If your nonprofit makes an arrangement with a business to receive a percentage of sales – or if a business offers that deal to your nonprofit – beware. In at least 22 states, that’s a regulated activity that may require a special registration filing. This type of activity is sometimes referred to as "charitable sales promotion" and sometimes as a "commercial co-venture."
There is nothing wrong with crafting an arrangement with a for-profit business for a nonprofit to receive a percentage of sales. However, it would be naïve to ignore the fact that for-profit businesses can benefit when consumers are motivated to purchase goods or services by the thought that they are making a donation to a charitable nonprofit. Studies show that consumers are motivated to make purchases if they believe that a percentage of sales will go to a good cause, hence the name, “Cause-related marketing.” Consequently, state regulators have an interest in protecting charitable nonprofits from being taken advantage of, and protecting consumer’s expectations about where the money will end up.
The law surrounding charitable sales promotions/cause-related marketing and “commercial co-ventures” is evolving.
A commercial co-venturer is any person or firm who for profit regularly conducts a charitable sales promotion or underwrites, arranges or sponsors a sale, performance or event of any kind which is advertised to benefit a charitable organization.
The IRS Form 990, Part VI, asks whether the organization invested in, contributed assets to, or participated in a joint venture or similar arrangement with a taxable entity during the year. If “Yes,” the Form 990 then asks whether the organization followed a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and take steps to safeguard the organization’s exempt status with respect to such arrangements.
Be aware that cause-related marketing is a regulated activity in several states. Typically, state laws require nonprofits to file a copy of the contract governing the arrangement before any sales take place. Because state laws vary, your nonprofit will want to be familiar with the laws governing charitable solicitation registration in general, and specifically those regulating commercial co-ventures and/or cause related marketing. Failure to register can lead to fines, and, in some states, even criminal penalties. Bottom line: know your state's law and document the arrangements with the for-profit so that there is accountability for the sales promotions.
Disclaimer: Information on this website is provided for informational purposes only and is neither intended to be nor should be construed as legal, accounting, tax, investment, or financial advice. Please consult a professional (attorney, accountant, tax advisor) for the latest and most accurate information. The National Council of Nonprofits makes no representations or warranties as to the accuracy or timeliness of the information contained herein.