WSR 23-17-131

PROPOSED RULES

DEPARTMENT OF AGRICULTURE

[Filed August 21, 2023, 11:31 a.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 23-13-013.

Title of Rule and Other Identifying Information: Chapter 16-160 WAC, Registration of materials for organic food production.

Hearing Location(s): On Wednesday, September 27, 2023, at 10:00 a.m., via Microsoft Teams. Join on your computer, mobile app, or room device https://teams.microsoft.com/l/meetup-join/19%3ameeting_ZjU1ZWEzZWUtZTNhOC00ZGVmLWFjYzAtNWM2MjJiZDJlZTg5%40thread.v2/0?context=%7b%22Tid%22%3a%2211d0e217-264e-400a-8ba0-57dcc127d72d%22%2c%22Oid%22%3a%22838c55c7-c187-44ae-8de0-2be684ce5d4a%22%7d, Meeting ID 217 869 248 329, Passcode njaxY; or call in (audio only) 564-999-2000 United States, Olympia, Phone Conference ID 931 022 358#.

Date of Intended Adoption: September 28, 2023.

Submit Written Comments to: Gloriann Robinson, Agency Rules Coordinator, P.O. Box 42560, Olympia, WA 98504-2560, email wsdarulescomments@agr.wa.gov, fax 360-902-1802, by September 26, 2023.

Assistance for Persons with Disabilities: Contact Leah Doyle, phone 360-902-2070, fax 360-902-2087, TTY 800-833-6388, email ldoyle@agr.wa.gov, by September 20, 2023.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The Washington state department of agriculture (WSDA) is proposing to restructure the existing fee schedule to cover the increasing cost of providing services. Under the proposed fee schedule, both the new application fee and the renewal fee will be comprised of two components, a company fee that is based on the gross annual income of the business in whole and a product fee that is charged based on the number of products being registered. The proposed product fee will be changed from the current rate of $400 - $500 per product for initial registration and $200 - $300 for renewal registration to a flat $350 fee for both initial and renewing registrations.

Changes are being proposed to the inspection fees as well. Currently, inspection fees are assessed at a cost of $40 per hour and the sum of travel costs. This proposal changes inspection costs to $2,000 per inspection. Out-of-state inspections are assessed at $3,000 in addition to any travel expenses which exceed $3,000. Inspections are not part of the standard workflow, only being conducted if compliance concerns cannot be resolved without them. In order to offset the cost, if an inspection is needed for a small business, a $1,500 discount to the inspection fee is available for small businesses, as defined by the Regulatory Fairness Act, chapter 19.85 RCW (RFA).

Additional revisions are being proposed to the way late renewal fees are being calculated. Late fees would be calculated on a per company basis, rather than a per product basis, which lowers the total potential late fee applicable to most businesses. A business which previously submitted a late renewal application for 10 products would have been subject to a $1,000 late fee ($100 per product) under the current rule. Under the proposed rule, this business would only be subject to a $100 late fee.

The intent of these proposed changes is to increase total revenue, without placing a significant additional financial burden on smaller businesses.

In addition to a restructure of the fee schedule, other minor proposed changes to this chapter include:

1. Updating the WSDA's organic input material registration logo to provide consistency, and increase recognition, with WSDA logos allowed for use on organic and transitional crops and products. The use of the logo is optional and not required on approved products;

2. Changing the expiration dates on registration certificates from October 31 to December 31 to better match production seasons and cycles of the certified businesses sourcing organic compliant inputs;

3. Replacing references to "the National Organic Program" with "USDA organic regulations"; and

4. Minor updates to the application process to improve the implementation of services.

Reasons Supporting Proposal: WSDA is authorized to set and collect fees for registration, renewal of registration, inspections, and sampling for the brand name materials list. RCW 15.86.070 authorizes WSDA to increase by rule fees as necessary to cover costs of providing services.

The United States Department of Agriculture (USDA) organic regulations require organic products be produced and handled using only natural input materials, with an exception for a limited number of synthetic materials specifically included in the rule. Determining which brand name, formulated materials are allowed for use in organic production or handling can be a daunting task for farms and other organic businesses.

