Transcript Legal and Tax Issues of Cause-Related Marketing

Cause-Related Marketing:
When Helping Others Helps Your Bottom Line
Sarah Duniway, J.D.
2010 Business Law Institute
May 2010
Agenda
• What is cause-related marketing
• Overview of key issues
• Case studies and analysis
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Cause-Related Marketing
• When a business supports a charitable cause
or event to help the business get its name out
• Advantages
– Charitable goals
• Raise funds
• Raise awareness of issue, mission, programs
– Business goals
• Increase profits
• Raise brand awareness
• Promote business as good citizen to customers,
employees
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Key Issues
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Use of charitable assets
Charitable solicitation regulations
Unrelated business income tax
Attribution of income
Managing risk
Sales tax
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Use of Charitable Assets:
Legal Principles
• Charitable assets:
– Money or goods donated to charitable cause or for
charitable purposes
– Charitable assets must be exclusively dedicated to
charitable purposes
• Federal tax law principle:
– No private inurement to insiders
– Insubstantial private benefit
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Use of Charitable Assets:
Application
• Ensure funds raised from public that
purport to be for charitable cause:
– Are in fact used for charity
– Overhead and fundraising expenses
reasonable
– Charities name, logo, brand used consistent
with its charitable purposes
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Use of Charitable Assets:
Application, Con’t
• Manage private benefit
– Benefits to business partner are:
• Reasonable
• Proportional to its investment
– If charity provides goods or services to
product or event:
• Must receive fair market value return
• Either compensation or share of contributions
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Charitable Solicitation Regulations:
Legal Principles
• Most states regulate solicitation of
charitable contributions in the state
– Regulations govern the ask, not the give
• Most require:
– Registration with state charity official
– Reports regarding fundraising activities
– Require honesty and fair dealing
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Charitable Solicitation Regulations:
Legal Principles, Con’t
• Many states regulate professional fundraisers
• Definitions vary by state
• Example: Minnesota defines “professional
fundraiser” as:
– Person or entity (other than charity’s employees)
– Who for compensation or profit
• Solicits charitable contributions,
– Includes sale of goods if portion of proceeds will be
donated to charity
• Manages, advises, consults, or prepares material for
solicitation of charitable contributions
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Charitable Solicitation Regulations:
Application, Con’t
• Co-ventured fundraising activities with a
profit component can trigger
professional fundraiser rules
– Reach of rules is intentionally broad
– Catches anyone who asks for donations or
even prepares materials
– If the person will be compensated or make
profit
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Unrelated Business Taxable Income
(UBTI): Legal Principles
• Nonprofits must pay income tax on net
income from unrelated business
activities
• Unrelated business income is income
from:
– Trade or business
– Regularly carried on
– Not substantially related to organization’s
tax-exempt purpose
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UBTI:
Definition
• Activity itself must be related
• Using $$ for good works not enough
• Examples of activities that can generate
UBTI:
– Sale of advertising
– Sale of consumer products where selling
product does not further mission
– Performance of services unrelated to
mission
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UBTI:
Exceptions
• Exceptions include:
– Royalties (i.e., licensing fees)
– Qualified sponsorship payments
– Income from passive investments
– Work performed substantially by volunteers
– Resale of donated goods
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UBTI Exceptions:
Royalties
• Royalties are payments for the use of valuable
intangible property
– Name, logo, mailing list
• If nonprofit performs more than minimal
activities, payment is for services and not a
royalty
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Limited oversight to ensure quality – ok
Limited activity to make availability known – ok
Active promotion – not royalty
Active involvement in event, campaign, sales – not
royalty
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UBTI Exceptions:
Corporate Sponsorships
• Qualified sponsorship payment is:
– Flat sponsorship payment in excess of any
“substantial return benefit”
– Not UBTI
• Substantial return benefit:
– Advertising but not acknowledgments
• Name, logo, tag line & contact info are
“acknowledgement”, if value-neutral
– Goods and services (de minimis ok)
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UBTI Exceptions:
Corporate Sponsorships
• Substantial return benefit, con’t
– Right to use nonprofit’s logo, trademark or
goodwill
– Exclusive provider arrangements
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Income Attribution Issues:
Legal Principles
• Income is attributed to the party who
gets to control it
• Donor can take charitable deduction
only for a contribution to a charity
• If business partner receives the money,
– Who gets the deduction?
