Creating a Successful Cause Marketing Program at Your Nonprofit While Minimizing UBIT

Cause marketing – marketing programs by for-profit brands based around a social or charitable cause – has the potential to create win-win situations for nonprofits and for-profit companies alike. Cause marketing can be a great way for nonprofits to increase their visibility while also raising funds. At the same time, companies can increase their profits by generating goodwill and making a positive social impact. However, creating win-win situations can prove elusive for nonprofits without an understanding of certain federal tax-related risks and a strategy to mitigate those risks.

Advertising Income – The Most Common Form of Unrelated Business Income

While most income of nonprofit, tax-exempt organizations (“Nonprofits”) is exempt from federal and state corporate income tax, certain income of Nonprofits is subject to a tax known as the “unrelated business income tax” or “UBIT.” Section 513(a) of the Internal Revenue Code (“IRC”) defines an unrelated trade or business as “any trade or business the conduct of which is not substantially related (aside from the need of such organization for income…) to the exercise or performance by such organization of its…purpose or function constituting the basis for its exemption.”

The UBIT rules are complex and can be confusing. For the purposes of cause marketing, it is important to understand what constitutes advertising income (e.g., in periodicals, on websites, on social media), the most common form of unrelated business income for Nonprofits. Even the most well-intentioned cause marketing programs can end up generating unrelated business income for a Nonprofit due to its advertising activities if the agreement and corresponding recognition benefits provided to cause-related marketing partners (each, a “Company”) are not properly structured.

While paying UBIT is not a bad thing – and Nonprofits generally should not let the federal tax laws be the tail that wags the dog – having the following tools can help Nonprofits plan strategically and attempt to mitigate UBIT to the greatest extent possible: (1) a menu of options for structuring cause marketing programs (referred to generally as “Deal Types”); (2) clearly defined recognition benefits your Nonprofit can provide without triggering UBIT; and (3) contract templates with standard terms. In addition to mitigating UBIT, these tools help create efficiencies when negotiating with Companies. Accordingly, what follows is a description of common Deal Types and the recognition benefits Nonprofits may provide Companies without triggering UBIT.

Common Deal Types

Below is an outline of certain cause marketing deal types designed to mitigate UBIT to the maximum extent. The first two – Corporate Sponsorship and Trademark License – conform with the most relevant and frequently used exclusions to unrelated business income in the IRC for cause marketing programs. These deal types may be combined as well as pursued separately.

1. Corporate Sponsorship
   1. Definition: A Corporate Sponsorship (also referred to as “Qualified Sponsorship”) is defined in Section 513(i)(2)(A) of the Internal Revenue Code (“IRC”) as “any payment [of money, property, or services] by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or business in connection with the activities of the organization that receives such payment.”
   2. How the Company May Communicate About the Sponsorship: The Company may use the Nonprofit’s name/logo (“Marks”) in limited ways for the sole purpose of identifying itself as a sponsor and to communicate the Company’s support of the Nonprofit. Allowing a corporate sponsor to use the Nonprofit’s Marks more broadly – such as in association with the advertisement or sale of the Company’s products or services – could be considered a “substantial return benefit” and would need to be analyzed under the 2% rule (defined below).
2. Trademark License
   1. Definition: A Trademark License is when a Company pays a Nonprofit some amount in exchange for the right to use the Nonprofit’s Marks in connection with the sale of the Company’s products or services. Provided the Nonprofit plays a passive role – meaning no services may be provided by the Nonprofit to the Company in association with the licensee fee – the income is considered passive “royalty” income and is excluded from UBIT under Section 512(b)(2) of the IRC. These deals can generally be divided into the following two categories:
      
      1. “Flat” Trademark Licenses: The Company pays the Nonprofit a “flat” dollar amount for the Company to use the Nonprofit’s Marks in association with the Company’s products or services. Example: To generate goodwill with its consumers, Nabisco wants to pay $25,000 to a Nonprofit in exchange for the right advertise its support of the Nonprofit to its consumers by placing the Nonprofit’s Marks on certain product packaging and marketing. (Note that while this is called a “Flat” trademark license to distinguish it from a Commercial Co-Venture (described below), it is possible for this fee to vary based on certain preconditions, such as the sale of a certain number of products or services, provided such payment terms are not publicly advertised as part of the deal (as the deal would then become a Commercial Co-Venture.))
         
