Charitable Solicitation Across State Lines: What You Need To Know When Your Charity Clients Engage in Multi-State Fundraising Activities

By:
Seth Perlman, Esq. and Tracy L. Boak, Esq.
Published Date:
Feb 1, 2015

Currently, 45 states, as well as the District of Columbia have some degree of statutory regulation of charitable solicitation activity conducted within their borders. Many, although not all states, require registration and reporting. The states with registration and reporting requirements apply to charitable organizations, professional fundraisers (aka commercial fundraisers or solicitors), professional fundraising counsels (aka consultants), and commercial co-venturers. Although an organization that solicits contributions nationally may find compliance with registration requirements to be burdensome, the penalties for noncompliance can be harsh, ranging from monetary penalties to “cease and desist” orders.

It is important that CPAs retained by charitable organizations particularly those who assist charitable organizations with the filing of their state registration forms (which may include identifying and disclosing a charitable organization’s contracts) have a good basic understanding of what constitutes a charitable solicitation; how the various entities are defined; as well as the extent to which they are subject to the state’s charitable solicitation laws. Significantly, CPAs should be aware of state regulators who have held CPAs accountable for their conduct in connection with their representation of charitable organizations. In recent years, both the California and New York attorneys general have named CPAs in civil actions alleging violations of state laws and breaches of fiduciary duties.

What is a Charitable Solicitation?

In most instances, the act of making a “charitable solicitation” triggers a state’s registration and reporting requirements although the definition varies from state to state, generally, a charitable solicitation is: any direct or indirect request for contributions for charitable purposes, including oral and written statements, offers for sale, and announcements for special events. Notably, the state solicitation laws do not apply to the receipt of unsolicited donations or other types of charitable activities such as the operating charitable programs. In other words, in order to constitute a charitable solicitation, there must be some affirmative act such as asking for a gift or selling goods or services that will benefit a charitable organization.

Who are the Regulated Entities Subject to the Charitable Solicitation Rules?

Charitable Organizations

Whether an organization has tax exempt status or may receive tax deductible contributions is a completely separate question from whether it is considered to be a charitable organization under state law. So, although “charitable organizations” certainly include section 501(c)(3) organizations recognized as charitable by the IRS, it may include other section 501(c) organizations, other nonprofit organizations defined by state law – or, even in some states, for-profit organizations.

Essentially, the important consideration is whether an organization engages in the solicitation of funds for charitable purposes. Charitable purposes include, but are not limited to: relief of the poor, distressed, or underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Typically, the registration process involves filing a state registration form, providing a copy of the organization’s IRS Form 990 (if one is required) as well as financial statements (which may be audited, depending upon the organization’s annual revenue) and a filing fee. Additional documentation that may be required with the initial registration includes a copy of the organization’s charter, bylaws and IRS acknowledgement letter (if the organization qualifies for tax-exempt status).

Currently, of the 45 states with charitable solicitation statutes, 41 states plus the District of Columbia, require charitable organizations to register prior to the commencement of solicitations. In some states, depending upon the amount of overall contributions or the nature of their activities, charities such as religious and educational institutions, hospitals and membership organizations may be exempt from registration. Moreover, as discussed more fully below, organizations that solicit solely via the Internet (and do not engage in any targeted activity in any state) may not be required to register in any state – other than in the state in which they are domiciled.

Professional Fundraisers (PFRs)

Specifically, a PFR is hired to solicit the general public, directly or indirectly, on behalf of a charitable organization (e.g., telephone and/or door-to-door solicitations) and often have custody and control of the contributions received. So an entity that directs solicitation or custody and control of contributions may qualify as a PFR. In 43 states, PFRs are required to register, post a surety bond, file contracts with their nonprofit clients, and file campaign financial reports. Also, many states require PFRs to disclose their professional status as a paid solicitor prior to making the request for a contribution.

Professional Fundraising Counsels (FRCs)

Generally, an FRC is an entity retained to help plan, manage, advise on, or produce and design solicitations on behalf of a charitable organization. FRCS do not, however, make the solicitations or have custody or control of contributions. Currently, in 31 states, FRCs are required to register and file contracts; and, in a few states, post bonds.

