By harnessing the power of the web, online fundraising has made it easier for charities to raise money.
It’s not uncommon for charities to include a “Donate Now” link on their website to encourage and help facilitate contributions from the general public. After all, a person who has accessed the charity’s website is likely to be interested in that organization or have some connection to it. This article will explore state regulation of Internet fundraising.
Generally, a charitable solicitation is a request for a contribution, whether expressed or implied, through any medium. Thus, a “Donate Now” website link is a charitable solicitation and, as such, is subject to regulation.
Charitable solicitation is primarily regulated at the state level. There are approximately 40 states, as well as the District of Columbia, that have statutory systems dealing with solicitation activity within their state. These statutory systems typically include registration, filing and disclosure requirements. They are imposed on nonprofits, professional solicitors, professional fundraising counsel and commercial co-ventures. This allows state authorities to monitor the behavior of the organization within the state. While a certain level of regulation can be beneficial to increase donor confidence and fight fraudulent solicitations, the inconsistency in reporting and disclosure requirements among the states can create a significant burden for nonprofits, in particular for smaller charities.
Common State Registration Requirements
Compliance with state solicitation laws often requires an initial registration as well as ongoing responsibilities to which the organization is subject. These are often accompanied by an administrative fee.
The Charleston Principles
In October 1999, members of the National Association of State Charities Officials (NASCO) and the National Association of Attorneys General (NAAG) met in Charleston, S.C., and agreed to adopt a set of principles to clarify the applicability of states’ charitable solicitation regulations to Internet fundraising. In March 2001, the “Charleston Principles” were published as non-binding guidelines. The Charleston Principles are an effort to provide guidance to both charities and state regulators regarding the application of state registration requirements to charities soliciting contributions over the Internet.
In general, the Charleston Principles attempt to define the type and extent of activity that will trigger the duty to comply with a state’s registration requirements.
Summary of the Charleston Principles
Activities that do trigger a duty to register:
1. A charity is domiciled in the state and its principal place of business is located in that state.
2. A charity is not domiciled in the state, but its non-Internet activity in that state would require registration under existing law (such as mailing, telephoning or non-Internet media advertising).
3. A charity solicits donations through an “interactive website” (such as a “Donate Now” button), and the charity either:
• “specifically targets persons” located in the subject state for solicitation; or
• receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website (see below).
4. A charity solicits donations through a noninteractive website (such as a simple listing of the organization’s contact information), and the charity either:
• invites further offline activity to complete a contribution; or
• establishes other contacts with the subject state (such as by sending e-mail messages or other direct communications that promote donations to the organization).
Activities that do not trigger a duty to register:
A charity, operating on a purely local basis or within a limited geographic area, does not target states outside its operating area if the charity’s website makes clear that its fundraising focus is limited to that area even if it receives contributions from outside that area on less than a repeated and ongoing basis or a substantial basis.
Charleston Principles Are Helpful But Less Than Perfect
The Charleston Principles serve as helpful guidelines for determining when charitable solicitations on the Internet trigger charitable registration in a state, but they are less than perfect. One of the problematic standards contained in the Charleston Principles allows states to acquire jurisdiction over an organization that receives contributions from a state on a “repeated and ongoing” or “substantial” basis.” The terms “repeated and ongoing” (i.e., the number of separate contributions) and “substantial” (i.e., the total dollar amount of contributions) lack any definite numbers that nonprofits can use to determine whether they need to register and comply with a state’s regulations.
At this time only two states, Colorado and Tennessee, have formally adopted the Charleston Principles into their charity regulations. Florida specifically does not follow them. Nearly two-dozen states use the principles as a guideline to varying degrees, but have not formally adopted them.
A Practical Approach
Generally, state registration is required if the charity engages in passive solicitation (such as the use of a “Donate Now” button on its website) and receives “substantial” or “repeated and ongoing” contributions from residents of a particular state.
If a charity is using a “Donate Now” button or conducts other passive Internet solicitations, it must register in states in which the organization has a physical presence (i.e., where the principal office is located, where they hold fundraising events and/or where they operate programs). After the “Donate Now” button is active the organization should assess whether a substantial number of donations are being received from certain other states that would require additional registration and annual filing. Charities should be mindful that forms of follow-up via e-mail, letter or phone call do not constitute passive solicitations and will be deemed to specifically target residents of that state subjecting the charity to registration and annual filing requirements.
Many states follow an unwritten rule that typically requires charities to register when it receives (or is expected to receive) charitable contributions in the state of greater than 50 contributors or $25,000.
A Look to the Future
Most of the charitable solicitation statutes were written prior to the Internet age. In the 15 years since the Charleston Principles were developed, one area that has emerged is solicitation through online social networks, such as Facebook and Twitter, and mobile giving, by cell phone and text message. These new techniques and technologies must also be considered when evaluating the reach of the state registration laws and the application of the Charleston Principles. The same concepts apply: Do donors acquired through social media and other mediums constitute substantial or repeated and ongoing solicitations from the residents of a state?
Keep in mind, state regulation and enforcement has increased significantly. Many states view registration and reporting fees as essential revenue. It is advisable that charities factor the cost of state solicitation compliance into the cost of raising funds across state borders.
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*This article originally appeared in BDO USA, LLP’s “Nonprofit Standard Newsletter – Fall 2014“. Written by Paul E. Hammerschmidt, BDO CPA and Seth Perlman, Esq.. Copyright © 2014 BDO USA, LLP. All rights reserved. http://www.bdo.com