         1. Recommended Disclosure: “Between [x date] and [x date], Company will contribute [$xx,000] to the Nonprofit. The purchase of [identify the product] will not result in a contribution to the Nonprofit. The mission of the Nonprofit is to_____. More information about the Nonprofit is available by mail at [address], by telephone at [telephone number], or at [website].”
         2. How Company May Communicate About the Promotion: The Company may use the Nonprofit’s Marks in connection with the marketing and sale of its products or services. Often this means on product packaging and in advertising and marketing to promote the Company’s affiliation with and support of the Nonprofit. The Company may not publicly state or imply that a consumer’s purchase will result in a donation to the Nonprofit under this model.
      2. Commercial Co-Venture/Charitable Sales Promotion: A commercial co-venture (“CCV”) – also called a “charitable sales promotion” – is a type of trademark licensing agreement and is regulated by many states. Generally, a CCV is when a Company advertises that the purchase or use of its products or services will benefit a charitable organization. However, the laws vary by state (approximately 26 states have some form of CCV regulation), as does the definition of a CCV. In some states, a CCV will trigger certain registration, reporting, filing, and/or disclosure obligations for the Company and the Nonprofit. In addition, the contracts generally must be in writing (sometimes with certain required provisions), and there are certain accounting, recordkeeping, and disbursement requirements of which to be aware. There are also bonding and registration requirements for the participating Company in some states. Finally, every state Attorney General regulates false and misleading marketing practices, including in connection with CCVs. This “Five Best Practices for Transparent Cause Marketing,” issued by the New York Attorney General’s Charities Bureau, are widely viewed as best practices in the cause marketing and CCV world. Because of these state laws and regulation, the cost of compliance can be high for Companies – especially those unfamiliar with CCVs and how they are regulated. When this is the case, it is often more cost effective to steer a Company to a different deal type such as a Customer Donation Program (described below).
         
         1. How Company May Communicate About the Promotion: The Company may use the Nonprofit’s Marks to induce consumers to purchase its products or services. For example, a Company may say, “When you purchase ABC Product, 5% of the purchase price will be donated to the Nonprofit.” Or, “Use our XYZ Service and we will donate $xx to the Nonprofit.” These inducements may appear on product packaging (usually in longer term deals) or in the Company’s advertisements, social media marketing, store signage, and elsewhere. Generally, Companies are discouraged from saying “a portion of the proceeds from your purchase will benefit the Nonprofit,” or similar language, as many state laws require the exact amount per purchase to be disclosed to consumers. However, if the Company has guaranteed to give a minimum amount to a Nonprofit, the Company may say, “at least $__ from your purchase will benefit the Nonprofit.” If there is a cap on the donation amount, that needs to be disclosed, and the time period in which the promotion will begin and end should be made clear. See the Required Disclosure below.
         2. Required Disclosure: The following disclosure should be used whenever the Company or the Nonprofit communicates about the CCV, including in all product packaging, advertising, social media marketing, store signage, and elsewhere:
            
            “Between [x date] and [x date], Company will contribute [X% of sales of X product or $x per product sold] to the Nonprofit for [a minimum of $xx,000] and [a maximum of $xx,000]. The mission of the Nonprofit is to _______. More information about the Nonprofit is available by mail at [address], by phone at [telephone number], or at [website].”
            
            
         3. Potentially Required Reporting: Depending on the states in which the CCV takes place and how/where the CCV is promoted, pre- and post-promotion filings may be required and the Nonprofit may be required to report the amounts received from CCVs on its annual state charitable solicitation filings.
3. Customer Donation Program
   1. Definition: A Customer Donation Program is when a Company volunteers to collect donations from its customers at the point-of-sale (or in some other way) and then remit those donations to a Nonprofit. These deals are also called “round-ups” because a common way in which these promotions are run is by asking consumers to round up their bill to the next dollar when checking out. The portion “rounded up” (or other additional donated amount) is then donated to the Nonprofit.
   2. How Company May Communicate About the Promotion: The Company may use the Nonprofit’s Marks for the limited purpose of advertising and marketing the promotion and disclosing where donations will be directed. The Company may not use the donation program to induce a purchase of the Company’s products or services. Communications that induce a consumer to make a purchase or imply that by making a purchase, the consumer will be supporting the Nonprofit, may turn a donation program into a (more-regulated) CCV.

