In every state, laws have been passed to make the formation of farmers’ marketing cooperatives easier. Many states have passed laws helpful to other types of cooperatives. Cooperatives such as mutual insurance, irrigation, or cooperative electrification associations are generally set up in accordance with state laws especially passed for this purpose. In 1940, Congress passed the District of Columbia Consumers Cooperative Act, which is important for the residents of any state since it permits incorporation in the District by nonresidents. Cooperatives may also be organized under the general corporation statutes of most states.

The legality of the cooperative form of business is likewise well established by decisions of state and federal courts.

Cooperative business has also been recognized by a considerable body of national legislation, extending from a good many recent laws favorable to cooperatives back to 1898 when “farmers’ purely local cooperative companies or associations” were exempted from the payment of a federal stamp tax. Perhaps the most important single piece of legislation relating to cooperatives is the Capper-Volstead Act of 1922. The Clayton Act of 1914 had provided that cooperatives or their members could not be “construed to be illegal combinations or conspiracies in restraint of trade, under the anti-trust laws.” The Capper-Volstead Act defined cooperative marketing associations and placed upon the secretary of agriculture the responsibility of determining whether an association of this type was unduly raising the price of a farm product by restricting its sale in interstate commerce.

Federal policy favorable to agricultural cooperatives was also expressed in the Cooperative Marketing Act of 1926, which provided for the creation of a Division of Cooperative Marketing in the Department of Agriculture. The Agricultural Marketing Act of 1929 authorized the Federal Farm Board, established by that act, to encourage the “organization, improvement in methods, and development of effective cooperative associations.”

Other Congressional expressions which recognize agricultural cooperation are found in the Federal Revenue Statutes, the Packers and Stockyards Act of 1921, the Grain Futures Act of 1922, the Farm Credit Act of 1933—which provided for the establishment of one central and twelve district “Banks for Cooperatives” to furnish financing services for eligible farmer cooperatives—the Tennessee Valley Authority Act of 1933, the Agricultural Adjustment Conservation Act of 1933, the Motor Carrier Act of 1935, and the Rural Electrification Act of 1936.

The Robinson-Patman Act of 1936, known as the Fair Trade Act, stipulated that “nothing in this Act shall prevent a cooperative association from returning to its members, producers or consumers the whole or any part of the net earnings or surplus resulting from its trading operations in proportion to their purchases or sales from, to, or through the association.”

Is Cooperative Business Tax-free?

The statement is often made that cooperatives do not pay their full share of taxes. What is the situation?

Cooperative associations do pay the same property taxes that similar business organizations are required to pay on buildings and plants which they own. But farmers’ marketing and purchasing cooperatives that meet conditions prescribed by Congress are exempt from federal income taxes. Moreover, the Bureau of Internal Revenue has permitted cooperatives which are not entitled to exemption as agricultural cooperatives to subtract from their total income the amount they pay out in patronage refunds and to figure their income tax on the remainder. Many states exempt farmers’ cooperatives from state income taxes also.

In the case of consumers’ cooperatives, the Bureau of Internal Revenue looks upon patronage refunds as rebates upon the business transacted with members rather than as a true income of the association. If a commercial business obligated itself to return its profits to its customers, it could also deduct such refunds in figuring out its taxable income.

Cooperators have lone urged that properly organized cooperatives should be exempt from the payment of income taxes, claiming that co-ops are nonprofit in character. They maintain that patronage refunds by marketing associations are really the return of “underpayments” made to members, and in the case of purchasing associations the return of “overpayments,” and should not be classed with business profits.

From EM 23: Why Co-ops? What Are They? How Do They Work? (1944)