(Editor’s note: This is the first in a three-part series on internet concerns for not-for-profit organizations.)
The Internet is a powerful communication tool that enables not-for-profit organizations to increase their visibility and broadcast their message, vision and mission. An organization’s online presence can bring new opportunities and ways to access potential donors.
Potential tax issues arise when a not-for-profit uses its website and the Internet to fundraise, lobby, market or sell products. Using the internet to accomplish a task does not change the way the tax laws apply to that task. The IRS holds that online advertising is still advertising and fundraising is still fundraising. The IRS will apply the Internal Revenue Code and judicial authority to an organization’s online activities as it would to those same activities conducted in the more traditional manner. If an organization has too much Unrelated Business Taxable Income (UBTI), it risks losing its tax exemption.
In our three-part series, Web Presence & Internet Concerns for Not-for-Profit Organizations, we will help you navigate when an online activity becomes subject to tax or other liabilities. By taking steps to mitigate your risks, your organization can take advantage of all the Internet has to offer while protecting its tax-exempt status.
Something as common as a hyperlink that is used to acknowledge a sponsor could lead to the creation of unrelated business income for the charity. For example, a major corporate donor has volunteered to underwrite a significant portion of the expenses associated with a charity’s annual fundraising event. As part of the sponsorship agreement, the charity provides a hyperlink on its website to the corporate donor’s website. So far, the agreement meets the guidelines for a qualified sponsorship payment, which is exempt from taxation.
What actions on the part of the charity and the part of the corporate donor will recharacterize the payment from qualified sponsorship to advertising revenue classified as unrelated business income?
Advertising vs. Corporate Sponsorships
Advertising revenue creates unrelated business income. The difference between advertising and sponsorship acknowledgement is in the content of the message. If the message contains qualitative or comparative language, prices, indications of savings or value, endorsements, or inducements to purchase, sell or use products or services, it is considered advertising.
A qualified sponsorship payment is one in which the donor has no expectation of substantial return benefit beyond the use and acknowledgement of its name, logo, locations, contact information or value-neutral descriptions of the sponsor’s goods or services. The acknowledgement identifies the sponsor without promoting its products, services or facilities. The value of any benefits provided to the sponsor, such as goods or services, should not exceed 2 percent of the sponsorship payment.
Regulation § 1.513-4(f) provides guidance on the hyperlink issue with a number of examples.
In one example, an orchestra includes the names and internet addresses of its sponsors on the orchestra’s website. The Internet addresses appear as hyperlinks that connect the orchestra’s website with the sponsor’s website. This example establishes that an exempt organization can post a sponsor’s hyperlink without generating unrelated business income.
Another example demonstrates how a qualified sponsorship payment can become advertising revenue. A health care charity receives funding from a pharmaceutical company. The charity’s website has a hyperlink that connects to the corporate sponsor’s website. On the corporate sponsor’s website, a message states that the charity endorses the use of the company’s product and suggests you ask your doctor for a prescription if you have this medical condition. The charity reviewed the message and gave permission for the endorsement to appear. The regulation concludes that the hyperlink and the endorsement are advertising. The qualified sponsorship exception is not available when an exempt organization provides promotional material on its own website or that of the sponsor.
Hyperlinks and Payment
If in return to linking to a sponsor’s page, the not-for-profit receives a percentage of sales attributable to the hyperlink, the payment could qualify as a royalty. Similar to funds exchanged for an organization’s mailing list, these payments would be exempt from UBTI treatment.
In a hyperlink-payment arrangement, it is imperative that an organization have a written agreement with the sponsor that details how the payment arrangement works. Organizations should also take care that the sponsor’s hyperlinked page contains value-neutral language. Hyperlink payments could only qualify for royalty payments if the organization is not actively participating in a business activity or promoting the business activity.
Lobbying and Political Endorsements
An organization has control over whether it establishes a hyperlink to another site. When an organization establishes a link to another website, the organization is responsible for the consequences of establishing and maintaining that link, even if the organization does not have control over the content of the linked site. Because the linked content may change over time, an organization may reduce the risk of political campaign intervention by monitoring the linked content and adjusting the links accordingly.
Links should be closely monitored for political activities. The IRS in Revenue Ruling 2007-41 addressed two situations which involved content and links contained on organization websites. An inadvertent connection to a “political website” may result in the revocation of the organization’s tax exemption.
M, a section 501(c)(3) LK:NON: EOR-IRC S501(C)(3) organization, maintains a website and posts an unbiased, nonpartisan voter guide that is prepared consistent with the principles discussed in Rev. Rul. 78-248. For each candidate covered in the voter guide, M includes a link to that candidate's official campaign website. The links to the candidate websites are presented on a consistent, neutral basis for each candidate, with text saying “For more information on Candidate X, you may consult [URL].” M has not intervened in a political campaign because the links are provided for the exempt purpose of educating voters and are presented in a neutral, unbiased manner that includes all candidates for a particular office.
Church P, a section 501(c)(3) organization, maintains a website that includes such information as biographies of its ministers, times of services, details of community outreach programs, and activities of members of its congregation. B, a member of the congregation of Church P, is running for a seat on the town council. Shortly before the election, Church P posts the following message on its website, “Lend your support to B, your fellow parishioner, in Tuesday's election for town council.” Church P has intervened in a political campaign on behalf of B.
Finally, links to other sites should not be used unless and until permission is granted from the destination site. Not-for-profits should adopt policies regarding activities contained in links by other organizations to their own site.
A Word of Caution
As previously noted, the old tax laws still apply to the new medium of the Internet. Without leaving the office, an IRS agent can “audit” your organization simply by clicking through your website. Take a moment to look at your website’s content and links in light of the potential for IRS review. If you have any questions or need assistance with making sure your website does not pose any tax-related issues, contact us.
Amy O’Loughlin is a Senior Tax Manager in the CBIZ Phoenix office. She can be reached at firstname.lastname@example.org or 602.650.6233.