FMC explores implications of IRS electronic payment reporting requirements
Posted On: April 19, 2011
By Stacy Miller, Executive Director
In March, official numbers from the USDA Food and Nutrition Service confirmed that the number of SNAP authorized farmers market organizations had grown to more than 1,600 in 2010, with redemptions totaling $7.5 million. That amount represent as more than 70% increase since 2009. What better celebration of spring than knowing more and more farmers markets are building healthy relationships with SNAP shoppers nationwide?
This road to increased accessibility has not been an easy one for some farmers markets, and there is reason to believe that the road may get a little rockier before it gets smoother. A few short weeks ago, the Farmers Market Coalition became aware of a new Final Rule related to IRS reporting requirements for electronic transactions. This regulation, ‘Information Reporting for Payments Made in Settlement of Payment Card and Third Party Network Transactions,’ (6050W, for short) requires that all payments, including EBT, debit, and credit sales, be reported to the IRS (via 1099K, a form they are currently creating) by the merchant processing companies facilitating these transactions (such as J.P. Morgan, ACS, or Fidelity). Essentially, this is to ensure that the IRS receives an annual record of all the incoming electronic transactions conducted by merchants, whether they’re hardware stores, cafés, farmers markets, or farmers themselves. Nonprofits are not exempt from reporting requirements, according to the IRS.
Unfortunately, USDA nor the Farmers Market Coalition were aware of this rule (stemming from the Housing Assistance Tax Act of 2008) until the comment period had passed. This means that advocating for complete repeal (as recently happened in Congress on April 5th to the more recent 1099 provision in the Health Care Act) would be a herculean task, and not very likely to succeed.
Given the unique nature of farmers markets, and the often arcane language of tax law, FMC sought help to understand and translate the possible implications of this new rule to our members. One of these allies is Dan Best, General Counsel to the California Federation of Certified Farmers’ Markets, who, along with FMC, has consulted with both the USDA Food & Nutrition Service and the Office of General Counsel at the IRS. We have also consulted with our (generously pro bono) attorneys, and, with their help, we now understand the new tax reporting requirements to pertain to market organizations accepting electronic payments as follows (Please note that the regulations themselves are open to some interpretation until the IRS formalizes written guidance, so this is based on the most expert legal guidance we have to date):
1. The Farmers Market acts as an intermediary for the payment between the farmers lacking payment processing equipment and the bank facilitating Electronic Benefit Transfer (EBT) payments, including debit and credit card transactions.
2. Electronic benefit transactions cards issued by government agencies are covered by this new reporting requirement. As an intermediary, the Farmers Market will receive a Form 1099-K from the bank for all card payment transactions (including EBT).
3. The Farmers Market will be required to maintain records showing the pass-through payments to each farmer showing the amount of payment card transactions for which they were reimbursed for the year.
Based on the legal review and preliminary conversations with the IRS, steps 3 and 4 MAY not apply to farmers markets operating scrip systems, though we need to wait for formal guidance from the IRS before any conclusions can be drawn. If the IRS does determine that a farmers market operating a scrip system must issue a 1099-K to its farmers, FMC will be advocating that the effective date of the reporting requirement be delayed to January 1, 2012 to allow for the appropriate education, training, and recordkeeping systems to be put in place. Because farmers markets are in nearly all cases civic organizations (either nonprofit or municipal) providing a public service by offering electronic payment options, this requirement would be penalizing them for their good deeds and pose a significant deterrent to any market offering EBT/SNAP. Some member organizations, like the Farmers Market Federation of New York, have already stepped forward to provide evidence of the undue burden this would impose. We will advise our members and other allied nonprofits about sign-on opportunities after we’ve worked with our lawyers to craft a strong argument for delay for farmers market umbrella organizations.
Timing is critical, as many markets are set to open soon. The IRS is presently working on a set of Frequently Asked Questions and FNS has notified its authorized SNAP retailers that they will be asked to provide Tax Identification Numbers to their merchant processors. FMC will be working with both entities to get questions answered and keep you informed.
To be safe and to be ready for potential compliance requirements, we want to emphasize the importance of keeping good EBT transaction records. FMC strongly recommends that markets operating scrip/token systems institute and maintain accurate paper trail records of the amounts of reimbursements to each individual producer. We’re working with allies, including Wholesome Wave, marketumbrella.org and others, to explore education and tools that could help markets improve their recordkeeping and bookkeeping efforts.
Note: This article is for informational purposes only. It cannot be used to avoid penalties imposed under the Internal Revenue Code. If you’d like to obtain advice specific to your situation, please consult your tax advisor.