– Is it income to the business?
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Income Attribution Issues:
Application
• If donors/customers will get deduction:
– Must structure relationship with business partner as a
true agency relationship
– Agency means charity gets to control its agent and is
liable for its actions
• If business partner will get the deduction:
– Be clear in materials that donors/customers are
making purchases, not donations
– Income is attributed to business and taxed as such
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Sales Tax
• Generally all sales of goods and
services are subject to sales tax
• Governed by state law
• Nonprofits generally not excepted from
collecting sales tax
– Common exception: certain fundraising
sales
• Issue: if fundraising is performed by
business partner, can it use charity’s
exemption?
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Sales Tax
• Nonprofits often have exemption from
paying sales tax
– When purchasing goods used in conduct of
charitable activities
• Issue: can business partner use
charity’s exemption for purchases to
benefit the charity?
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Contracting Principles
• Who has risk of failure?
• Who bears risk of expenses?
• If agency relationship, specify scope,
limitations, responsibility for conduct
• Who controls communications?
• Ensure charity has control over its charitable
assets
– Right to approve materials, certain transactions, etc.
• Use of names
• Registration and disclosure obligations
• Standard contract principles
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Case Study: First Monday
• Burger Palace designates First
Mondays
– Donates 1/3 of profits from all sales on first
Monday of the month
– To charity selected by employees
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First Mondays
Analysis
• Who gets the deduction?
– Donation of profits implies it is restaurant
who is making the donation
– Restaurant should get the deduction
– Proceeds from sales on First Monday all
income to restaurant
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First Mondays
Analysis
• Is restaurant a professional fundraiser?
– Probably not – not soliciting charitable
contributions from public
– Contrast: “1/3 of your payment for dinner will
go to charity”
• Can restaurant use charity’s name?
– Should have permission
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Case Study:
Walk for Heart
• HeartCo, a heart device manufacturer
sponsors Walk for Heart to benefit local heart
association
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Key underwriter
Provides employee volunteers
Runs advertising campaign to promote walk
Charity names walk for HeartCo
• All promotions include HeartCo’s name, logo, web site,
tag line
– HeartCo has booth with models of devices and
educational materials
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Walk for Heart
Analysis
• Are payments, contributions of services
and advertising a qualified sponsorship
payment?
– Yes.
• Naming, inclusion in promotions is mere
acknowledgement
• Booth also qualifies as acknowledgement
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Walk for Heart
Analysis
• Contrast: heart association grants
HeartCo license to use its logo on
promotions of HeartCo devices
– Right to use logo is a substantial return
benefit
– Must determine FMV of use of logo
– Only payment in excess of FMV, if any,
would be qualified sponsorship payments
– Logo payment may be royalty
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Case Study:
Co-Branding
• Environmental group, CleanUP, and
home cleaning company co-brand a
cleaning product
• Brand includes CleanUP’s logo and
endorsement
• CleanUP gets % of profits from sales
• CleanUP promotes product to its
members, through its web site and
materials
• Company promotes product to public
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Co-Branding
Analysis
• Are CleanUP’s charitable assets used
for charitable purposes?
– Is there too much private benefit?
• Allocation of $$ fairly reflect parties’ contributions
• If product promoted as benefiting CleanUP, funds
to organization should be consistent with this
claim
– CleanUP should ensure product, company,
use of its name are consistent with its
mission, reputation
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Co-Branding
Analysis
• Is income UBTI?
– Is endorsing and marketing an eco-friendly
cleaning product substantially related to
CleanUP’s exempt purposes?
• Close call
• If not substantially related, is there an
exception?
– CleanUP’s promotion activities eliminate
ability to classify income as a royalty, so no
exception
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Co-Branding
Analysis
• Other issues
– Written agreement
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Responsibilities and rights of each party
How $$ allocated
How project unwound if not successful
Who bears what risk
– No charitable contributions involved
– No sales tax exemptions
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Conclusion
• Cause-related marketing can benefit
both parties
• Important to structure carefully at front
end
– Written agreement
– Consider registration, tax, UBTI, charitable
assets issues up front
• Benefit to charity must be reasonable
• Representations to the public are key
– Must be consistent with actual practices
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Sarah Duniway, J.D.
Gray Plant Mooty
(612) 632-3055
[email protected]
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