Cause Marketing: Plan Carefully to Avoid Legal and Tax Pitfalls

By:
Luana K. Lewis
Published Date:
May 1, 2016

In recent years, cause marketing efforts have grown more popular with charities and their commercial marketing partners. Customer perceptions and behaviors are expected to drive the cause marketing trend even further in the future. According to the 2015 Cone Communications Millennial CSR Study, 56% of U.S. consumers indicated they have bought a product with a social or environmental benefit in the past 12 months, with 66% of affluent millennials saying they have done so.

Cause marketing variants can run the gamut of possibilities. Some borderline appeals fall into grey areas, but most tend to sort into two buckets: “halo effect” types of campaigns that associate a business with a pro bono outcome of some kind, but which don’t necessarily involve a call to purchase and may not even mention a specific charity; and arrangements between charities and commercial enterprises that might meet a state’s legal definition of “commercial co-venture.” Definitions vary widely by state, and some state definitions of commercial co-venture are far broader than others. 

New York State defines “commercial co-venturer” fairly narrowly: “Any person who for profit is regularly and primarily engaged in trade or commerce other than in connection with the raising of funds or any other thing of value for a charitable organization and who advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization.”

About 80% of states regulate charities, and about 40% of them (including New York) also have laws regulating commercial co-venture. Cause-related marketing practices can trigger very complex legal considerations as well as potential tax complications, particularly if campaigns cross state lines, and should never be undertaken without a thorough investigation of potential consequences for both the charity and the business involved in the project. 

Your Charity’s Name Is a Charitable Asset

Often, business and charity co-venturers can achieve new income goals by working together on a cause marketing effort, but it’s important for both to recognize the issues that might trigger regulatory attention and concern. Be sure that your charity’s management and development staff members know how to identify a project that might fall under commercial co-venture rules. Here are some additional things to keep in mind:

-- Your charity’s name and brand represent property with monetary value, which your organization’s leaders are responsible for protecting and preserving. Other parties must not use your charity’s name and brand without permission. 

-- A charity that does not defend and control the use of its name and brand might lose its rights over them, and could find that its name and brand have been unintentionally released into the public domain.

-- Charitable assets – including your organization’s name and brand - are meant to be deployed primarily in service of a charity’s mission. For this reason, regulatory authorities such as state attorneys general and the I.R.S. generally want to see cause marketing agreements that provide charities with a reasonable and fair share of the related income. Cause marketing deals must not result in an unfair or unreasonably disproportionate use of charitable assets for commercial purposes. For more information, watch this video

-- Remember, in most cause marketing deals, the business is the “donor” and earns the related charitable tax deduction for the amount provided to the charity through the campaign. This is a material benefit to the business co-venturer, beyond the sales income realized through the cause marketing arrangement. The consumer participant in a cause marketing campaign is typically a purchaser and not a donor.

-- Consider whether a proposed cause marketing deal might potentially create a “related party transaction” for a charity or benefit “disqualified persons.” Be mindful of state requirements relating to potential conflicts of interest as well as other regulatory concerns. It’s wise to avoid projects that might raise self-dealing issues.

Negotiate a Written Contract

To protect themselves, charities planning to enter into a cause marketing effort with a business need to seek competent guidance from legal and tax advisors, ideally professionals with expertise in the cause marketing area. It’s best to do this planning well in advance, so there will be adequate time to check out regulatory requirements, anticipate and manage potential pitfalls, and negotiate a written contract that will do the utmost to protect the nonprofit’s reputation and charitable assets. 

In New York State, commercial co-venturers are required to enter into a written contract with the charity before undertaking any cause marketing business together, and the contract must be filed with the New York Attorney General’s Charities Bureau (see Section 173 of New York regulatory requirements). Some issues to consider with the help of legal counsel might include

-- the charity retaining a controlling interest in the co-venture, to ensure that its charitable purpose remains at the forefront of the project and that this priority cannot be overruled for commercial, for-profit interests

-- the charity maintaining its right to monitor and control all of its charitable assets and related issues, including the use of the charity’s name and brand and marketing claims made on its behalf. Be cautious about uses of the charity’s brand that might imply a product or service endorsement, potentially bringing FTC regulations in this area into play

-- specifics about which co-venturer will bear risks such as expenses, campaign failure, liability, and so on

-- details about which party is responsible for obtaining registrations and meeting regulatory and bonding requirements in all applicable states, as well as other performance obligations

-- specifics about how income to the charity will be calculated and reported, how frequently amounts due will be paid to the charity, requirements regarding maintenance of campaign records, and the charity’s right to review records relating to the cause marketing deal on a regular basis (see New York State regulatory requirements)

-- contractual provisions that provide suitable options for termination, including coverage for situations when a campaign fails, or when a reputational peril suddenly arises out of your association with a cause marketing co-venturer

-- traditional contractual provisions about agency (if it exists) or non-agency, provisions that survive termination, etc.