Started in 1998, the WSDA organic program is one of the leading organic material review organizations in the United States. As a service and resource to organic businesses, the WSDA organic program evaluates an input's composition and manufacturing process for compliance with the applicable sections of the USDA organic regulations. Registration of organic inputs is voluntary; registration is not required for a certified organic producer or handler to use a compliant input. However, input companies who choose registration benefit from having their approved inputs published online by WSDA. WSDA's published list of approved brand name inputs provides a valuable tool for farms and handling or processing businesses to easily identify inputs that will not jeopardize their compliance with organic standards. As of July 2023, the program registered almost 1,000 products from almost 300 different companies for use in organic agriculture.

WSDA is the only USDA accredited certification agency highlighted in USDA's National Organic Program's Handbook as a reputable source for determining the compliance of inputs for use in organic agriculture. Producers, handlers, and certifiers throughout the United States reference WSDA's organic input material registration list.

Registration fees fund organic input registration services; no general fund tax dollars are received to provide organic input registration services.

As required in chapter 15.86 RCW, user fees fund organic input registration services by WSDA. At present, fees are based solely on the type of product being registered without consideration of the complexity of the product or the scope of the company producing the product. As such, product fees were kept low to allow market access for smaller businesses.

Unfortunately, as the number of complex products has grown and the required oversight in the growing market has increased, the cost of providing registration services has outpaced the revenue received. The structure of the fee schedule, as well as the annual fees assessed per registered product, does not provide sufficient revenue to support the expense of providing registration services.

For example, 80 percent of the annual expenses generated by the WSDA organic program are in staff salary and benefits. At least three full-time staff are required to provide adequate and quality organic input registration services at present. State salaries and benefit expenses have steadily risen since the last fee change in 2010. In fiscal year (FY) 2022, registration services generated $241,000 in revenue. The estimated cost to support three input material registration staff for FY 2024 is $459,300. The current fee schedule does not support the cost involved in providing organic input material registration.

The organic program has sought to delay any fee increases by implementing improvements and operating as efficiently as possible. To counter rising expenses, the WSDA organic program has worked to incorporate numerous efficiencies, including development of streamlined electronic renewal applications and implementation of a database designed specifically for organic certification and input material evaluations. The efforts by program management have delayed the need to make significant changes to chapter 16-160 WAC since 2010.

Statutory Authority for Adoption: RCW 15.86.130, 15.86.140.

Statute Being Implemented: Chapter 15.86 RCW.

Rule is not necessitated by federal law, federal or state court decision.

Name of Proponent: WSDA, governmental.

Name of Agency Personnel Responsible for Drafting, Implementation, and Enforcement: Brenda Book, 1111 Washington Street S.E., Olympia, WA, 360-902-2090.

A school district fiscal impact statement is not required under RCW 28A.305.135.

A cost-benefit analysis is not required under RCW 34.05.328. WSDA is not a listed agency under RCW 34.05.328 (5)(a)(i).

Scope of exemption for rule proposal from Regulatory Fairness Act requirements:

Is not exempt.

The proposed rule does impose more-than-minor costs on businesses.

Small Business Economic Impact Statement

WSDA is proposing changes to chapter 16-160 WAC. Proposed changes include restructuring the registration fee schedule, changes to the optional registered material logo, and other minor updates to definitions, terminology and the application process.

The USDA organic regulations require organic products be produced and handled using only natural input materials, with an exception for a limited number of synthetic materials specifically included in the rule. Determining which brand name, formulated materials are allowed for use in organic production or handling can be a daunting task for farms and other organic businesses.

Started in 1998, the WSDA's organic program is one of the leading organic material review organizations in the United States. As a service and resource to organic businesses, WSDA's organic program evaluates an input's composition and manufacturing process for compliance with the applicable sections of the USDA organic regulations. Registration of organic input materials is voluntary; registration is not required for a certified organic producer or handler to use a compliant input. However, manufacturers of input materials who choose registration benefit from having their registered input materials published online by WSDA. WSDA's published list of approved brand name input materials provide a valuable tool for farms and handling or processing businesses to easily identify input materials that will not jeopardize their compliance with organic standards.

The organic industry has grown significantly in the last decade. In 2012, the farm gate value of organic crops from Washington state was $355 million. By 2017, that number nearly doubled to $667 million and to $776 million by 2019. The demand for input materials that have been preapproved for use in organic production has grown with the expanding organic sector.