Clearly Defined Benefits: How a Company’s Support May Be Recognized by a Nonprofit Without Triggering UBIT

This is where the rubber meets the road in any cause marketing deal. And negotiations with Companies around benefits can easily break down if expectations aren’t set early – especially with Companies that are less experienced with cause marketing.

Just as important as understanding the different cause marketing deal types is understanding the recognition benefits a Nonprofit can provide to a Company as part of a cause marketing program (due to the qualified corporate sponsorship exception to UBIT). Sharing a clearly defined suite of benefits the Nonprofit can provide at the outset of negotiating a cause marketing program will enable more productive and efficient discussions. Usually, the type and amount of benefits a Nonprofit provides corresponds to the amount of money and/or visibility a Company provides to the Nonprofit. In other words, the more money or brand awareness/exposure a Company gives to a Nonprofit, the more benefits the Nonprofit may provide the Company in return. However, if a Nonprofit provides a Company with too many benefits, or benefits of a certain type, UBIT may be triggered. Therefore, it’s important for Nonprofits to know what you can and cannot offer without potentially incurring a tax liability. Below is a summary of the law in this area. The terms that are italicized are defined.

1. Generally, without triggering UBIT, a Nonprofit may provide: (i) Use or Acknowledgement of the Company’s Marks; and (ii) Goods, services, or other benefits of Insubstantial Value.
   1. Use or Acknowledgement does not include Advertising, but may include:
      
      1. Displaying a Company’s Marks and slogans that do not contain qualitative or comparative descriptions of the Company’s products, services, facilities, or the Company itself;
      2. Displaying a list of the Company’s locations (e.g., mailing/street addresses), telephone numbers, or website URLs (provided the link is to the home page of the Company’s website and not an order page);
      3. Displaying value-neutral descriptions (including displays or visual depictions) of the Company’s product line(s) or services;
      4. Displaying a Company’s brand or trade names and product or service listings; and
      5. Designating a Company as an “exclusive sponsor.”
   2. Note on Use or Acknowledgement: Marks or slogans that are an established part of the Company’s identity are not considered to contain qualitative or comparative descriptions. Also, mere display or distribution (whether for free or remuneration) of a Company’s product by the Company or the Nonprofit to the general public at a sponsored activity or event will not be considered an inducement to purchase, sell, or use the Company’s product and thus will not affect the determination as to whether a payment qualifies for the qualified corporate sponsorship exception to UBIT.
   3. Insubstantial Value. Goods, services, or other benefits of Insubstantial Value are those that have an aggregate fair market value of not more than 2% of the amount of the payment made by the Company. Note that if the fair market value of the benefits exceeds 2%, the entire fair market value (as opposed to the cost) of such benefits, not merely the excess amount, is considered a substantial return benefit.
2. Generally, in order to qualify for the qualified corporate sponsorship exception to UBIT, a Nonprofit may not provide a Substantial Return Benefit, which includes:
   1. Advertising, defined as, any message or other programming material that is broadcast or otherwise transmitted, published, displayed, or distributed, and that promotes or markets any trade or business, or any service, facility, or product. Advertising includes:
      
      1. messages containing qualitative or comparative language;
      2. price information or other indications of savings or value;
      3. an endorsement;
      4. an inducement to purchase, sell or use any company, service, facility, or product; or
      5. providing acknowledgements in a Nonprofit’s regularly scheduled and published periodical, such as a magazine or newsletter.
   2. Providing facilities, services, or other privileges to the Company (or persons designated by the Company), unless such privileges are of Insubstantial Value;
   3. Granting the Company (or persons designated by the Company) an exclusive or non-exclusive right to use an intangible asset (e.g., name, logo, trademark, copyright, patent) of the Nonprofit (note that payment for providing a Company with the right to use such an intangible asset may constitute a tax-free royalty (i.e., a Trademark License deal as described above)); or
   4. Designating a Company as an “exclusive provider.”

Conclusion

While there is no one-size-fits-all approach for cause marketing, understanding the various Deal Types that can be used for cause marketing, creating clearly defined recognition benefits, and developing standard contract terms can mitigate UBIT risks and make negotiating cause marketing deals with Companies easier, more efficient, and more successful.

For more information, contact Ms. Hamsher at shamsher@TenenbaumLegal.com.

For more information about UBIT and nonprofits, click here for this Tenenbaum Law Group article.