DATELINE: December 19, 2007, Chicago
Talk about the power of New York Times reporter Stephanie Strom. She writes a lengthy front-page piece on embedded giving appearing in the December 13, 2007 edition of the Times and by the next day, Senate hearings are complete, with Senator Robert Menendez indicating that he planned to introduce legislation. See Charity's Share From Shopping Raises Concerns. After a nine-day delay...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour. |
the legislative language has finally surfaced as Senate Bill 2529, which is captioned "Protecting the Spirit of Giving Act." The rush to produce the legislation certainly didn't yield a particularly thoughtful or well-crafted bill.
THE PROPOSAL. Under Section 3 of the proposed legislation, a retailer or manufacturer cannot (i) use the name of a charitable organization to solicit donations, (ii) sell or market a product that is linked to the charitable organization or to which a portion of the proceeds is dedicated to the charitable organization, or (iii) sell or market a product on behalf of a charitable organization, unless it notifies the charitable organization of (i) the manner in which the retailer or manufacturer intends to use the charitable organization's name, emblem, or logo, and (ii) the amount or percentage of the donation of the purchase price that will be remitted to the charitable organization. The retailer or manufacturer must also obtain the advance written approval from the charitable organization.
Under Section 4 of the Act, if the retailer or manufacturer markets the product with the intention of remitting a portion of the proceeds from the sale of such product to a charitable organization, it must disclose in writing the amount or portion that will be remitted to the charity and the time period during which the donations will be collected.
Seems pretty straightforward and simple, but is it? Not really. To begin with, to the extent you believe that the federal government should be in the business of regulating charitable giving, this legislation has some major holes.
DEFINING CHARITABLE ORGANIZATION. For this type of legislation, it would be a huge mistake to limit the definition of charitable organizations to Section 501(c)(3). That would leave out veterans organizations and advocacy groups like the Sierra Club and the National Rifle Association. Consequently, we were glad to see a more expansive definition used in the Act. The definition of charitable organization includes organizations described in Sections 170 or 501(c). While somewhat of a nit, that strikes us as too broad. Does Congress really need to protect country clubs and cemetaries?
PHONY ORGANIZATIONS. The limit to Section 170 and Section 501(c) organizations provides consumers with no additional protection from retailers, manufacturers, or promoters that create an organization that sounds charitable, but that is not. In effect, fraudsters can avoid the legislation simply—just don't apply for recognition as a tax-exempt organization under Section 501(c). Moreover, retailers and manufacturers might raise funds for legitimate good causes that are not linked to exempt organizations. For example, a retailer might collect funds for the children of a police officer killed in the line of duty, those who require aid following a wildfire or a hurricane, or those specific individuals with cancer or other life-threatening diseases. None of these people would fall within the Act's definition of a charity and, therefore, these sorts of campaigns are not covered by the proposed legislation.
LIMITATION TO PRODUCTS. The legislation—and we did check the Consumer Product Safety Act's definitions—limits its scope to "consumer products." As everyone knows, the United States is increasingly a service economy. That means that movie theatres collecting for the Will Rogers Institute aren't covered, nor are health clubs advertising that a portion of the membership fee will be contributed to a charity. Just a few days ago, we received an e-mail from United Airlines inviting us to participate in an embedded giving program using our airline miles. Is an airline ticket a product?
Moreover, If we are reading the Consumer Product Safety Act correctly, automobile dealers are also excluded to the extent they sell cars—an exception that retailers can drive a truck through, so to speak. We also note that the recently announced United Way Pennies for Change program arguably is excluded despite the fact that the press release talks about local United Ways benefiting. Are the credit card companies considered retailers if the transaction involves the purchase of a product, or are they providing a service? This is a program that screams for fair and full disclosure because under the program, 45% of the proceeds will be contributed to the national umbrella organization, something that many prospective participants might object to if they knew the full facts.
