Presentation on theme: "1 Sponsorships, Endorsements, and Cause-Related Marketing: Avoiding the Legal and Tax Traps of Charitable Fundraising Lorman Education Services Teleconference."— Presentation transcript:
1 Sponsorships, Endorsements, and Cause-Related Marketing: Avoiding the Legal and Tax Traps of Charitable Fundraising Lorman Education Services Teleconference May 21, 2007, 1 p.m. – 2:30 p.m. ET Beth A. Caseman, Esq. Venable LLP, Washington, D.C.
2 Today’s Program Unrelated business income tax ("UBIT") basics Implications for corporate sponsorship, cause marketing, and endorsement programs Pitfalls to avoid in cause marketing programs Charitable solicitation registration requirements Recent changes to substantiation, disclosure, and contribution rules under the Pension Protection Act Form 990 reporting
3 Unrelated Business Income Tax — The Basics Tax-exempt organizations are not exempt from all taxes, only from those taxes that would otherwise apply to income received from activities that are substantially related to their exempt purposes. Income a tax-exempt organization receives from unrelated business activities – business activities that are regularly carried on and that are not substantially related to the organization’s exempt purposes – is generally taxable as unrelated business income. IRC § 512.
4 Unrelated Business Income Tax — The Basics When will a tax-exempt organization be liable for tax on its unrelated business income? If it receives net income from a trade or business, that is regularly carried on, and that is not substantially related to its exempt purposes Exceptions may apply!
5 Unrelated Business Income Tax — The Basics A trade or business is "related" if: It bears a causal, and substantial, relationship to the achievement of an organization’s exempt purposes (aside from the need for funds) It "contribute[s] importantly" to the accomplishment of "any purpose for which an organization is granted exemption"
6 Unrelated Business Income Tax — Exceptions May Apply Interest income Qualified convention and trade show activities Qualified sponsorship payments Royalties
7 Corporate Sponsorship Income "Qualified sponsorship payments" will not be subject to UBIT Definition: A "qualified sponsorship payment" is "any payment [of money, property or services] by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit."
8 Corporate Sponsorship Income "Substantial return benefits" are defined as benefits provided to the corporate sponsor other than (i) permissible forms of acknowledgment or (ii) disregarded benefits, including benefits that have an aggregate value of not more than 2% of the amount of the payment.
9 Corporate Sponsorship Income Permissible forms of use or acknowledgment: Use or acknowledgment of the name or logo (or product lines) of the sponsor’s business, as long as use is not qualitative or comparative List of sponsor’s location, telephone number, and/or internet address, including a hyperlink from the exempt organization’s web site to the sponsor’s web site
10 Corporate Sponsorship Income Permissible forms of use or acknowledgment: Value-neutral descriptions (including displays or visual depictions) of the sponsor's product lines or services Sponsor brand or trade names and product or service listings Designating a sponsor as an "exclusive sponsor" Distribution of sponsor’s product at a sponsored activity
11 Corporate Sponsorship Income "Substantial return benefits" include advertising providing goods, facilities, services or other privileges to the sponsor, unless privileges are of "insubstantial value" granting the sponsor (or persons designated by the sponsor) exclusive or non-exclusive rights to use an intangible asset (e.g., trademark or logo) of the exempt organization; or designating a sponsor as an "exclusive provider"
12 Corporate Sponsorship Income Advertising is defined as any message that promotes or markets any trade or business, or any service, facility or product. Messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use the products or services, are advertising. If the substantial return benefit is a form of advertising, it is subject to UBIT.
13 Corporate Sponsorship Income Advertising is generally subject to UBIT (unless it is not regularly carried on); however, other substantial return benefits may not be. Giving a sponsor the right to use the organization’s name and logo in connection with the sponsor’s own publicity may be characterized as a royalty.
14 Corporate Sponsorship Income If sponsorship arrangement includes one or more substantial return benefits, the organization must make a "reasonable and good faith" allocation of each portion of the sponsorship payment to the benefits provided based on their fair market value, and examine each one to determine its appropriate tax treatment.
