Fundraising Challenges for Nonprofits
There are special rules, laws, and other challenges nonprofits face while raising money. These rules are in place to ensure nonprofit organizations adhere to their special nonprofit status, and tax-exempt nonprofits may face even tighter scruitnity.
The United States Supreme Court has ruled that states do not have the right to require companies to collect sales taxes if they do not do business in that state. Mailing catalogs to and placing advertisements in a state is not considered doing business.
Uniform Registration Statement
Because the different registration requirements of the different states create such a burden on interstate nonprofit organizations, all states except Colorado, Florida, and Oklahoma have standardized the process. Instead of a different form with different requirements for each state, use the Uniform Registration Statement (URS).
Besides the state laws, numerous cities and towns have their own charitable solicitation laws. While many of these only apply to in-person, door-to-door, or telephone solicitors, some expect every group conducting a national campaign to register.
If you are conducting a local fundraising campaign, check with the clerk of any city or town in which you will be operating. Checking with every town in the nation is clearly beyond the ability of most new groups. When you grow, you may need to hire a professional fundraiser who can keep track of such compliance.
Regulating charitable solicitations raises some serious constitutional issues, most importantly, free speech. While states have argued that soliciting money is a commercial activity that is subject to regulation, the United States Supreme Court has held that asking for money for charitable causes is not commercial speech, but is a highly protected form of free speech.
Whereas most laws only need to be reasonable to be valid, any laws that regulate charitable fundraising must be as limited as possible to achieve only a legitimate and narrow governmental interest. The government cannot use broad formulas, such as percentages of net proceeds that go to charity, to limit solicitations, and they cannot require lengthy disclosures to be made during verbal solicitations.
States have been able to regulate trespassing, gambling, fraud, and disclosure. Laws on these subjects that affect charitable solicitors will usually be upheld.
Unrelated Business Income
To keep nonprofit organizations from competing unfairly with profit-making businesses, there are strict limits on how much unrelated income such groups can earn. Violation of the limits can result in tax penalties or loss of the charitable exemption. In all cases, unrelated business income is taxed and a separate tax form must be filed for the taxable income.
There are some exemptions for nonprofits that allow income to be raised without penalty. An organization cannot regularly operate an unrelated trade or business. However, if an organization operates a business only sporadically, such as hosting an annual fund drive, the income is exempt. Also, if the business is related to its exempt function, such as a cafeteria in a hospital or a bookstore in a school, then the business is exempt.
The IRS has penalized organizations that have different classes of members. Typically, a tax-exempt group has regular members and associate members who do not usually participate in the group in the same manner as regular members, but who get many of the same benefits. The IRS has ruled that if the rights and participation between different classes of members are too different, then the associates' member dues are unrelated business taxable income.