasingly, those who deal with LLCs are finding ways around this personal liability “shield.” One strategy that is becoming more frequent among lenders, landlords and other businesses doing business with LLCs is to require a personal guaranty from individual LLC members or managers. The personal guaranty binds the LLC members or managers to a promise to be personally liable for the debts and liabilities of the LLC.
While personal guaranties are becoming a ubiquitous part of doing business, their legal implications are far from routine. When faced with a demand for a personal guaranty, here are several important points LLC members or managers should keep in mind:
- A valid personal guaranty will negate the personal liability protection provided by the LLC. By signing a personal guaranty you are essentially waiving your LLC personal limited liability shield. For example, if the LLC cannot repay the loan you guaranteed, the creditor may come after your personal assets. However, the personal guaranty will not negate other LLC liability protections, such as liability for torts committed by the business.
- The word “guaranty” is not necessary to create a personal guaranty. There are no formal magic words required for the formation of a personal guaranty; it is sufficient if the document contains words that unequivocally create a promise to answer for the debt of another.[i] Examples of language that create a personal guaranty include: a party "guarantees" an obligation of another; a party agrees to immediately undertake the obligations of borrowers upon written notice of default from the creditor; a creditor has the right to "call" upon the LLC manager to make payments due from the LLC; or the LLC manager agrees to be "responsible for" an obligation when due.[ii]
- How you sign may matter. Ohio cases indicate that signing your name followed by your business title (“John Doe, President”) on an agreement that contains personal guaranty language does not negate personal liability or shift liability to the LLC. [iii] However, disclosing that you are representing the LLC by using “by,” “per,” “on behalf of” and indicating the name of the business may deem the agreement ambiguous and prevent personal liability. [iv] There is a major hurdle to this strategy, however: the other party must accept this form of signature—a tall order considering it would essentially render the personal guaranty agreement meaningless.
- You will almost always be responsible for the entire debt. The personal guaranty agreement will specify your obligations; however, most create unconditional joint and several liability for all who sign the agreement. In other words, each LLC member or manager who signs is responsible for the full amount of the debt and the bank may pursue any and all LLC members or managers who signed the guaranty.
- Some personal guaranties live beyond the original transaction. A guaranty may be restricted to a single transaction or may continue to apply to some or all future transactions. Phrases such as "now or at any time hereafter," "all obligations however and whenever incurred," and "now existing or hereafter contracted" are examples of language that may create a personal guaranty for future transactions of the LLC. Under Ohio law, a guaranty will likely not be interpreted as one that continues into the future absent this type of language, which displays a clear intent to be bound in the future.[v] Where the guaranty is a continuing guaranty, it remains effective until the LLC manager or member clearly communicates an intent to revoke and no longer be bound by the guaranty.[vi]
- Some lenders or property owners are willing to negotiate. While personal guaranties are becoming very common, they can be negotiable and tailored to your company's situation. Some businesses automatically include personal guaranty agreements or language in their standard business transactions and it's possible that a deal could go through without the guaranty .[vii] For example, an LLC that can show adequate capital in its reserves may be able to negotiate a loan without a personal guaranty. Alternatives to a personal guaranty, such as larger security deposits or letters of credit, may also be negotiated. If the person or business insists on having a personal guaranty, there are still ways to limit personal risk such as proposing an endpoint to the guaranty when certain conditions are met (dollar amount caps, no default for a set period of time); subjecting only certain personal assets to the guaranty; ensuring the guaranty is limited to the particular transaction at hand and not future transactions and exempting a spouse of an LLC manager or member from the guaranty.
- Ignorance is not bliss. Claims that a party thought he or she was signing something other than a personal guaranty, did not read the entire document, or was not made aware of the personal guaranty have generally not been well received by Ohio’s courts as reasons to negate a personal guaranty.[viii] To void a personal guaranty on the basis of "ignorance," there must be evidence demonstrating that a party committed fraud in securing a personal guaranty from another party—a hard standard to meet.
- Personal guaranties are not the only way to waive LLC personal liability protection. Be aware that co-signing a loan, signing a contract in your own name, pledging personal property as collateral, acting without authority, or making fraudulent representations or omissions when applying for the loan may also place your personal assets at risk.
Nearly any sort of business deal can involve a personal guaranty. The following recent Ohio court case [ix] demonstrates how a simple personal guaranty can have lasting consequences:
- The owner of an Ohio building company submitted a credit application to a supplier in order to purchase materials on credit. As part of the credit application, the owner signed a personal guaranty for the company's transactions. The guaranty included language stating that it was “a continuing guaranty for all sales heretofore and hereafter made” between the two companies until “the time that notice of the termination of this guaranty shall be received, in writing, by personal mail at the principal office of (the supplier).”
- Upon approval of the credit application, the owner of the building company purchased materials on credit and promptly paid the supplier in full. The owner of the building company then continued to purchase materials from the supplier on credit for over a decade and the building company paid the amounts due. However, thirteen years after the personal guaranty and original purchase was made, the building company was unable to pay for its purchases.
- The supplier alleged that the owner of the building company was personally liable by way of the thirteen year old personal guaranty, which the building company owner had failed to terminate or revoke in writing.
- The court enforced the personal guaranty, despite the building company owner’s belief that he guaranteed payment only for the original purchase of materials. In holding the building company owner personally liable for the company's debt, he court pointed to the language in the original guaranty which used the word “continuing,” and noted that the guaranty did not have language limiting its duration or application to any specific purchase.
This case is a good reminder that failing to understand or negotiate personal guaranty language can lead to serious and unintended results for the managers or members of LLCs. * * * For information on organizing an LLC, see Robert Moore & Barry Ward, OSU Extension, Fact Sheet: Starting, Organizing, and Managing an LLC for a Farm Business, available at http://ohioline.osu.edu/bst-fact/pdf/LLC_Farm_Business.pdf.
Tags: LLC personal guaranty, LLC personal liability protection, personal guaranty
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