What is a Patronage Refund?
Patronage refund is the name for how co-ops send profits back to their owners. Essentially, each owner gets back part of the profit from their own purchases.
Co-ops are distinctive businesses based on cooperative ownership. Owners purchase equity shares, but the profits are not distributed based on the number of shares owned. Co-op profit is distributed based on how much each owner spends at the co-op; that is their patronage.
VFC provides the food and products that our owners want to purchase. Every owner purchase is recorded when you use your owner number. Those records are the basis for the patronage refund in profitable years.
Surplus from Owner Sales Belongs to the Owners
Food Cooperatives enjoy a privileged status and can return the profit to the owners as patronage refunds that are tax free to both the co-op and the owners. The cooperative can distribute the patronage refunds to each owner as cash or retain a portion as additional investment in the business.
The Board of Directors looks at the financial performance each year, considers the co-op's financial position and plans for the future. They decide what portion to pay as cash.
Co-op shares differ from stock in other kinds of businesses. They do not gain or lose value, they cannot be traded and they do not increase owner voting power. The non-voting shares are how we record who the Co-op assets belong to.
VFC Board declares Patronage Refund for FY 2014-15
As the Viroqua Food Co-op continues to grow, it’s important to recognize a Patronage Refund as an indicator of our success. In years in which the Co-op is profitable, VFC Board of Directors declares a Patronage Refund. This refund returns a portion of the profit to Co-op owners, while also reinvesting in our continued growth.
In Fiscal Year 2014-15, sales totaled $6.9 million. Based on this, 67% of sales were to owners, resulting in a Patronage Refund totaling $41,322. Of that amount, 20% is returned directly to VFC Owners via checks in January 2016. The other 80% is retained by the Co-op as equity in the name of each owner.
Why does the Co-op retain 80% of the refund?
The Board of Directors, as the elected representatives of the Co-op’s owners, decides each year if a Patronage Refund is beneficial to the health of the Co-op. The Co-op gains the best benefit in reduced taxes by declaring the greatest patronage allowed, determined by total percent of sales to owners. Wisconsin State Cooperative Statutes also demand that when the maximum patronage is declared, a minimum of 20% be distributed to owners – leaving 80% retained for our cooperatively-owned business. This represents an ongoing investment in our Cooperative by the owners. The ability to retain significant cash, tax-free, creates a resilient business and builds our community’s commonwealth.
Is the Patronage Refund taxable?
No. Since an individual refund is a deferred price reduction on goods purchased, an owner’s share of the Patronage Refund is NOT considered taxable income.
How is the refund distributed?
A minimum purchase amount of $1,675 from July 1, 2014 to June 30, 2015 is required to receive a Patronage Refund check. Qualifying owners receive a check directly in the mail and may use their Patronage Refund for in-store purchases or redeem it for cash at their bank or Credit Union. Alternatively, owners can donate their Patronage Refund to VFC’s Cultivating Community Fund (see opposite page for details). Those using the installment pay option to purchase an ownership must have their ownership balance paid in full before receiving Patronage Refunds. For those who have not paid their ownership share in full, the Patronage Refund will apply toward any remaining ownership share balance.
How can a Co-op Owner donate their Patronage Refund to VFC’s Cultivating Community Fund?
Owners who wish to donate the cash portion of their Patronage Refund to the CCF may do so at the registers.
What is the advantage of retaining patronage?
The retained owner equity helps to build a stronger Co-op through long-term owner investment in the business. The equity that is allocated to your account aggregates with that of all other owners to put the Co-op in a stronger financial position, enabling it to be here for generations to come. We also do not pay income tax on any of the retained patronage and this keeps more money at work in our community that the Co-op could have paid in taxes.
Retaining patronage also provides the resources needed to pay down debt and to build the foundation we need for future Co-op development. This is part of the special status that cooperatives benefit from because we own it.
Any additional questions regarding the FY 2014-15 Patronage Refund can be directed to VFC’s Finance Manager Eric Speck by emailing: firstname.lastname@example.org
Patronage Refund FAQ
1. What purchases will not count toward my patronage refund?
Purchases of gift cards, equity payments, sales tax, bottle deposits, class fees, newsletter advertising, and round up donations to charity are not a part of sales or of the patronage calculation.
2. Do sale items count toward my patronage refund?
Yes, sale items are credited at the price you paid, not the full price of the item.
3. Why did the Co-op decide on a $3 minimum for patronage refund checks?
The Board decided to apply a minimum $3 check amount as a cut-off point because the costs associated with writing and distributing checks under $3 would outweigh the benefits.
4. Does the patronage refund affect my owner equity payments?
If you chose to pay the owner equity requirement on the installment plan, patronage earned is applied to the outstanding amount until you are a fully invested owner.
5. Is retained patronage something I can take out at some point in the future? What does it mean that you are retaining patronage in my “name”?
VFC may retain a portion of the patronage refund. We then track the patronage deferred each year in your name in a database. Think of it as a special account for your retained patronage. That way there is a record of the retained patronage that is yours should the VFC Board decide to return a portion of it in the future.
The only time that the deferred portion of patronage would be returned to owners is if at some date in the future the Board is in a position to do so and the financial status of the Co-op allows for it. It is unlikely that retained patronage will be returned to owners in this way because it is a way to keep money in the Co-op working for the owners. We also do not pay income tax on any of the retained patronage and this keeps more money at work in our community that the Co-op could have paid in taxes.
6. Why don't Senior Memberships qualify for Patronage Refunds?
To fully participate in Cooperative structure, one must pay the full value of the Owner equity requirement. (See Co-op Principle 3) Free Senior Memberships were issued to those 65 and older with limited rights and benefits. We discontinued this practice in 2006. Senior-member status does not include the patronage refund benefit.
We encourage VFC members with an obsolete ‘free Senior Membership’ status to purchase Owner Equity shares in VFC to be eligible for patronage refunds in the future. Become a fully invested Owner of the VFC and gain all the benefits of ownership in the Co-op! Our Customer Service Manager, Jackie, can help you through the process.
7. Why is it so important for owners to maintain a current address in our files?
As an owner, you have the legal right and duty to be informed of certain governance activities of your Co-op such as board elections. There is also the practical consideration that without a good address on file, we may be unable to deliver benefits to you like patronage refunds.