Oct. 12, 2015
A Montpelier compost producer owes $137,000 in back taxes he failed to charge customers over a five-year period.
A recent Vermont Department of Taxes determination found Karl Hammer, owner of the Vermont Compost Co., liable for more than $137,000 in sales taxes he failed to charge his customers over a five-year period.
The state began requiring compost producers to pay a tax on wholesale purchases of compost in 2009, and several company owners, including Hammer, say the Department of Taxes didn’t notify them of the requirement. Prior to 2009, compost wholesalers were exempt from the sales tax.
In 2014, the law was changed to revert to an exemption for compost wholesalers. Hammer, meanwhile, owes sales taxes for the interim period, from 2009 to 2014.
Hammer is attempting to collect the sales tax from customers — on purchases they made years ago. He recently sent out more than 1,000 letters to customers, asking them to pay taxes they owed at the time of sale.
State officials say Hammer is allowed to ask his customers for the uncollected tax, but it’s an unusual strategy.
“I’ve heard a range of responses, all the way from incredible sympathy – we’ve had people send more money than we ask for – to, ‘you will hear from my attorney,’” Hammer said. “Many people have rounded (the amount) up. One woman said, ‘I’m so sorry you had to go through this stupid thing,’ and she owed $16 and she rounded up to $50.”
Tax officials say this approach isn’t unprecedented, but neither is it common.
“It’s not something you see terribly often,” Vermont Department of Taxes Commissioner Mary Peterson said. “Generally, someone who’s gotten an audit does not go back after their customers.”
Peterson could not immediately say whether Hammer’s customers were legally obligated to pay taxes he sought from them, but said vendors in Hammer’s position are legally allowed to seek such remittance.
Peterson would not state whether customers are legally required to pay sales tax after the fact to a vendor who didn’t collect the tax at the time of sale. Whether his customers must shell out tax money for past sales or not, Hammer ultimately must pay the Department of Taxes, Peterson said.
“As far as the department’s concerned, we’re looking for the tax from the vendor,” she said.
Nearly all of those who have replied to 1,150 invoices he’s sent out for back taxes have agreed to pay, Hammer said.
“We’ve been making it clear to everyone, this is kind of (pay) as they can and if you will,” Hammer said.
The taxes are for sales between 2009 and 2014 – three years of which he says he wasn’t aware that tax code required he assess it, and two-and-a-half years of which he fought to change the law, Hammer said.
Bulk compost was exempted from the state sales tax when a solid waste bill, Act 148, went into effect in July 2014.
Though the change came through legislative action two years ago, “there’s nothing in it for them to go out and help people to make sure they’re complying,” Hammer said. “It’s a terrible public policy.”
Steve Wisbaum, owner of Champlain Valley Compost, hasn’t experienced the problems Hammer encountered. Wisbaum said he had been charging sales tax on all his compost until the law changed last year.
Green Mountain Compost’s Dan Goossen said his company, too, charged sales tax all along, and avoided troubles of the sort that Hammer experienced.
But Wisbaum said the state “clearly messed up” by not notifying the few compost wholesalers in the state when tax policy changed in 2009.
“It would have been so easy for the state to just contact us and let us know that,” Wisbaum said. “None of us got any notice that the exemption had been removed. It would have been a very simple courtesy, at no cost.”
Peterson said notifying Vermont taxpayers of a change in the tax code isn’t practical, nor is it common practice.
“In the U.S., it’s your responsibility to figure out what the tax laws are, and to pay what is due,” she said. “It’s a pretty complex tax code … and my little 130-person office, plus or minus, can’t possibly tell hundreds of thousands of Vermonters what they have due.”
That said, Peterson arrived in her position in 2011, and since then she’s embarked on outreach efforts meant to avert predicaments like the one Hammer is in.
“I recognize it’s to everyone’s advantage to have more education,” she said.
In Vermont it’s now common practice after tax code changes occur for tax officials to prepare fact sheets and other informational materials, and to make them available to taxpayers, notifying them of the changes.
“That’s something I’m proud of,” she said.
On the other hand, “I don’t want to give people the impression that it’s not the taxpayer’s primary responsibility,” she said. “If you’re going to get into your car, it’s your responsibility to know the rules of the road. It’s sort of the same thing with taxes – there is a bit of onus on the taxpayer to educate themselves with respect to the circumstances.”
Hammer said he tried to stay abreast of current tax law. He said he had been in touch with Department of Taxes officials several times since the late 1990s, and said he’d been operating with the understanding that, as an agricultural product, compost was exempt from sales tax, as are fertilizers, tractors and a host of other agricultural products.
This was true – practically speaking, at least – until 2009, when a 2007 alteration in agricultural tax law was clarified and was applied to compost sales.
Hammer said he hadn’t been aware that the change applied to the sales he was making.
Hammer says he’s nevertheless glad that something good came of the experience.
The change in statute, however, didn’t shield his business from the sales tax liability incurred from 2009 to 2014. Retroactive provisions for the new exemption were stripped from the bill in the Vermont Senate.
“That’s amateurs getting outmaneuvered by pros under the Golden Dome, and that’s hardly a new story,” Hammer said.
Over the years, the Department of Taxes has taken an inconsistent approach toward compost, but that appears to have changed, Composting Association of Vermont director Pat Sagui said.
“We’re really pretty new in terms of an industry that’s on the tax department’s radar,” Sagui said.
Today, bulk sales of compost aren’t taxed, and that appears to many a fair solution, she said.
The change resulted during the 2014 legislative session, and it was spearheaded by the House Committee on Agriculture and Forest Products, Sagui said.
“Everybody’s pretty happy with that,” she said. “It was a good thing on many levels.”
One of those levels pertains to the universal recycling law passed in 2012, and known as Act 148. This legislation requires households to compost their food waste by 2020. Compost producers want to take advantage of that, and the new exemption helps them do so, Sagui said.
“We wanted to be building markets,” she said.
Hammer said that he, too, wants to focus on that end of the business in the future.
“Small business people have to do so many things, this stuff can really tear at you – I’d much rather be dealing with compost, that’s for sure,” he said.