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States Increasingly Say That All Revenue Sources Constitute a Solicitation

Nonprofit compliance can be complicated business.  That’s been true for as long as there has been a Section 501(c)(3) in the US tax code.  That complexity has only gotten more burdensome since the states have stepped up their solicitation registration requirements and enforcement.  For those organizations that operate in multiple states, it can be madness-inducing trying to keep it all straight.

What It Was Like Before

One thing that we used to count on was a fairly uniform definition of solicitation.  Even if several states had different registration thresholds or criteria, the differences usually involved amounts of money raised or the purpose of the organization, not what solicitation meant.  In its most simple and traditional definition, solicitation was the act of asking someone for a donation of money, services, or an in-kind gift.  If this “ask” happened in one of the 41 state jurisdictions that require registration, then there’s a pretty good chance your nonprofit needed to register with that state.  What’s happening now, however, is a complete redefinition of what constitutes a solicitation.

What Is Happening Now

The definition of solicitation is quickly changing to be synonymous with revenue generation.  The majority of states are moving toward an enforcement model that virtually disregards source of revenue when determining registration requirements.

Which Revenue-Generating Activities are Considered Solicitations for Registration Purposes?

Most obvious.  Revenue sources most closely association with traditional fundraising are certainly still considered a solicitation.  These include fundraising events (such as golf tournaments, silent auctions, charity dinners, etc.), direct mail campaigns, or an email campaign.

Less obvious.  Relatively few people would consider a donation that arises out of a personal relationship or a one-on-one conversation to be a solicitation.  Most states disagree.  Whether the interaction is spontaneous, or an intentional, strategic meeting for the specific purpose of asking that person for a donation, it is likely a solicitation by definition.  Likewise, passive fundraising activity, like a donate-button on your website, is considered a solicitation.  The good news about that last one is that most web donation scenarios are covered under the Charleston Principles safe harbor, at least until you receive a donation from it.

Least obvious.  A few categories of revenue are ones that, in the past, haven’t typically been considered the result of solicitation activity.  These include:

  • Unsolicited donations
  • Program revenue from the sale of products and/or services
  • Participation fees
  • Membership dues

Unfortunately, these activities can rarely be excluded from the solicitation definition anymore.

The new normal across the country for states that require charity registration is to consider all forms of revenue generation to be the result of solicitation.  Why?  We’ve spoken with a number of state charity regulators across the country, and it comes down to several factors:

  • It’s easier for the states.  Most state charity offices are overworked and understaffed.  If every organization has to be separately evaluated to parse which activities are truly solicitation and which are not, you can imagine the time it would take.  In addition, there is a lot of subjectivity involved in that approach.  It’s simply easier to capture all revenue under the definition.
  • The IRS isn’t watching as closely as it used to.  The IRS is even more overworked and understaffed than the states these days.  While that definitely does not give you license to skirt on federal compliance, the reality is that the IRS is struggling to keep up with nearly 1.5 million charities nationwide.  Therefore, the states are picking up the slack…big time!
  • Most nonprofit revenue is sourced from the public.  This is really where it all comes down.  Does it really matter if the dollar is a gift, a fee, or a sale, if it’s coming from the same individual?  Increasingly, the states say, “No”.  And, it makes sense.  The state charity regulators have a responsibility to enforce state law, and to protect the donating public.  The most consistent way to do that is to capture all revenue under the banner of solicitation and require charities to register and report annually.  Their position is that all nonprofit revenue, no matter the source, is the result of either direct or indirect solicitation, even if it’s only a ticket sale to a children’s play.

Does Your Nonprofit Ask for Donations?

If so, you probably need to register for (or renew) your charitable solicitations registration.  Click here to submit on online request for a call-back, and a member of our team will reach out.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 5 Comments

  1. I’m head of a board for a 501(c)3 where the only employee is also the president and founder of the organization. Her salary is currently 20 percent of our budget and is asking for a large increase upwards of 35 percent increase which she wanted brought to a vote. The accountant told her it was legal for her to solicit and designate donations solely for the purpose of her salary. I was under the impression that a not for profit was not designed for the enrichment of a sole person especially when our purpose is to help women released from prison. An independent accountant agreed with me and told me it was illegal. Once I disclosed that, the vote was stopped. Although I am president of the board, I have since learned that two other board members ( secretary and treasurer) are okaying that she not only continue with her flat salary but can now get a 50 percent monthly bonus of any donations she brings in (a commission) on a trial basis and are possibly implementing this without a vote as another vote was not called but I was informed on how they were proceeding. Is this legal?

    1. Questions about whether something is legal or illegal are tough to answer. You may be surprised to hear that soliciting donations for the express purpose of paying a salary is NOT illegal. As long as the purpose of the solicitation is transparent, and the expense legitimate, it can be an effective tactic for smaller orgs to be able to fairly compensate someone without overburdening an already tight operations budget. In order to make it pass the smell test, however, you need to make sure other fundraising efforts aren’t short-changed by any targeted solicitation.

      Now, the rest of the story. The 50% bonus you mention is not OK. It’s fine is a portion of funds raised go toward affording her salary, but not on a commission-type basis. The IRS calls that non-linear compensation and is almost always a violation of private benefit rules. In addition, it is bait-and-switch method of fundraising, as your donors would likely revolt if they knew about such an arrangement. And, your two board members who seem to be green-lighting this activity have no legal right to authorize this without board approval. Your full board needs to address this type of unilateral action swiftly.

      Good luck with it!

  2. I’m on a volunteer board for a nonprofit that’s a friends of organization. Our mission is to support the sister state relationship between our state and its sister prefecture in Japan. We have been invited to send 5 artists to Japan on an art exchange. It seems like the group artist are to consist of mainly board members (who are artists). Is it appropriate to raise funds to send board members abroad? The future solicited funds would be to send artists on the exchange, which would be true since the board memembers are artists… I’m not sure whether I have a question of ethics or of misappropriating donor funds… Thanks for your incite!

    1. Hi, Emily. Board members are not prohibited from participating in legitimate organizational activities, even if there is an associated cost. It would only be a problem if board members exclude others in favor of themselves on a regular basis. If not, you should be OK.

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