Selling Too Much Food Hot? SNAP-Authorized You’re Not!

Small grocery stores and specialty retail food stores that sell hot foods are facing an unprecedented threat to their businesses.  Not from competition or due to rising costs.  Instead, thousands of small fish and seafood markets in impoverished urban neighborhoods across the country are threatened with the withdrawal of their Supplemental Nutrition Assistance Program (“SNAP”) authorization because USDA’s Food and Nutrition Service (“FNS”) believes they sell too much hot food to their customers.

FNS’s recent efforts to withdraw these small retailers’ SNAP licenses stem from its December 2016 Final Rule entitled “Enhancing Retailer Standards in the Supplemental Nutrition Assistance” regulation.  In its Final Rule, FNS amended the definition of “ineligible firms” to include:

[F]irms that have more than 50 percent of their total gross sales in foods cooked or heated on-site by the retailer before or after purchase; and hot and/or cold prepared foods not intended for home preparation or consumption, including prepared foods that are consumed on the premises or sold for carryout, shall not qualify for participation as retail food stores under Criterion A or B. This includes firms that primarily sell prepared foods that are consumed on the premises or sold for carryout.

7 CFR §278.1(b)(1)(iv).   Stated differently, FNS believes that grocery stores whose sales of foods that are heated or cooked on-site, regardless of whether it was heated or cooked pre-sale or post-sale, exceed half of their total sales are restaurants.  And restaurants, with few exceptions and in only a few states, are not eligible to be participants in the SNAP program.  FNS’s misguided regulation does not take into account whether the store has tables or chairs for customers to eat their food.  FNS’s regulation permits it to conclude that a grocer is a restaurant even if it has no servers and provides no plates or utensils to customers.  Shockingly, this is a major improvement from FNS’s proposed rule which sought to define a grocery store as a restaurant if it had more than 15% of its sales in heated or cooked foods. 

While the agency heeded comments from industry groups, including the country’s largest convenience store chain, and reduced the threshold to 50% of gross sales, FNS failed to advise to retailers that they needed to upgrade their cash registers to sophisticated point-of-sale (“POS”) systems and program them to keep track of a multitude of categories so that they could prove to the federal government that they are grocery stores, not restaurants.  The lack of a sophisticated POS system makes it difficult, if not impossible, for smaller SNAP retailers on the receiving end of a letter requesting sales records from FNS to produce records sufficient to satisfy regulators, at least during administrative proceedings. 

FNS officials have informally advised that retailers should produce their sales receipts.  Unfortunately, most small retailers use older cash registers that do not have the detailed receipts generated by POS systems used by superstores and larger supermarkets.  Instead, most small retailers’ registers provide small receipts that provide little detail or they use handwritten order tickets.  FNS’s regulations, guidance, policy memoranda, and other issuances do not require retailers to utilize POS systems or keep sales receipts for specific periods of time.  And virtually no retailers – large or small – have the ability to identify which foods were heated or cooked post-sale, especially if the retailer did not charge a cooking fee.  As a result, crab retailers and others are faced with a difficult task – proving that less than 50% of their gross sales were foods cooked or heated in the store. 

Not surprisingly, many Maryland retailers have lost their SNAP authorizations.  Since issuing its regulation, FNS is believed to have withdrawn the authorization of hundreds of small retailers based upon this new regulation.  The precise number is not known because FNS is slow to publish its Final Agency Decisions and because the agency has failed to disclose all relevant information regarding its regulation, including form e-mails sent to more than 200 SNAP retailers during 2017, despite a FOIA request from OFW Law.  FNS’s assertion of FOIA several exemptions are the basis for withholding these records– including that unsupportable assertion that the requested information is confidential business information (“CBI”).  How a federal agency can reach the conclusion that e-mails from FNS to SNAP retailers can be deemed confidential business information is truly perplexing, especially since FNS already lists store names and addresses of all SNAP-authorized retailers on its website.

During 2017, FNS commenced a broad attack on the SNAP authorization of retailers in the mid-Atlantic that specialize in selling live Maryland blue crabs.  As recently reported in the Baltimore Sun, FNS has withdrawn the SNAP authorizations of dozens of crab retailers, mostly in poorer neighborhoods in Maryland’s largest city.  Crabs are generally sold live and a majority of these crustaceans are cooked at home.  But not all customers – especially those on food stamps, have the ability to cook crabs at home.  Many retailers will cook crabs as a courtesy for customers post-sale, frequently at no charge.  FNS has repeatedly confirmed that SNAP retailers may cook foods for EBT customers post-sale, as long as SNAP benefits are not used for any cooking fees.

Most of Baltimore’s SNAP retailers are small, family-run businesses with modest sales and profits.  Many are located in so-called food deserts and virtually all are dependent on sales to SNAP beneficiaries, who often make up a majority of their customers.  FNS’s withdrawal of these retailers’ SNAP authorizations are creating a hardship for these small businesses, their employees, and those that FNS is charged by Congress with assisting – SNAP beneficiaries.  Many of these businesses have already starting laying off employees and some will likely close in the near future due to the loss of revenues resulting from the withdrawal of their SNAP licenses. 

The timing of FNS’s attack on mid-Atlantic crab retailers could not be worse for Maryland’s crab industry.  The Wall Street Journal recently reported that Maryland’s crab processors are facing a dire labor shortage, largely as a result of the Department of Homeland Security’s changes to the H2-B low-skilled seasonal worker visa process and Congress’ failure to raise the cap on visas despite pleas from agricultural interests across the country.  Elected officials are starting to take note.  Last week Maryland Delegate John Mautz wrote to USDA Secretary Sonny Perdue asking the Department to delay implementation of its regulation until next year in order to provide SNAP retailers with adequate time to make costly changes necessary to comply with FNS’s restaurant regulation.  Whether USDA will heed this plea for relief and assist Maryland’s watermen, retailers, and SNAP beneficiaries remains to be seen.

In the interim, SNAP retailers should strongly consider upgrading their registers and save all invoices and receipts for the foreseeable future. Crab retailers and others that have already had their authorizations withdrawn may re-apply after a six month waiting period has expired.  And those retailers who have yet to receive a letter from FNS requesting records would be well advised to prepare for the inevitable.  Finally, watermen, crab retailers, and SNAP beneficiaries should consider joining forces to attempt to right this wrong -- this is no time to adopt a crab mentality.

OFW Principal Stewart D. Fried provides represents and provides regulatory advice to grocers, convenience stores, and associations across the United States regarding SNAP and WIC-related issues, including proceedings concerning SNAP authorizations and trafficking and other program violations before FNS and the federal courts.

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