This is not an exhaustive checklist and should not be taken as legal advice. Seek qualified legal counsel in order to draw up an appropriate written contract. The charity’s governing board of directors should review the terms of a cause marketing contract before it is signed. Charity boards of directors must be informed about the terms of significant fundraising contracts (including cause marketing deals) in order to meet Standard 1 of the BBB Standards for Charity Accountability.

Watch Out for UBIT and Charitable Solicitor Registration Issues

Depending on how a cause marketing deal is structured and how marketing claims are made, a commercial co-venture project might result in unrelated business income tax (UBIT) consequences for a charity. If not structured with care, a deal might also require that the business or charity co-venturer register for charitable solicitation purposes in one or more states.          

While a charity might reasonably accept some occasional modest income from activities not related to its charitable mission, too much unrelated business taxable income (UBTI) might call the nonprofit’s tax exempt status into question. Skilled advisers can help avoid such undesirable problems. Some issues to watch include the following:

-- In general, it is recommended that charities avoid any active marketing role in the cause marketing campaign and simply receive appropriate income from it. It is also important for a cause marketing campaign to be strongly related to the nonprofit’s charitable mission.

-- Cause marketing deals that require a charity to promote a product or service actively, use advertising types of claims for a business, or otherwise call upon consumers to purchase from a commercial entity, might trigger UBIT concerns in some cases.

-- For similar reasons, it is recommended that charities avoid deal terms that require them to provide any other substantial services or benefits beyond the use of the organization’s name or brand, in return for participating in a cause marketing campaign.

-- If a co-venturer is using marketing claims that appear to solicit donations for a charity, it is vital to ensure that all required state charity and solicitor registrations are in place and held by all the affected parties, before any campaign messages go into the marketplace. Additional state regulatory requirements for disclosures might apply to any actual charity solicitation; be sure you are in full compliance if using such an appeal for cause marketing purposes.

-- Since a charity’s leaders might be held responsible for the actions of a cause marketing co-venturer that might effectively be acting as its agent to solicit donations, it is critical that the charity negotiate provisions in the cause marketing contract that allow it to screen, approve, monitor, and control any and all solicitation or marketing appeals made on its behalf.

Seek professional advice when evaluating tax and regulatory consequences that could result from a specific cause marketing deal. The possibilities for catastrophic errors are great; don’t take chances.

Consumers Must Not Be Misled

Regulatory authorities are particularly interested in ensuring that cause marketers do not use claims or tactics that might mislead consumers about the charitable impact of their purchases. Cause marketers can stumble in this area and consequently risk drawing scrutiny or even regulatory action. 

At the point of solicitation, all the terms and conditions that might affect a cause marketing purchase – the who, what, when, where, and how terms of the transaction - must be disclosed to the consumer in a clear and conspicuous way. BBB Charity Accountability Standard 19 provides valuable guidance in this area:

Clearly disclose how the charity benefits from the sale of products or services (i.e., cause-related marketing) that state or imply that a charity will benefit from a consumer sale or transaction. Such promotions should disclose, at the point of solicitation: a) the actual or anticipated portion of the purchase price that will benefit the charity (e.g., 5 cents will be contributed to abc charity for every xyz company product sold), b) the duration of the campaign (e.g., the month of October), and c) any maximum or guaranteed minimum contribution amount (e.g., up to a maximum of $200,000).

Cause marketing appeals that make vague promises of a donation from “a portion of the proceeds” or that otherwise lack specificity would not meet this BBB Standard. See also Section 174-c of New York State regulatory requirements regarding disclosure.

In addition to these BBB guidelines, cause marketers should bear these recommended practices in mind:

-- Clearly identify the charity or charities to be benefited by the campaign.

-- Make it very easy for consumers to trigger the cause marketing benefit to the charity. Steps to trigger the donation should be simple and instructions should be prominently available.

-- Practice proportionality: If a cause marketing claim is featured on product units, the number of units in the marketplace should correspond to the maximum benefit that the charity might realize from the campaign. For example, if a cause marketing claim is featured on packaging for 10,000 bars of soap but the maximum benefit to the charity is reached after 1,000 bars are purchased – then there would be 9,000 bars of soap still in the marketplace, making cause marketing claims that might mislead consumers, since purchases of those 9,000 bars could not result in any additional benefit to the charity.

-- Adequate cause marketing disclosures should take place even in text-limited solicitation formats such as social media.

-- Be accountable to the public for the cause marketing campaign results: Let consumers know how much was raised for the charitable cause, when the campaign is over.

When it comes to cause marketing campaigns, an ounce of prevention is worth at least a pound of cure. Careful planning and consultation with professional advisers early in the process of developing a campaign will help protect your organization’s good name and charitable assets.


Luana K. LewisLuana K. Lewis is the senior vice president of programs and services at the Better Business Bureau Serving Metropolitan New York. Formerly she was the director of proposals and research at the Ad Council, where she also served in media development and fundraising roles. She can be reached at llewis@newyork.bbb.org.  

This article is intended for general education purposes only and should not be construed as legal or tax advice.  

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.