SWEAT SHIRTS AND MUSEUM POSTERS. There is also a serious technical problem with the Act. The requirement that the consumer be notified is tied to the retailer or manufacturer having an intention that some of the proceeds be devoted to charity. The regulation of the relationship between the retailer or manufacturer and the charity—Section 3—is not tied to intentions. Under Section 3's plain language, this means that anytime a store sells a poster bearing the name of a Section 501(c)(3) art museum or theatre group, it must arguably notify the charity and enter into an agreement to use its name. The same would seem to hold true when Amazon.com or a bricks and mortar bookstore sells an exhibition catalogue bearing the name of an art museum or other cultural institution or a sporting goods store sells NYU, Northwestern, or University of Wisconsin athletic clothing. This is admittedly a technical reading of Senate Bill 2529, but as currently written it lends itself to this reading. Specifically, Section 3 is triggered if,
"A retailer or manufacturer…sell or market a product that is linked to the charitable organization or to which a portion of the proceeds is dedicated."
The use of the "or" means that linkage to the charitable organization is sufficient to trigger Section 3's requirements despite the absence of a contribution. Section 4 supports this reading by negative implication because it is triggered only if the retailer or manufacturer intends to remit a portion of the proceeds. Now it might be that the Federal Trade Commission will adopt a regulation clarifying this point, but the drafter could have eliminated the issue through clearer language.
CHARITY RETAILERS. We also took a look at the definition for "retailer," which can be read to include charities that sell goods. That potentially subjects museums, hospitals, and universities to the proposed legislation. Although probably not the intent, this could result in charities being required to make the necessary disclosures on all the goods they sell through their stores. That would effectively require them to disclose profit margins. Now we aren't experts on the Federal Trade Commission, but we thought it had very limited if any jurisdiction over nonprofits. If that is correct, then this might not be an issue.
TAX ISSUES. Senator Menendez is not very sensitive to tax issues, either. Who gets the charitable contribution deduction, the retailer/manufacturer or the consumer? The answer depends on the type of transaction. If the retailer is selling a product and a portion of the purchase price will be donated to charity by the retailer, then the deduction belongs to the retailer. In this case, the donative element is truly embedded. The consumer has no say in the matter. The purchase price is the purchase price. On the other hand, if a grocery store is simply asking the consumer whether the donor wants to add a dollar amount to the tape total, then the consumer should be entitled to the deduction. Here the purchase price for the groceries is unaffected by the consumer's decision. It would be nice if legislation addressing embedded giving made the tax treatment clear.
Unfortunately, in the case of a truly embedded gift, we suspect that many consumers will claim an income tax deduction if they receive a notice telling them what amount of the purchase price goes to charity despite the fact that they are not legally entitled to a deduction . This creates a new audit issue for the IRS and will likely lead to the same amount being deducted twice because as we all know, the IRS does not have 100% audit coverage. To eliminate this likelihood and nuisance, the Section 4 disclosure to the consumer should include a disclosure addressing the proper tax characterization of the charitable element.
PRE-EMPTION. Regulation of charity has traditionally been relegated to the states. Senator Menendez's legislation does not acknowledge or address the continuing role, if any, of the states. Does the legislation preempt state laws that cover the same ground, or is the intent that existing state laws covering the same ground co-exist with the proposed legislation? The legislation should explicitly address that issue. In our view, if Congress believes that this is an area that cries out for national legislation, it should pre-empt the states to minimize the compliance burden. Why should an honest retailer operating in all 50 states have to comply with the laws in all 50 states and then federal law? If Senator Menendez thought federal regulation was in order, he should have first undertaken a comprehensive survey of state requirements. We see no evidence that he undertook such a study. From such efforts, he should have drafted a comprehensive regulatory solution, and then eliminated what is essentially duplicative state compliance burden.
In short, Senator Menendez has rushed to regulate a particular type of transaction without fully understanding it. This is the problem with writing legislation within a week of hearings without allowing time for industry comment by those who were not invited to the hearings. It stems from what we suspect was a preconceived solution.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
Copyright 2007, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124
