August 21, 2018
There are over 90 farmer’s markets located throughout the State of West Virginia. Last year those farmer’s markets engaged in estimated sales totaling over $6 million. Farmer’s markets increase access to locally grown foods, help support local farmers and the community, and provide a forum for learning about the farmers and foods grown nearby. This year the Community Economic Development Law Program received several inquiries asking for assistance in creating new farmer’s markets. Organizers often grapple with the decision of organizing the market as a for-profit or a nonprofit entity.
Due to the requirements that must be met to qualify as a tax-exempt nonprofit organization, most farmer’s markets are not eligible for tax exempt status. A tax-exempt nonprofit must be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes. . .,” and no part of the earnings of the organization can benefit any private individual. These requirements present a problem for farmer’s markets because, as the IRS states, the “sale of products such as fruits, vegetables, cookies, wines, breads, and coffee is indicative of a business.” The goal of the market is to provide a place for local farmers to gather and expand their sales opportunities. This puts most farmer’s markets squarely in the realm of a for-profit business.
There are, however, nonprofit tax-exempt farmer’s markets in West Virginia and around the country. How do they do it? There is no one right answer. There are no concrete rules for what can and cannot be a nonprofit farmer’s market type organization. The IRS reviews applications for tax exempt status on a case by case basis. There are, however, activities that may increase a farmer’s market’s chance of qualifying for tax-exempt status. Among these are:
- Accepting SNAP, WIC, and Senior Farmer’s Market Nutrition Program payments.
- Establishing the market in an area that is deteriorated, blighted, or designated a food desert.
- Dedicating a substantial part of the budget to charitable, educational, or scientific programs as those programs are defined by the IRS.
- Partnering with local food banks, health clinics, schools, and youth organizations to provide access to free local produce and education about the benefits of eating locally grown products.
Likewise, there are some activities that may get the application denied. The following are things that should be avoided:
- Allowing vendors to set their own prices for products.
- Placing the market in an area where it competes with other for-profit markets.
- Providing educational activities for vendors that are not open to the general public.
- Spending all or nearly all of the budget on advertising, promoting, and informing buyers about the market.
- Having no substantial budget items focused on charitable, educational, or scientific programs.
Farmer’s markets are valuable community assets that serve to connect communities. Whether considering a for-profit or a nonprofit market, the Community Economic Development Law Program can help. Keep in mind that the information contained in this post is for educational purposes only and provides only general information and a general understanding of the law. You should contact Legal Aid’s Community Economic Develop Law Program or another attorney to obtain advice on your specific situation.