This article was originally published in NetRaising.
Your website may inadvertently cause tax risks to your organization. A website communicates an organization’s mission, programs, and events to donors, volunteers, and the community. That is a valuable service. However, it can also communicate taxable unrelated business activities, prohibited or limited activities, and noncompliance with tax rules. Knowing basic guidelines gives individuals responsible for the website the ability to recognize potential risks and bring them to the attention of management. Management can then take appropriate action. Even if management is very savvy, the webmaster may be the first to notice when something changes, such as a questionable outgoing link to another website, which could create a risk to the organization.
Top Six Risks:
1. MISSION CREEP
Is the mission you are showing on the website still accurate? Does it reflect the activities that further the organization’s exempt purpose? Often organizations operating for many years find that their activities have changed from the original activities and purpose for which the organization received its exempt purpose. This may not be a bad thing, especially if it is due to the organization meeting more current needs of the population it serves.
Management and possibly the board should periodically review the content of the website to ensure the activities are consistent with what you’d expect for the organization. Some updating with the IRS via the annual Form 990 may be necessary if the mission has changed. There may also be unrelated taxable activities that would need to be reported on Form 990 or perhaps the website content is not current and needs to be updated.
Pay attention to what links are on your website and where they go. Often, nonprofit organizations will link to websites of their corporate sponsors. These links may be taxable advertising. See the fifth consideration below for more on advertising. Do not link to an actual sales page or provide a call to action encouraging your website visitors to buy from the sponsor or vendor. Many organizations, including the IRS, have implemented popups that alert users when a link is taking them away from the organization’s website. Also, it would be wise to implement a regular system to monitor the linked websites since they often change and could cause unanticipated advertising or broken links.
If your website has links to for-profit companies, then management should implement a monitoring system or a notification popup letting users know they have left the organization’s website.
3. DONATE BUTTON
You want to make it easy for donors to contribute. What could be simpler than a “donate now” button? Nothing. However, the donate button facilitates contributions from donors in many states. Most states have charitable solicitation registration requirements and annual filings from organizations that solicit funds from their residents. How does that apply to a “donate here” button when the organization has no other presence in the state? Some states consider the donate button to be a solicitation in their state. Fortunately, most do not. However, once you receive a contribution from a person in another state, you have created a relationship with the donor and likely will want to solicit more funds from them. Who wouldn’t? Now the organization may be directly soliciting in other states, even if those states do not consider the donate button to be a solicitation. By soliciting those contacts, the organization may also open themselves up to those states’ privacy laws.
Especially in an election year, be mindful of any political statements or opinions about supporting or opposing candidates or specific legislation closely associated with a candidate. Public education on an issue is allowed, provided the information is balanced and unbiased. That is very difficult to accomplish and often does not fulfill the organization’s mission of advocating for a particular position. Know the difference between education and lobbying and the difference between lobbying and political activities. Lobbying is allowed for certain exempt organizations and allowed only to a limited extent for 501(c)(3) organizations. Political activities are allowed to a limited extent for certain organizations but prohibited entirely for 501(c)(3) organizations. This is a very complicated area of tax law. To learn more, go to irs.gov and download Publication 557 called Tax-Exempt Status for Your Organization.
Call to the attention of management if the organization engages in these activities on the website. The website can also include links to the organization’s Facebook and other social media accounts. Do not “Like” political candidates, even if they “Like” your organization.
Selling or providing products and services delivered through your website may expose your organization to state and local sales and use taxes in one or more states. Be aware of which states buyers live to determine the organization’s responsibility to collect sales tax on sales. Since the Supreme Court ruling in South Dakota v. Wayfair in 2018, physical presence in a state is no longer required for sales tax to apply. About 43 states and the District of Columbia have adopted sales tax obligations for out-of-state on-line sellers in response to the Wayfair ruling. All of these jurisdictions have a sales revenue or transaction volume threshold before collection is required. Also, if the sale of the products does not further the organization’s exempt purpose (other than to fund it), then the sales revenue may be Unrelated Business Income (UBI) which is taxable. That’s not necessarily a bad thing, but understand that the organization should track related expenses to offset the income. If the organization has UBI of $1,000 or more, it will need to file an additional return, called the 990-T.
Management should be aware of state sales tax laws and the sales thresholds that would create nexus with that state for sales tax obligations. Management should annually review income to evaluate federal and state taxability with the organization’s tax advisor. Ensure that no underlying facts have changed that would alter the taxability of the income.
Selling advertising space on your website is a great source of revenue. However, it may generate UBI. Know the difference between acknowledging a sponsor, which should not generate UBI, and advertising, which usually does. Advertisements generally contain endorsements of the business or product, qualitative or quantitative language, or a call to action to buy the product. Also, be careful that you don’t, in your enthusiasm, accidentally turn an acknowledgment into an advertisement. To learn more, go to irs.gov and download Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
Have standard contracts for qualified corporate sponsorships and advertising. Know that advertising is subject to tax and price it accordingly. If advertising is on the website, management should annually review the volume of taxable income earned on the website and discuss the organization’s method for allocating expenses between taxable and non-taxable activities with the organization’s tax advisor.
Be proactive and prevent tax surprises. Be sure the lead finance person in your nonprofit organization and your external accountant or tax advisor are part of the discussion when determining new activities on the organization’s website. Also, monitor activity on the website, given the six risks above. It is too easy to inadvertently fall into one of these activities. Risks can be avoided if management knows of all the activity on the website before the organization faces an external examination related to UBI, excise taxes, or threatened loss of exempt status because of activity on its website.