Understanding Charitable Sales Promotions: A Guide for Nonprofits and Businesses – Charity Lawyer Blog

Charitable sales promotions, also known as cause-related marketing or commercial c0-ventures, are powerful tools for nonprofits and businesses. These arrangements allow companies to advertise that a portion of proceeds from selling goods or services will benefit a charitable organization. For example, a promotion might say, “When you buy our new app, 50% of the purchase price will go to the Zoo!”

While charitable sales promotions can be a win-win for both parties, they are subject to a complex web of state laws designed to protect consumers. Here’s what nonprofits and businesses need to know to ensure compliance and maximize the benefits of these collaborations.

What Is a Charitable Sales Promotion?

A charitable sales promotion is an arrangement where a commercial entity markets its products or services as benefiting a specific charitable cause. These partnerships are excellent fundraising and marketing mechanisms, offering nonprofits increased visibility and revenue while providing businesses with a boost in goodwill and sales. However, they also come with regulatory responsibilities.

State Regulation of Charitable Sales Promotions

Consumer Protection Focus

More than 40 states regulate fundraising activities, and about 20 specifically address charitable sales promotions. These laws ensure that consumers understand how their purchases benefit charities and that funds reach their intended purpose. A notable case occurred in the late 1990s when the General Mills/Yoplait “Save Lids to Save Lives” campaign faced scrutiny for misleading disclosures about donation amounts.

State-Specific Requirements

Each state’s laws and requirements vary, so reviewing applicable statutes is critical before launching a charitable sales promotion. Here are some common regulatory elements:

• Registration. Some states, including Alabama, Hawaii, Illinois, Massachusetts, Maine, and South Carolina, require the commercial co-venturer to register in advance.
• Bonding. A few states mandate that co-venturers secure a surety bond.
• Written Contract. Many states, like New York and New Jersey, require a written agreement detailing the promotion’s terms.
• Advertising Disclosures. Advertisements must clearly state how the charity will benefit, including the percentage of sales, dollar amount, or other contributions.
• Accounting and Recordkeeping. Co-venturers must maintain detailed records and provide charities and, in some cases, the state with a final campaign accounting.

Best Practices for Managing Charitable Sales Promotions

1. Identify and Educate
   Ensure staff can recognize charitable sales promotions and are informed about state regulations. Develop a checklist to guide collaborations with commercial partners.
2. Plan Ahead
   Choose co-venturers carefully. Partner with reputable businesses that take compliance seriously. Allow plenty of time to meet state requirements, especially for advertising disclosures.
3. Create a Written Contract
   A contract is a legal requirement in most states and a safeguard for both parties. Include terms like:
   • Charity authorization (e.g., signatures from two officers in Massachusetts).
   • Details of the promotion, including duration, sales items, and donation calculations.
   • Tax treatment of funds raised.
   • Compliance and indemnification provisions.
4. Monitor Compliance
   Nonprofits should encourage their co-venturers to adhere to state laws and enforce contract terms. Proactive monitoring can help avoid state investigations or reputational damage.

Federal Tax Considerations

The IRS distinguishes between passive and active roles in charitable sales promotions:

• Passive Role: If a charity plays a passive role, funds received are typically considered public support, not taxable.
• Active Role: If the charity actively participates (e.g., promotes the co-venturer on its website), it may trigger unrelated business income tax (UBIT). In such cases, structuring the arrangement as a qualified corporate sponsorship payment can help avoid tax liabilities.

Key Contract Elements for Charitable Sales Promotions. When drafting a charitable sales promotion agreement, include these essential elements:

• Tax Treatment and Activity Description. Clearly define which activities are subject to tax.
• Indemnity and Insurance. Protect the charity from liabilities arising from the promotion.
• Branding and Intellectual Property Terms. Outline how the charity’s name and logo can be used.
• Compliance Representations. Include assurances that the co-venturer will comply with all relevant laws.
• Advance Approvals. Require pre-approval for advertising and promotional materials.

BBB Standards for Charitable Sales Promotions. The BBB Wise Giving Alliance provides additional guidance, emphasizing transparency at the point of solicitation. Disclosures should include:

• The portion of the purchase price that benefits the charity.
• The campaign’s duration.
• Maximum or minimum contribution amounts.

Conclusion. Commercial co-ventures offer significant opportunities for both charities and businesses, but they require careful planning and adherence to legal standards. By understanding state laws, implementing best practices, and crafting comprehensive contracts, nonprofits and their commercial partners can create successful campaigns that benefit all stakeholders. For more resources, visit the National Association of State Charity Officials website or review the BBB Standards for Charity Accountability.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in the states of Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.