As required in chapter 15.86 RCW, user fees fund organic input registration services by WSDA; no general fund tax dollars are received to offset any of the costs associated with providing registration services. At present, fees are based solely on the type of product being registered without consideration of the complexity of the product or the scope of the company producing the product. As such, product fees were kept low to allow market access for smaller businesses.

Unfortunately, as the number of complex products has grown and the required oversight in the growing market has increased, the cost of providing registration services has outpaced the revenue received. The structure of the fee schedule, as well as the annual fees assessed per registered product, does not provide sufficient revenue to support the expense of providing registration services.

For example, 80 percent of the annual expenses generated by the WSDA's organic program are in staff salary and benefits. At least three full-time staff are required to provide adequate and quality organic input registration services at present. State salaries and benefit expenses have steadily risen since the last fee change in 2010. In fiscal year 2022, registration services generated $241,000 in revenue. In July 2023, the estimated cost to support three input material registration staff for FY 24 is $459,300. The current fee schedule does not support the cost involved in providing organic input material registration.

WSDA is proposing a restructuring of the existing fee structure to ensure quality services continue. WSDA is proposing to keep product fees low, but also incorporate a company fee, which will scale with reported income. The intent is to increase total revenue, without placing significant additional financial burden on smaller businesses. Additionally, WSDA's organic program, is proposing to revise late fees to be on a per company basis rather than a per product basis.

As part of this project, WSDA's organic program developed four goals to address specific issues with the current fee structure:

1. Simple and Transparent: The current fee structure has separate fees for different types of products. Since product type does not have a strong correlation with the amount of work required to evaluate compliance, it will be simpler to separate this decision from fees.

2. Balanced: The cost of providing registration services must be recovered by WSDA, while ensuring registration remains accessible and affordable for small or new businesses. The current fee structure is based entirely on the number of products being registered, which can hinder the development of new products. The proposed fee structure would balance this by adding a company fee based on company size (total gross annual income) and reducing the emphasis on the number of products registered.

3. Consistent: Revenue from registration fees needs to be predictable so that resources can be secured proactively and services provided quickly. Replacing the current inspection fee, which is based on an hourly rate, with a flat fee will allow operations to consistently and accurately predict their inspection costs.

4. Effective: WSDA's organic program is a fee for service program. The cost of providing services must be recovered in full by the fees charged for the services provided. The current fee structure does not generate revenue sufficient to support the services provided.

In addition to a restructure of the fee schedule, other minor proposed changes to this chapter include:

1. Updating the WSDA's organic input material registration logo to provide consistency, and increase recognition, with WSDA logos allowed for use on organic and transitional crops and products. The use of the logo is optional and not required on approved products;

2. Changing of expiration dates on registration certificates from October 31 to December 31 to better match production seasons and cycles of the certified businesses sourcing organic compliant inputs;

3. Replacing references to "the National Organic Program" with "USDA organic regulations"; and

4. Minor updates to the application process to improve the implementation of services.

No professional services are needed by businesses in order to comply with these proposed changes.

The cells in the table above showing as "redacted" reflect data that is suppressed by regulatory entities for confidentiality reasons in industries with a small number of businesses. If both the revenue and the payroll data are suppressed, the department will use $100 as the minor cost threshold as specified in RCW 19.85.020(2).

A description of how affected Washington businesses, and their relevant North American Industry Classification System (NAICS) codes were identified can be found in section 4 of this statement.

The fee restructuring component of the proposed revision to this rule is not likely to have an appreciable impact on the cost of equipment, supplies, labor, professional services, or administrative costs. It should not cause any changes to sales or revenue.

While the proposed revision aims to restructure the existing fee structure for organic input material registration, it does not rely on any additional recordkeeping or administrative actions beyond those currently present in the existing rule.

The probable cost of compliance will be dependent primarily on the size of a business (total gross annual income) and the number of products registered:

The proposed fee schedule includes an annual product fee of $350.00 due for each product seeking registration. There is an additional company fee due based on the total gross annual income of the business. The applicable income ranges and corresponding fee is included below.

Companies who do not wish to disclose their gross annual income bracket may instead choose to pay the maximum company fee of $2,400.00.

