Patronage and Net Surplus Savings

Davis Food Co-op Patronage Refunds

Thank you for shopping at the Co-op and identifying your purchases with your Co-op Card. Article V of our Bylaws obligates the Cooperative to apply “net surplus savings and earnings” at the end of each fiscal year to restore capital if impaired, set aside reasonable reserves for necessary business purposes, and to allocate earnings from sales to members to such members in proportion to their patronage. If we make money from selling goods and services to members, then (if prudent) that profit is returned to members as patronage dividends (or patronage refunds – the two terms are used interchangeably by most cooperatives).

There are a number of other interesting provisions in our Bylaws. Our Directors make the determination if a dividend can be issued, or if our business requires retention of earnings. Our co-op was able to pay patronage refunds to thousands of member households for four years. We then embarked on a major renovation of our building and all the equipment in it, to offer new and improved services and products, in order to prepare for competition (which arrived and certainly had an effect). That has resulted in our Board deciding either to retain earnings as a necessary reserve, or to declare net losses rather than earnings.

Here is a summary of patronage refunds (or lack thereof) since they were first authorized in 2003:

Patronage refund?

Total refunded/net earnings retained

% paid in shares/paid in cash

1/1/2003 to 9/27/03

Yes

$124,519

0/100

9/28/2003 to 10/2/2004

Yes

$308, 838

50/50

10/3/2004 to 10/1/2005

Yes

$305,683

65/35

10/2/2005 to 9/30/2006

Yes

$455,138

80/20

10/1/2006 to 9/29/2007

No

$190,405 retained for business purposes

not applicable

9/30/2007 to 9/27/2008

No

$100,010 retained for business purposes

not applicable

9/28/2008 to 10/3/2009

No

$52,329 retained for business purposes

not applicable

10/4/2009 to 10/2/2010

No

(net loss for fiscal year)

not applicable

10/3/2010 to 10/1/2011

No

(net loss for fiscal year)

not applicable

10/2/2011 to 9/29/2012

No

(net loss for fiscal year)

not applicable

9/30/2012 to 9/28/2013

No

$24,546 retained for business purposes

not applicable

The current fiscal year runs from September 29, 2013 to September 27, 2014.

Any past patronage refund paid to you in the form of share investments belongs to you, not the Co-op; that is, should you withdraw from the Co-op, these shares can be converted to cash. Shares from patronage refunds would not relieve a shareholder, in part or in whole, of the obligation to invest $20 in shares by March 31 of the current calendar year—unless it brings you to $300, the maximum dollar amount of shares invested allowed in one membership. You will receive the annual Notice of Share Assessment which will provide your up-to-date equity investment balance.

Your patronage makes greater Co-op earnings possible and increases the portion that will be distributed to you. Please continue to let us know how we can meet your needs, and even surprise and delight you!

If you are a consumer shareholder buying for personal and household consumption your patronage refund is not taxable income for you. Please see the explanation below for details and exceptions. The refund truly is your money—as a cooperative owner—coming back to you. It is like a deferred discount, one that brings the Co-op closer to being not-for-profit in its service to member/owners.

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Explanation of Bylaw consent provision with respect to Patronage Refunds

A provision of the Davis Food Co-op Bylaws—Article V, Section 4(B) (7)—requires that persons who become or remain shareholders of the Co-op after the adoption of that provision thereby consent to include in their gross incomes for income tax purposes the amounts of any patronage refund paid to them by the Co-op, except to the extent that certain exceptions apply.

The first exception states that inclusion in taxable income is not required where a shareholder's purchases from the Co-op are attributable to “personal, living, or family items.” This exception would apply to “consumer shareholders” whose purchases were for personal or household consumption. It would not apply to consumer shareholders whose purchases were for use or resale in a trade or business, or for use in other income-producing activities, nor would it apply to business shareholders.

Thus, the Bylaw consent provision is of no significance to most consumer shareholders of the Co-op, and such shareholders are not required to include the patronage refund in their taxable incomes. Inclusion of the patronage refund in taxable income is required only of business shareholders and of consumer shareholders whose purchases were for business or income-producing purposes.

Questions?

If you have more questions, please email Doug Walter, or telephone (530) 758-2667 and leave a message for Doug at ext. 111.

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