Tread Cautiously when Fundraising Online

More and more non-profits are using the Internet in new and innovative ways to further their charitable goals. Not surprisingly, one of the strongest growth areas of Internet use by non-profits is online fund raising, either through solicitations on a charity's own web site, or by partnering with one of the many online "e-commerce" sites. Although these mechanisms can generate new revenues in some cases, from a legal and self-protection standpoint online fundraising is a relatively new and uncharted area. When contemplating online fundraising activities, non-profits should consider a variety of issues before proceeding.

Most non-profits in New Jersey are aware that they must register with the New Jersey Division of Consumer Affairs, Charities Registration Section, prior to soliciting funds in the state. However, many may not know that a growing number of state regulators around the nation have concluded that a non-profit that requests donations online is "soliciting" donations in any state whose residents actually access the site. The states have taken this position whether the charity is soliciting funds via its own Web site or on one of the growing number of "commercial donation" sites (such as www.igive.com or www.givetocharity.com), where donors can contribute online to charities that are registered with the site. This means that non-profits that solicit over the internet may be required to comply with the charitable registration and reporting requirements of as many as 39 states. The state of Florida, for example, has begun to require organizations to register in certain instances, and has actually taken action against at least one charity that was enrolled in an online "commercial donation service" but was not registered with that state. New Jersey charity officials have told us that they, too, consider any Internet solicitation accessed by New Jersey residents to be an in-state solicitation, requiring registration and reporting.

In an attempt to address the problem, the National Association of State Charity Officials (NASCO) and the National Association of Attorneys General (NAAG), in partnership with non-profit leaders and others, have developed a Unified Registration Statement (URS), a standardized registration form now accepted by 33 states including New Jersey. The URS is one part of the Standardized Reporting Project, a larger NAAG/NASCO effort to streamline and standardize compliance under the various state solicitation laws. The URS is useful for organizations that solicit funds in multiple states, whether online or via other means (such as direct mail). However, the URS alone provides only limited relief to the burdens of multi-state filing. Even if a charity uses the URS it must still pay the necessary filing fees of each state in which it is required to register, and these costs can add up quickly. It is also important to note that the URS is a registration document only. It cannot be used to satisfy annual financial reporting obligations of a given state. Efforts are underway to develop standardized financial reporting forms, as well as registration and annual report forms for independent paid fund raisers and fund raising counsel.

Non-profits seeking to partner with a for-profit entity in an online cause-related marketing venture (for example, a percentage of the sale of the for-profit's goods or services will be donated to the charity) should carefully examine the legal and tax implications before proceeding. Just as is the case with such partnerships "offline," revenue derived from these arrangements may be subject to Unrelated Business Income Tax, depending upon how the arrangement is structured.

The Internet holds many exciting possibilities for furthering a non-profit's goals. But as with any evolving field, exercising due caution is always advisable. A little up-front investment in time, research and consultation with appropriate professionals such as attorneys, accountants or the Center, can help your organization avert a great deal of trouble in the long run.

For a more thorough discussion of the pros and cons of online fund raising, see "Using the Internet for Fundraising," by Eric Mercer. The article is available online at the Internet Nonprofit Center's Web site at http://www.nonprofits.org/misc/981027em.html. New Jersey non-profits with legal and tax questions can also contact the Center.