Changes were made to the inspection fees as well. Previously, inspection fees were assessed at a cost of $40 per hour and the sum of travel costs. This proposal changes inspection costs to be $2,000 per inspection. Out-of-state inspections are assessed at $3,000 in addition to any travel expenses which exceed $3,000. Inspections are not part of the standard workflow, only being conducted if compliance concerns cannot be resolved without them. In order to offset the cost, if an inspection is needed for a small business, a $1,500 discount to the inspection fee is available for small businesses, as defined by RFA.

Additional revisions are being proposed to the way late renewal fees are being calculated. Late fees would be calculated on a per company basis, rather than a per product basis, which lowers the total potential late fee applicable to most businesses. A business which previously might have submitted a late renewal application for 10 products would have been subject to a $1,000 late fee ($100 per product) under the current rule would only be subject to a $100 late fee under the proposed rule.

The proposal also revises sections of the rule to remove ambiguity. For instance, the product specific application requirements have been separated into their own section to clarify a company does not need to resubmit company specific information, such as contact information, with each new product submitted. These changes to the rule only clarify the existing application process and do not result in any additional requirements. They should have no impact on the cost of compliance.

Finally, the proposal includes a revision to the optional logo, which may be used on products registered with WSDA's organic program. The use of this logo is not compulsory. Existing companies would not be required to revise existing labels. Instead, any new labels drafted would be required to replace the previous logo with the proposed logo, if the company wished to use a logo. WSDA's organic program does not perceive this revision to have an appreciable impact on the cost of equipment, supplies, labor, professional services, or administrative costs. It should not cause any changes to sales or revenue.

To determine the affected industries, WSDA's organic program reviewed business licensing information available from the Washington state department of revenue (DOR). For each business either registered or seeking registration with WSDA's organic program as of July 1, 2020, WSDA's organic program reviewed their unified business identifier (UBI) to determine their status as a Washington state business and their NAICS code to determine the applicable industry.

Each business is reflected under only a single NAICS code. In the event a business had two or more NAICS codes, the code most applicable to input manufacturing and registration was selected.

WSDA compiled a list of the 60 different industries currently represented by organic input material registrants. WSDA then calculated the industry specific minor cost threshold by taking the greater of either one percent of average annual payroll as reported by either the Washington state employment security department (ESD), the United States Bureau of Labor Statistics (USBLS) or the United States Census Bureau's County Business Pattern (CBP) or 0.3 percent of average annual revenue as reported by DOR. In the event the information was redacted due to data suppression, WSDA's organic program used a minimum minor cost threshold of $100.

WSDA's organic program then calculated both the current fees, using the existing fee structure, and the proposed fees using the proposed revision for each of the 176 registrants identified as Washington state businesses. Since gross annual income is not reported under the current system, this information was unavailable to calculate the proposed fees. Instead, each of the proposed fees were calculated using the largest income bracket (businesses with over $50,000,000 in gross annual income). WSDA identified 15 businesses (8.5 percent) where the difference between the proposed fees and current fees would exceed the minor cost threshold.

The 15 businesses were present in seven different industries. If an industry includes a business with a proposed change that exceeds the minor cost threshold, that industry is included in bold in the table below.

Inspections are not part of the standard workflow for this program. They are a tool which may be used to evaluate compliance as needed. The fees have been adjusted to ensure the costs of conducting inspections are recovered if an inspection is needed, however no inspections have been conducted in the last five years. The table above does not reflect the cost of inspections or the $1,500 discount on inspection fees provided to businesses that meet the definition of "small business" in RFA.

RCW 19.85.040(1) requires WSDA to compare the cost of compliance for small businesses with the cost of compliance for the 10 percent of businesses that are the largest businesses required to comply with the proposed rules using one or more of the following as a basis for comparing costs: (a) Cost per employee; (b) cost per hour of labor; or (c) cost per one hundred dollars of sales.

As a fee restructuring, without additional recordkeeping requirements the impact is relatively uniform across all businesses. There are no projected increases in equipment, supplies, labor, professional services, or administrative costs. There are no projected losses in sales or revenue.

Logically, gross annual income will correlate to business size, with larger businesses within the same industry likely reporting higher gross annual income. To this effect, the proposal reduces the proportionate impact on small business by charging a comparatively smaller fee to business reporting lower gross annual incomes.

