On your next shopping trip to the local mall, you are likely to encounter posters or hangtags advertising that a portion of the price from the sale of a pair of shoes, item of clothing, or other goods, will benefit a designated charitable organization. These sales promotions are a popular strategy to engage customers who are motivated to support a charitable cause through their purchases. This type of campaign is at the heart of cause marketing (or cause-related marketing) by which an alliance between a business or a brand and a charitable organization can generate both profit and social benefit.
In the U.S., when companies engage in charitable sales promotions, they are considered “commercial co-venturers” under state charitable solicitation laws, and subject to a number of regulations, including advertising disclosure requirements, registration and reporting obligations, and contract language requirements.
By way of example, California defines a “commercial co-venturer” as “any person who, for profit, is regularly and primarily engaged in trade or commerce other than in connection with the raising of funds, assets, or property for charitable organizations or charitable purposes, and who represents to the public that the purchase or use of any goods, services, entertainment, or any other thing of value will benefit a charitable organization or will be used for a charitable purpose.” Cal. Gov. Code § 12599.2. This definition of “commercial co-venturer” is used by the majority of states.
Commercial co-venturers are subject to state charitable solicitation laws, as well as federal and state consumer protection laws. The regulations are aimed at protecting against potential consumer fraud or deception, and ensuring that the funds raised are in fact used for charitable purposes as advertised. There are about 25 states that specifically regulate commercial co-venturers and charitable sales promotions.
There are various types of promotions that fall under the broad concept of cause marketing, including social media campaigns (e.g., Share this post and we’ll donate $1 to ABC Charity”) and point of sale fundraising campaigns (also known as donation checkout campaigns or charity checkout campaigns). While these campaigns may not constitute commercial co-venture promotions, a number of the same legal principles (e.g., obtaining written consent from the charity; transparent disclosures) apply to these types of campaigns as well.
State Registration and Reporting Requirements
Commercial co-venturers are required to register and/or file a copy of any commercial co-venture contract and a campaign report per contract in up to seven (7) states. The overall registration and reporting process includes a few key components: (1) annual registration of the company; (2) filing of a surety bond; (3) filing of the contract and/or solicitation notice; and (4) filing of a campaign report. A chart of the commercial co-venturer state registration and reporting requirements is available here.
Companies must register and/or file contracts or campaign reports in a state (assuming it has such a requirement) if it is conducting or advertising the charitable sales promotion in that state. Companies marketing a charitable sales promotion in retail stores nationwide would need to comply with all of the states’ requirements. Find more information on how to evaluate registration requirements for online charitable sales promotions.
About 38 state states require charities to register to solicit charitable contributions in their state. Charities that are beneficiaries of a commercial co-venture promotion are generally required to register in each state where the promotion is taking place. In addition, several states require the charity to file commercial co-venturer contracts and campaign reports, or disclose the relationship in its annual registration forms. Here’s a chart of charity state registration and reporting requirements related to their commercial co-venture relationships.
Companies that are registering as a commercial co-venturer for the first time should give themselves about 1 – 2 months prior to the start date of the promotion to take care of the registration and contract filing requirements.
For additional information about registration requirements and related issues for commercial co-venturers and charities engaged in cause marketing campaigns, click here.
Approximately 20 states require the commercial co-venturer to obtain the written consent of the nonprofit organization whose name will be used during the charitable sales promotion. In most states, a written contract with specific provisions is required.
The following list represents the most commonly required provisions that must be included in commercial co-venture agreements:
- The goods or services to be offered to the public as part of the promotion;
- The geographic territory of the promotion;
- The actual or estimated dollar amount or percentage of the purchase price or sales that the charity will receive, including the minimum guarantee or donation cap, if any;
- The term (start and end dates) of the promotion;
- The provision of a final accounting to the charity; and
- The date(s) when funds will be transferred to the charity.
Advertising and Disclosure Requirements
Commercial co-venturers are required to include certain disclosures when advertising their charitable sales promotions. State charity and consumer protection regulators are particularly concerned about ensuring that consumers have sufficient information to understand how their purchases will benefit charity. The most important and common disclosure requirement is that advertisements must include the percentage or dollar amount of the purchase price that will be donated to the charitable organization. For example, vague language like “a portion of proceeds from the sale of each product will go to ABC Charity” would not comply with the disclosure requirements.
In addition, to meet the best practices standards of charity watchdog agencies and state charity regulators, all advertising disclosures should also include the effective dates of the promotion, and any applicable maximum or guaranteed minimum donation (e.g., “10% of the purchase price of each unit sold, up to $500,000” or “$1 will be donated to ABC Charity for each unit sold, with a minimum guaranteed donation of $100,000”).
Find more information about specific advertising and disclosure issues, including flat donation campaigns and percent of profits campaign structures.
Unrelated Business Income Tax
Charities are generally limited in their ability to be actively involved in the charitable sales promotion. This limitation is due to federal income tax rules relating to “unrelated business income.” “Unrelated business income” is defined, under the Internal Revenue Code, as income generated from a trade or business that is regularly carried on, and that is not substantially related to furthering the exempt purpose of a tax-exempt organization. In the cause marketing context, income received from a business (even if it is described as a donation or royalty) can be subject to federal income tax if it is received in exchange for services from the charity. The IRS could potentially view any promotional activities carried on by the charity as advertising or marketing services being done in exchange for a payment, making such payments subject to unrelated business income tax (“UBIT”). UBIT is assessed at the standard corporate tax rate, which is currently 21%. In a worst-case scenario, a nonprofit that engages in too much unrelated trade or business activities may risk losing its tax-exempt status. As a result, many charities limit their involvement to providing a trademark license, providing acknowledgment or recognition of the company in their public communications, and receiving the donation generated by the promotion.
Find additional information on navigating UBIT issues in cause marketing.
The information provided above does not constitute legal advice and is not intended to substitute for legal counsel. Prepared by: Perlman & Perlman, LLP.