15 Royalties A royalty is any payment received in consideration for the use of a valuable intangible property right. Payments for the use of an organization’s name, logo, or other trademarks, trade names, service marks, copyrights, photographs, facsimile signatures, and membership mailing lists are ordinarily considered royalties and are tax-free.
16 Services BUT, p ayments for services provided in connection with granting the right to use the organization’s name and logo (such as marketing or administrative services) are not royalties - and are generally taxable as unrelated business income.
17 Is the Income Taxable? Advertising — ALMOST ALWAYS Sponsorship income — DEPENDS Endorsement programs — DEPENDS Cause marketing programs — DEPENDS
18 Endorsements Where an association or other tax-exempt organization "endorses" a vendor's product or service to its membership by allowing the vendor to use the association’s name, logo, and/or membership mailing list in marketing the product to the association’s members Examples: credit card affinity programs, insurance programs, and other types of programs where an exempt organization licenses its name and logo in exchange for a portion of revenue received
19 Cause Marketing Generally, when a commercial business and a nonprofit organization agree to advertise a commercial product through use of the nonprofit’s name or logo, for the mutual benefit of both organizations The basic message: "Buy the product of Corporation XYZ and a contribution will be made to Charity ABC."
20 Cause Marketing Cause marketing (or “cause-related marketing”) can be a useful means for a charitable organization to promote awareness of the organization’s name and identity (and thus attract donors), and is seen by corporations as a way to increase perceived goodwill in the community (and thus attract customers).
21 Endorsements and Cause Marketing Taxability of the income received will depend on contents of contract, reality of relationship IRS looks to the amount of activity that a tax- exempt organization is exerting in support of a program IRS position is "evolving," thanks to a push from the judicial system
22 Mailing List Rental Income Usually a part of larger affinity program/endorsement agreement Generally not taxable
23 Endorsements and Cause Marketing, Program Structures Single agreement, mere license License agreement with tax-exempt organization, separate services agreement with for-profit subsidiary Separate license agreement and services agreement, both with tax-exempt entity License and services contained in the same agreement
24 Endorsements and Cause Marketing, Contract Tips Call it a "Royalty Agreement" or a "License Agreement" Be clear that payment is for use of name and logo, not in exchange for services Use gross income for measuring royalty payments Tax-exempt organization should exercise quality control
25 Endorsements and Cause Marketing, Contract Tips Avoid actual promotion of the other party’s products or services Agreement should not list required duties or activities of the tax-exempt to assist in marketing Avoid "joint venture," "partnership," or "agent" Be certain that the "paper trail" is consistent with all the terms and conditions of the contract itself
26 Endorsements and Cause Marketing, Other Issues Other legal issues Tort False Advertising Commercial Co-Venturer Requirements Charitable Solicitation Registration
27 Cause Marketing: Pitfalls to Avoid Cause marketing is a state-regulated activity!!! Charities and their for-profit ‘partners’ may be subject to fines and penalties if laws or regulations are violated Charity may damage its reputation by aligning itself with for-profit entity not in line with its mission
28 Cause Marketing: Pitfalls to Avoid Charities and their for-profit alliance partners must ensure compliance with state regulations Many states require written contract between the parties to be filed with the state Several states require for-profit entities to register or be licensed as "commercial co-venturers" or professional fundraisers and to post bonds
29 Cause Marketing: Pitfalls to Avoid Guidelines issued by 1999 Attorneys General Report issued by Office of the Attorney General, State of California, "What’s in a Nonprofit’s Name?" http://caag.state.ca.us/publications/nonprofit/ http://caag.state.ca.us/publications/nonprofit/
30 Cause Marketing: 1999 Attorneys General Report Guidelines (cont.) Both the commercial sponsor and the nonprofit organization must comply with consumer laws prohibiting false advertising, unfair and/or deceptive trade practices and consumer fraud. Advertisements must not misrepresent that the nonprofit organization has endorsed the advertised product. If the nonprofit has not endorsed the product, the advertisement should clearly and conspicuously disclose this fact.
31 Cause Marketing: 1999 Attorneys General Report Guidelines (cont.) Advertisements using the name or logo of a nonprofit organization must avoid making express or implied claims that the advertised product is superior to others in the same product category, unless the claim is true and substantiated. Advertisements using the name or logo of a nonprofit must disclose clearly and conspicuously that the corporate sponsor has paid for the use of the nonprofit’s name or logo when that is the case.