However, the product fee is not adjusted for gross annual income and remains constant without regards to business size. This means the product fee is likely to have a larger impact (cost of fee compared to total gross annual income) for smaller businesses when compared to the 10 percent of businesses that are the largest businesses required to comply with the proposed rule.

The table below compares businesses paying the lowest of the company fees, with businesses that have the largest income and paying the largest of the company fees. Ten products are used for both businesses to demonstrate the difference in total fees for small and large businesses.

Since the product fee is the same for all businesses, regardless of business size, WSDA's organic program projects that this fee restructure will have a greater impact in cost per one hundred dollars of sales on small businesses when compared to the 10 percent of businesses that are the largest businesses required to comply with the proposed rule.

RCW 19.85.030(2) requires consideration of the following methods of reducing the impact of the proposed amendment on small businesses:

(a) Reducing, modifying, or eliminating substantive regulatory requirements: These regulatory requirements are set by the USDA National Organic Program and are outside the scope of the WSDA's organic program. Reducing, modifying, or eliminating regulatory requirements are not an option to reduce the cost of the rule on small businesses.

(b) Simplifying, reducing, or eliminating recordkeeping and reporting requirements: The proposed rule does not change any of the current recordkeeping or reporting requirements. Reducing, modifying, or eliminating recordkeeping or reporting requirements are not an option to reduce the cost of the rule on small businesses.

(c) Reducing the frequency of inspections: The requirements for input materials used by organically certified operations is set by the USDA National Organic Program. As such, any changes to inspection frequency or schedule would be outside the scope of the WSDA's organic program and not an option to reduce the cost of the rule on small businesses.

(d) Delaying compliance timetables: WSDA's organic program is required by statute to recover the full cost of administering the program (RCW 15.86.070). This fee restructuring is being implemented to ensure compliance with this requirement. Delaying implementation or compliance timetables would prevent the program from fully recovering costs. In order to reduce costs on small businesses where we can, WSDA's organic program will implement flexible timetables on nonfee-related components such as use of the updated logo.

(e) Reducing or modifying fine schedules for noncompliance: The new fee structure substantially reduces the impact of late fees, the most common fee for noncompliance. Under the current fee structure, late fees are incurred on a per product basis at $100 per month. After two months, late fees are often equivalent to the full renewal amount. Under the new fee structure, late fees are incurred on a per company basis. This will result in a substantial reduction of penalties for companies with multiple products.

(f) Any other mitigation techniques including those suggested by small businesses or small business advocates: The current fee structure is based entirely on the type and number of products seeking registration. This means costs increase proportionally to the number of products you are registering without consideration to the size of your business or scope of the product line. WSDA's organic program hopes that by shifting some of the burden of fees from number of products to the size of the business, using a company fee based on gross annual income, that small businesses will be afforded more flexibility in developing and marketing their smaller product lines, as adding new products will have a lesser relative impact on their total fees. Additionally, new product and new company fees have been reworked to make their costs consistent with renewal fees. Under the previous fee structure, the fees for new products was larger than the fee for renewing products. Under the proposed fee structure the same product fee is due with your initial or renewal application annually. A $1,500 discount to the inspection fee is available for small businesses, as defined by RFA. The standard inspection fee is $2,000. This represents a 75 percent reduction for small businesses. There were no other mitigation techniques suggested by small businesses or small business advocates.

The WSDA's organic advisory board (OAB) was established in 1987 to advise WSDA concerning the implementation of the organic program. OAB consists of small and large businesses in Washington state. It includes and supports: Organic farmers, processors, handlers, input material suppliers, and other interested parties. They provide feedback on how the program can improve the services.

A fee restructure has been a conversation with the WSDA OAB over the last decade due to the requirements for the program to recover expenses in response to increased costs. Ongoing work with this group helped inform the design of the new logo and established the goals for the fee increase.

It is unlikely that the revisions will have any appreciable effect on a business's ability to comply with the requirements of the rule and should not result in the loss or creation of any jobs.

A copy of the statement may be obtained by contacting [no information supplied by agency].

August 21, 2023

Luisa F. Castro, Assistant Director

Food Safety and Consumer Services Division

OTS-4882.2