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Perishable Agricultural Commodities Act
In addition, businesses dealing in produce should use sales contracts and invoices to take advantage of the special protections afforded by the Perishable Agricultural Commodities Act (PACA). The Act sets forth prompt pay terms (e.g., 10 days after acceptance) which tend to be very favorable to sellers.

Additionally, PACA licensees can include the specific language cited in the U.S. Department of Agriculture’s PACA regulations on invoices to preserve trust rights, which allow produce suppliers to be paid before other creditors if a buyer goes bankrupt. If a seller does not notify the buyer of its intent to preserve its trust rights under PACA, this protection can be lost.

Food businesses and the produce growers who supply them will be significantly impacted by U.S. Food and Drug Admin-istration (FDA) regulations recently promulgated under the Food Safety Modernization Act (FSMA). In particular, the rules relating to produce safety impose extensive requirements for growers with regard to water quality, sanitation of equipment, worker hygiene, and other food safety issues.

The Act’s rules for hazard analysis and preventive controls impose new requirements for food processors and handlers to identify hazards in their products and processes and to implement controls to prevent the hazards from occurring.

The administrative burdens and costs of complying with these rules will be substantial. For smaller businesses, it makes good sense to consider whether the business or operations can be structured in a way to qualify for the exemptions provided in FSMA’s rules.

Under both the preventive controls and produce rule, businesses will be exempt from most requirements if annual food sales are below a certain dollar amount. Both rules provide a qualified exemption (“qualified” in that it can be taken away in certain circumstances) from most of the requirements if the business or farm’s average annual food sales are less than $500,000 and if the majority of its sales are direct to consumers or to local retailers or restaurants.

Under the preventive controls rule, “very small” businesses, meaning those with annual food sales of less than $1 million, may also be eligible for the qualified exemption. In addition, if a farm’s produce sales do not exceed $25,000 annually, it is completely exempt from the produce rule. The produce rules also do not apply to certain commodities (listed in the regulations), those that are not generally consumed raw.

Which food sales count toward the exemption limits differ under the two rules. For the preventive controls rule, all food sales of affiliated companies count. In other words, all food sales of separate food processing or handling facilities under common ownership or control will be counted toward the exemption limit.

In contrast, for purposes of the produce rule exemptions, the relevant sales are those of a “farm,” which is defined as an operation in a physical place under one management. Thus, a grower with multiple farms in different locations might qualify for an exemption on one farm but not another, depending on the relative sales from each location. Also, within one location, operations under different management would be treated as separate “farms.”

Given these exemptions, small food and farming businesses should consider whether they can structure their businesses or operations to avoid taking on more of a regulatory burden than necessary. It may be possible for a food enterprise to keep parts of its operation under separate ownership and control so the total food sales will not be aggregated for purposes of determining whether any one facility is eligible for the qualified exemption under the preventive controls rule.