32 Cause Marketing: 1999 Attorneys General Report Guidelines (cont.) Advertisements shall not mislead, deceive or confuse the public about the effect of the consumer’s purchase on charitable contributions by the commercial sponsor. Advertising partnerships between commercial and nonprofit entities should avoid exclusive product sponsorships.
33 Cause Marketing: BBB Standard 19 The Better Business Bureau’s Standards for Charitable Accountability Standard 19: Clearly disclose how the charity benefits from the sale of products or services (i.e., cause-related marketing) that state or imply that a charity will benefit from a consumer sale or transaction. Such promotions should disclose, at the point of solicitation:
34 Cause Marketing: BBB Standard 19 (cont.) 1.the actual or anticipated portion of the purchase price that will benefit the charity (e.g., 5 cents will be contributed to abc charity for every xyz company product sold), 2.the duration of the campaign (e.g., the month of October), 3.any maximum or guaranteed minimum contribution amount (e.g., up to a maximum of $200,000).
35 Cause Marketing: Pitfalls to Avoid Sample state statute governing cause marketing agreements: Mass. Gen. Laws ch. 68 §§ 18-24 "Commercial co-venturer", any person who for profit or other commercial consideration, conducts, produces, promotes, underwrites, arranges or sponsors a performance, event, or sale to the public of a good or service which is advertised in conjunction with the name of any charitable organization or as benefiting to any extent any charitable purpose. Any such person who will benefit in good will only shall not be deemed a commercial co-venturer if the collection and distribution of the proceeds of the performance, event or sale are supervised and controlled by the benefiting charitable organization[.]"
36 Cause Marketing: Pitfalls to Avoid Mass. Gen. Laws Chapter 68 Section 22. Contracts (a) Every contract or agreement between a professional fund-raising counsel or a commercial co-venturer or a professional solicitor and a charitable organization required to have a certificate of registration pursuant to section nineteen shall be in writing, signed by two officers of the charitable organization, and filed with the director of the division within ten days after such contract or agreement is entered into. No solicitation shall be conducted prior to the filing of such contract or agreement. (b) Every contract or agreement between a professional solicitor or a commercial co-venturer and a charitable organization shall include: (1) a statement of the charitable purposes to be described in the solicitation; and (2) a statement of the guaranteed minimum percentage of the gross receipts from fund-raising which will be utilized exclusively for the charitable purposes described in the solicitation.
37 Cause Marketing: Charitable Solicitation Registration Most states require charities to register with the state and file reports annually if they will be raising funds within the state Generally, any nonprofit soliciting contributions from the public within the borders of a state, by any means, is required to register (and must do so before soliciting).
38 Cause Marketing: Charitable Solicitation Registration Physical presence in the state not required. Letters, phone calls, advertisements requesting financial support from a state's residents is enough (in the eyes of the state) to trigger that state's solicitation law. Web site solicitations alone generally not sufficient to require registration Unified Registration Statement available at http://www.multistatefiling.org/ http://www.multistatefiling.org/
39 Pension Protection Act of 2006 Requires Section 501(c)(3) organizations to publicly disclose their unrelated business income tax returns (Forms 990-T) in same manner that all exempt organizations must make their Forms 990 publicly available.
40 Pension Protection Act of 2006 Requires exempt organizations with annual gross receipts of $25,000 or less to file annual electronic notice with IRS, disclosing basic identifying information (name, web site, address, EIN, evidence of continuing basis for exemption). Electronic notice will be publicly available. Failure to file for 3 consecutive years will result in revocation of exemption.
41 Pension Protection Act of 2006 Permits IRS to disclose to state officials, on request, notice of proposed revocation of tax exemption of Section 501(c)(3) organizations, issuance of a proposed deficiency of tax, and returns of organizations in connection with such disclosure
42 Pension Protection Act of 2006 Donors claiming charitable contribution deductions must maintain a record of any cash contribution. May be a cancelled check, or written acknowledgment from the charitable organization showing the name of the organization, date, and amount of the contribution.