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Volume
4, Issue 6 - December 2002 |
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SPECIAL EDITION
TAX IMPLICATIONS OF INTERNET ACTIVITY |
The Internet is becoming more and more a part of nonprofit organizations’
operations from fundraising, to communications with donors, to distribution of
reports and information. The IRS is still in the process of ironing out its
rules and regulations with regard to the Internet and nonprofits. What follows
are common questions and proposed answers for nonprofits to consider based on
current published rules and regulations.
This edition is written by Kim McNulty, CPA, an accountant who focuses her
practice on nonprofit accounting.
QUESTION: Can a nonprofit satisfy the donor
substantiation requirements under Section 170(f)(8) for written acknowledgements
of a contribution of $250 or more with a printed web page confirmation or copy
of a confirmation e-mail from the recipient organization?
ANSWER. Yes, a donor satisfies the
requirement for a written acknowledgement by obtaining written confirmation
transmitted through a web page or by email as long as the acknowledgement
contains the following information: 1) name of organization, 2) amount of cash
contribution, 3) description (but not value) of non-cash contributions, 4)
statement that no goods or services were provided by the organization in return
for the contribution, if that is the case, 5) description and good faith
estimate of the value of goods or services, if any, that an organization
provided in return for the contribution, and 6) statement that goods or
services, if any, that an organization provided in return for the contribution
consisted entirely of intangible religious benefits, if that is the case. For
more information on the substantiation and disclosure requirements, see IRS
Publication 1771.
QUESTION:
Can a nonprofit meet the requirement that it provide an appropriate disclosure
for “quid pro quo” contributions if it puts a notice on an Internet-based
solicitation or in an electronic confirmation after receiving such a
contribution?
ANSWER. IRS Publication 1771 does not
answer this question specifically, however, given that this publication approves
the use of electronic receipts for acknowledgement purposes, it is reasonable to
conclude that the IRS will also accept electronic notices for disclosure of quid
pro quo gifts, provided they are sent in manner likely to come to the donor’s
attention.
QUESTION: If a nonprofit places a
solicitation for contributions on its web site, must it register in all states
that require registration by charities soliciting in the state?
ANSWER. Currently 39 states require
charities that solicit contributions in that state to register. This question is
a state question rather than a federal question and there are no definitive
answers at this point. At a minimum, a nonprofit needs to register with its home
state if applicable. Organizations may want to consult with legal advisors about
the need for other state registrations needed.
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QUESTION: What is the potential unrelated
business income tax impact of selling nonprofit merchandise such as t-shirts,
coffee mugs, etc., through a nonprofit’s web site?
ANSWER: Selling merchandise for a profit
is a trade or business. The fact that the merchandise carries a nonprofit’s logo
does not make the sales of such items related to the nonprofit’s purpose. Sales
of some items, such as educational videos related to the nonprofit’s mission,
are related and generally are not subject to unrelated business income tax.
Nonprofit logo items, such as t-shirts, that are not closely tied to the
organization’s exempt purpose activities, are more than likely not related and
may be subject to unrelated business income tax.
To determine whether the sales of these items are subject to unrelated
business income tax, nonprofits can use current guidance on the definition of
unrelated business tax activities. One requirement of an unrelated business
activity is that the activity must be regularly carried on. Because web sites
are generally accessible 365 days a year, and there is unlimited access to the
purchasing of merchandise from the nonprofit’s web site, the IRS may consider
the sales activity to meet the frequency and duration elements of the “regularly
carried on” test. Therefore, assuming the merchandise is not in and of itself
related to the organization’s exempt purpose, the sales of these items over the
Internet may be subject to unrelated business income tax.
The rules for determination of unrelated business activities are complex,
even without consideration of the use of the Internet. Nonprofits should seek
the advice of their CPAs and attorneys in evaluating all potential unrelated
business activities.
QUESTION: If a nonprofit places a link to a
corporate sponsor’s web site, will the sponsorship payments be subject to
unrelated business income tax?
ANSWER. The answer to t his question has
not been confirmed by the IRS, but it is reasonable to assume the payment from
the corporate sponsor would not be subject to unrelated business income tax. The
current rules and regulations with regards to sponsorship payments allow
nonprofits to provide an acknowledgement for sponsorship payments and avoid
unrelated business income tax. However, acknowledgements cannot be advertising.
Acknowledgements can include the sponsor’s name, address, logo, and slogan. A
link to the sponsor’s web site is nothing more than an address for a web page
combined with a tool the user may employ, solely at the user’s discretion, to go
to the linked site. There would appear to be no basis for treating the link
differently from the sponsor’s mailing address.
QUESTION: If a nonprofit raises revenue by
offering a link on its site to a web-based merchant, such as Amazon.com, will
the revenue that the merchant pays to the nonprofit be subject to unrelated
business income tax?
ANSWER: The answer depends on whether the
nonprofit is advertising for the merchant, in which case, it would be subject to
unrelated business income tax, unless the merchant’s goods can be viewed as
related to the nonprofit’s exempt purpose. An organization’s agreement with
these merchants could fall under the same determinations which occur with
corporate sponsor links discussed above, meaning, as long as the nonprofit does
not promote, endorse, or advertise for the business, but just displays the link
in the form of the merchant’s name or logo, it may not be subject to unrelated
business income tax. A message in connection with a link that contains
qualitative or comparative language, price information, or other indications of
savings or value, an endorsement, or an inducement to purchase or use the
merchant’s products or services, would generally be considered advertising, and
such revenue generated from this activity would be subject to unrelated business
income tax.
Note: Find IRS publications online at
www.irs.gov.
AND A FINAL QUESTION ABOUT LOBBYING
QUESTION: Does providing a hyperlink to the
website of another organization that engages in lobbying activity constitute
lobbying by a charitable organization?
ANSWER: The answer should be no. Similar
to the discussions above regarding links to other web sites, the nonprofit
should be able to provide a link to another web site for a clearly identified
non-lobbying purpose and not have the link cause the lobbying conducted on the
other web site be attributed to the nonprofit.
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Kim
McNulty, CPA, has been in public accounting for fifteen years. Her experience
includes nonprofit organizations, construction companies, employee benefits
plans, manufacturing and real estate.
For the past nine years, Kim’s experience has largely focused on nonprofit
clients. She regularly teaches nonprofit seminars and is an instructor for the
Nonprofit Management Assistance Certificate classes, which are a part of the
University of New Mexico Division of Continuing Education and Community Services
programs.
Kim is a founding partner of McNultyZahm, LLC in Albuquerque, New Mexico. You
can reach her at (505) 830-9446. Her email address is
kim@mz-cpa.com.
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