Farmers Market not Tax Exempt

Farm Business Management Update, August - September 2008

By L. Leon Geyer (geyer@vt.edu), Professor, Agricultural Law, Department of Agricultural and Applied Economics, Virginia Tech

In a private letter ruling [Priv. Ltr. Rul. 200818028 (Feb. 8, 2008)], a farmers market was held not to be a tax exempt organization. Tax exempt non-profit organizations are commonly called a 501(c)(3).

Farmers often collectively form an organization such as a farmers market to promote direct marketing of farm products, handcrafted goods, and to operate a farmer’s market. Membership is available for anyone who sells locally grown farm products and similar goods, such as flowers and artisan crafts. Members may be charged rent for space in the market or for related marketing and advertising services.

Most of the activity is devoted to promotion and marketing of the farmers market, market the farmers produce for profit, operation of the market, such as rent, insurance, supplies, and professional fees. Rules may cover the obligations of vendors to clean up their assigned areas, ensure health codes are followed, and conform to the market’s operating hours.

An organization is not exempt from taxation merely because its operations are not conducted to produce a profit. To be a charitable organization the organization must operate exclusively for one or more of the purposes described in section 501(c)(3) of the Code and regulations.

Section 501(c)(3) of the Code provides for the exemption of organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The regulations require an organization to show that it is not organized or operated for private interests in order to be exempt under section 501(c)(3) of the Code. When a group of individuals associate to provide a service for themselves, they are serving a private interest. Where a farmers market’s primary activity is providing a location for members to sell goods and promotion of their sales activity, ninety percent of your funding comes from those same individuals, and all or most of the directors are vendors at the market and personally benefit from your operation, the market is not a tax exempt organization according to the IRS. These facts demonstrate that the market provides a substantial private benefit to the farmers market members.

The presence of a single substantial non-exempt purpose will prevent the grant of tax-exemption.

Based on the above facts, the IRS concluded in the private letter ruling that farmers markets which provide a substantial benefit to farmers/sellers do not meet the operation test for exemption under section 501(c)(3) of the Code. Farmers markets are operating for the mutual benefit of its members and in a manner indistinguishable from commercial entities. Therefore, a tax free benefit for a farmers market would not serve a public interest as required by section 501(c)(3) of IRS regulations.

Accordingly, farmers markets are generally not exempt as a §501 (c) (3) charitable organization and must file the appropriate federal income tax returns.

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