It’s been a rough 12 months for Vermont’s compost industry. Last June, Green Mountain Compost learned its product had been contaminated with herbicides. The tainted compost withered many organic gardens throughout the state.
Two months later, a far less publicized crisis hit Vermont Compost Company in Montpelier. The business received a letter from the Vermont Department of Taxes indicating it was being audited for failure to collect sales tax on compost sold since 2009.
Owner Karl Hammer, whose company has been making and selling compost since 1994, initially thought it was an error. For years, he operated under the assumption that compost was a nontaxable commodity, just like seeds, starter plants, fertilizers and animal bedding.
Shortly after the first letter, Hammer got a second, stating he owed $394,000 in unpaid back taxes. It gave him 10 days to submit to the audit.
“That did get my attention,” he says. “And then off we went through the looking glass.”
Unbeknownst to Hammer, Vermont had written new tax rules in 2009 that listed tax-exempt items for commercial growers. The list included animal feed, baler twine, turkey poults and bull semen. Even synthetic fertilizer — which is made from fossil fuels — was on there. But organic compost and manure were not.
“There’s a basic food justice issue here,” Hammer argues. “The tax department is saying that organic farmers, by choosing organic methods, are subject to a 6 percent tax that chemical farmers are not subject to.”
To add insult to injury: Organic growers in Massachusetts, New Hampshire and New York can buy Vermont compost tax-free.
Hammer is the only known compost manufacturer under review by the Department of Taxes. Officials there won’t comment on Hammer’s case, which is ongoing, nor will they say whether other manufacturers and sellers of compost, manure and other “soil amendments” are being audited.
“It’s a weird policy. It just doesn’t make any sense,” says state Rep. Will Stevens (I-Shoreham), who owns 88-acre Golden Russet Farms. He buys 100 tons of product from Vermont Compost every year.
Stevens, who also serves on the House Committee on Agriculture, argues that Vermont’s tax law is treating compost differently than any other raw commodity used in wholesale production. For comparison, he uses the example of a Vermont furniture manufacturer who buys locally harvested wood to make chairs. From the felling of the tree to the milling of the lumber, there’s no “taxable event” until the chair is sold to a customer. The same goes for all other “production inputs” — nails, glue, finish, etc. — used in making chairs.
How compost was left off the tax-exempt list in 2009 remains a mystery. Jeff Dooley is lead tax policy analyst for the Vermont Department of Taxes, but says he didn’t write the regulations on compost. Nor does Dooley know why chemical fertilizers earned a reprieve.
“The department’s stance has always been that, because compost doesn’t fall into any of the exemptions, it’s taxable,” he says. “And because it’s tangible personal property and doesn’t fit into any of the exemptions, we have to apply the law the way it’s written.”
Nevertheless, Dooley insists that there’s “definitely no particular initiative by the department to single out this industry.”
Hammer argues that the tax department’s aggressive pursuit of his company is at odds with the goals of Act 148, a state law enacted last year that’s intended to boost the state’s recycling efforts and completely ban the landfilling of organic materials by 2020. Every year, his company accepts about 850 wet tons of food scraps from the Central Vermont Solid Waste Management District. That biodegradable material comes from 75 food generators throughout Washington County, including hospitals, food co-ops, supermarkets and public schools.
As a pair of muddy German shepherds chase chickens around his facility, Hammer warns that Vermont will face a composting crisis if it continues to punish businesses like his.
And it goes beyond that. “Investing in the soil of the farm is a very good investment over time,” he says. “All civilizations that hit the wall on soil come to an end.”
When will Hammer get his own closure with the Vermont Department of Taxes? He’s negotiated the bill down to about $100,000, but says he just learned that some of his heavy machinery is considered “contaminated.” That tax term, he explains, means that if backhoes and excavators are used more than 4 percent of the time for “post-production” work, such as in loading bags of compost onto customers’ trucks, they’re also subject to sales tax.
“The minutiae of this audit is just astonishing,” he says. “They just decided that certain pieces of my equipment are contaminated and added another $13,000 to my bill.”
Though Hammer’s is the only known business currently under scrutiny, the audit is causing confusion among other compost producers. Bob Foster, owner of Foster Brothers Farm and Vermont Natural Ag Products of Middlebury, says he isn’t sure whether he should charge sales tax on compost he sells to a professional landscaper who may use it for one purpose that has traditionally been tax-exempt (such as a vegetable garden) and another that has not been (such as fertilizing a lawn).
“There’s just an awful lot of confusion around this subject,” says Foster, whose company makes the “Moo Do” line of potting soil, compost and manure, and is one of the largest compost facilities in the state.
Pat Sagui, director of the Composting Association of Vermont in Westfield, says that in light of Hammer’s situation, some compost sellers are charging sales tax while others are not. The Composting Association isn’t advising its members one way or the other.
Sagui says a legislative fix to the compost tax is in the works. Last session, the Agency of Agriculture, Food and Markets provided the House Ag committee with language to address this problem, but the 2013 session ended before the committee could take up the bill. According to Rep. Stevens, the bill will be a “priority” when the legislature reconvenes in January.
In the meantime, Hammer has been trying to make the best of a bad situation. The audit hasn’t just been a “huge internal cost” to his business, he says. The six-figure tax bill and its potential consequences have taken a psychological toll on Hammer and his employees.
“People are taking out mortgages, having babies. People who work here believe in the work we do. Some of my people are making professional salaries,” he says. “I keep hoping saner heads will prevail.”