Commercial Co-venturers (CCVs)

Finally, a CCV is an entity that does not regularly engage in fund-raising, but instead advertises that the purchase or use of goods or services will benefit a charitable organization. For example, a McDonalds’ advertisement may state that for every hamburger sold, McDonalds will donate $1 to the Ronald McDonald House (a nonprofit organization). Currently, six states require registration, contract filing, the posting of a bond and/or the filing of a campaign financial report. In addition, 20 other states regulate the activity by requiring specific contract terms and point of sale disclosure, but do not require registration or contract filing by the CCV. Instead, the charitable organization that benefits from the CCV advertising may be required to file and/or report the contract.

Are Internet Solicitations Subject to State Charitable Solicitation Registration Requirements?

By a literal reading of most state statutes that require registration, Internet solicitations that reach residents of the state would be included. However, in order for a state to obtain the requisite jurisdiction to impose its regulation statutes upon an entity’s online solicitation activities (including requiring registration), those activities must meet the constitutional requirement of “minimum contacts” with that particular state. Moreover, states acknowledge the practical reality that applying (and enforcing) their registration requirements to every Internet solicitation is virtually impossible.

With this backdrop, in 2001, the National Association of State Charity Officials (“NASCO”) issued guidelines, called the Charleston Principles (the “Principles”) declaring the states’ commitment to consistently apply minimum contacts principles to the existing state charitable solicitation regulatory framework (including registration requirements and general enforcement actions relating to deceptive or fraudulent solicitations). As to meeting the appropriate minimum contacts requirements, the Principles assert that existing state charitable solicitation statutes as drafted, encompass and apply to Internet solicitation. For this reason, the Principles do not advocate amendments to existing law.

However, NASCO does encourage state charity regulators to use the Principles as practical guidelines for applying existing state laws to Internet fundraising activities.

The Principles apply to any of the regulated entities that solicit contributions via the Internet (i.e., charities, PFRs, FRCs and CCVs). For organizations soliciting solely via the Internet, the Principles state that the application of state registration and reporting regimes should be limited to: (1) entities domiciled within the state; (2) out-of-state entities whose non-Internet activities would require registration in the state (e.g., direct mail or inbound telephone solicitation into the state); and (3) out-of-state entities that solicit through an interactive or non-interactive Web site and either specifically target persons physically located in the state, or receive contributions from the state on a repeated and ongoing, or substantial basis through or in response to the Web site solicitation. An entity is domiciled with a particular state if its principal place of business is in the state. However, according to the Principles, a physical presence within a state, such as a branch or regional office, may also be indicative of appropriate state jurisdiction.

The Principles leave the definition of "ongoing" or "substantial" (the third point) to the individual states. In that regard, the authors aware of only two states, Colorado and Tennessee that have formally adopted numerical thresholds. In Colorado, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least 50 online contributions, or the lesser of $25,000 or 1% of its total contributions in online contributions during a fiscal year, respectively. In Tennessee, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least $100 or $25,000, respectively, in online contributions in a year.

Organizations should be mindful that the Principles are limited to solely online solicitations that occur a passive context. In other words, if in addition to online solicitation, an organization engages in any other targeted solicitation activity, such as telephone, direct mail or in-person solicitations, the organization must register in all the targeted states. Furthermore, similar to a letter or fax, it is important to note that email solicitations may also trigger registration requirements.

Conclusion

Having an understanding of the regulatory framework governing charitable solicitations will help you better identify compliance issues and prevent potential fines, penalties and other consequences for your charity clients and you.


Seth Perlman Tracy L. Boak

Seth Perlman, Esq., and Tracy L. Boak, Esq., are partners at Perlman & Perlman, LLP, a law firm serving nonprofit organizations, social enterprises, fundraising professionals, companies engaged in philanthropy, and social enterprises. The firm provides counsel on corporate governance, tax-exemption, fundraising regulation, business activities, for-profit/non-profit alliances, and intellectual property matters. They can be reached at tracy@perlmanandperlman.com and seth@perlmanandperlman.com.

 
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