Cause-Related Marketing: When Helping Others Helps Your Bottom
Line Sarah Duniway, J.D. 2010 Business Law Institute May 2010 Slide
2 2 Agenda What is cause-related marketing Overview of key issues
Case studies and analysis Slide 3 3 Cause-Related Marketing When a
business supports a charitable cause or event to help the business
get its name out Advantages Charitable goals Raise funds Raise
awareness of issue, mission, programs Business goals Increase
profits Raise brand awareness Promote business as good citizen to
customers, employees Slide 4 4 Key Issues Use of charitable assets
Charitable solicitation regulations Unrelated business income tax
Attribution of income Managing risk Sales tax Slide 5 5 Use of
Charitable Assets: Legal Principles Charitable assets: Money or
goods donated to charitable cause or for charitable purposes
Charitable assets must be exclusively dedicated to charitable
purposes Federal tax law principle: No private inurement to
insiders Insubstantial private benefit Slide 6 6 Use of Charitable
Assets: Application Ensure funds raised from public that purport to
be for charitable cause: Are in fact used for charity Overhead and
fundraising expenses reasonable Charities name, logo, brand used
consistent with its charitable purposes Slide 7 7 Use of Charitable
Assets: Application, Cont Manage private benefit Benefits to
business partner are: Reasonable Proportional to its investment If
charity provides goods or services to product or event: Must
receive fair market value return Either compensation or share of
contributions Slide 8 8 Charitable Solicitation Regulations: Legal
Principles Most states regulate solicitation of charitable
contributions in the state Regulations govern the ask, not the give
Most require: Registration with state charity official Reports
regarding fundraising activities Require honesty and fair dealing
Slide 9 9 Charitable Solicitation Regulations: Legal Principles,
Cont Many states regulate professional fundraisers Definitions vary
by state Example: Minnesota defines professional fundraiser as:
Person or entity (other than charitys employees) Who for
compensation or profit Solicits charitable contributions, Includes
sale of goods if portion of proceeds will be donated to charity
Manages, advises, consults, or prepares material for solicitation
of charitable contributions Slide 10 10 Charitable Solicitation
Regulations: Application, Cont Co-ventured fundraising activities
with a profit component can trigger professional fundraiser rules
Reach of rules is intentionally broad Catches anyone who asks for
donations or even prepares materials If the person will be
compensated or make profit Slide 11 11 Unrelated Business Taxable
Income (UBTI): Legal Principles Nonprofits must pay income tax on
net income from unrelated business activities Unrelated business
income is income from: Trade or business Regularly carried on Not
substantially related to organizations tax-exempt purpose Slide 12
12 UBTI: Definition Activity itself must be related Using $$ for
good works not enough Examples of activities that can generate
UBTI: Sale of advertising Sale of consumer products where selling
product does not further mission Performance of services unrelated
to mission Slide 13 13 UBTI: Exceptions Exceptions include:
Royalties (i.e., licensing fees) Qualified sponsorship payments
Income from passive investments Work performed substantially by
volunteers Resale of donated goods Slide 14 14 UBTI Exceptions:
Royalties Royalties are payments for the use of valuable intangible
property Name, logo, mailing list If nonprofit performs more than
minimal activities, payment is for services and not a royalty
Limited oversight to ensure quality ok Limited activity to make
availability known ok Active promotion not royalty Active
involvement in event, campaign, sales not royalty Slide 15 15 UBTI
Exceptions: Corporate Sponsorships Qualified sponsorship payment
is: Flat sponsorship payment in excess of any substantial return
benefit Not UBTI Substantial return benefit: Advertising but not
acknowledgments Name, logo, tag line & contact info are
acknowledgement, if value-neutral Goods and services (de minimis
ok) Slide 16 16 UBTI Exceptions: Corporate Sponsorships Substantial
return benefit, cont Right to use nonprofits logo, trademark or
goodwill Exclusive provider arrangements Slide 17 17 Income
Attribution Issues: Legal Principles Income is attributed to the
party who gets to control it Donor can take charitable deduction
only for a contribution to a charity If business partner receives
the money, Who gets the deduction? Is it income to the business?
Slide 18 18 Income Attribution Issues: Application If
donors/customers will get deduction: Must structure relationship
with business partner as a true agency relationship Agency means
charity gets to control its agent and is liable for its actions If
business partner will get the deduction: Be clear in materials that
donors/customers are making purchases, not donations Income is
attributed to business and taxed as such Slide 19 19 Sales Tax
Generally all sales of goods and services are subject to sales tax
Governed by state law Nonprofits generally not excepted from
collecting sales tax Common exception: certain fundraising sales
Issue: if fundraising is performed by business partner, can it use
charitys exemption? Slide 20 20 Sales Tax Nonprofits often have
exemption from paying sales tax When purchasing goods used in
conduct of charitable activities Issue: can business partner use
charitys exemption for purchases to benefit the charity? Slide 21
21 Contracting Principles Who has risk of failure? Who bears risk
of expenses? If agency relationship, specify scope, limitations,
responsibility for conduct Who controls communications? Ensure
charity has control over its charitable assets Right to approve
materials, certain transactions, etc. Use of names Registration and
disclosure obligations Standard contract principles Slide 22 22
Case Study: First Monday Burger Palace designates First Mondays
Donates 1/3 of profits from all sales on first Monday of the month
To charity selected by employees Slide 23 23 First Mondays Analysis
Who gets the deduction? Donation of profits implies it is
restaurant who is making the donation Restaurant should get the
deduction Proceeds from sales on First Monday all income to
restaurant Slide 24 24 First Mondays Analysis Is restaurant a
professional fundraiser? Probably not not soliciting charitable
contributions from public Contrast: 1/3 of your payment for dinner
will go to charity Can restaurant use charitys name? Should have
permission Slide 25 25 Case Study: Walk for Heart HeartCo, a heart
device manufacturer sponsors Walk for Heart to benefit local heart
association Key underwriter Provides employee volunteers Runs
advertising campaign to promote walk Charity names walk for HeartCo
All promotions include HeartCos name, logo, web site, tag line
HeartCo has booth with models of devices and educational materials
Slide 26 26 Walk for Heart Analysis Are payments, contributions of
services and advertising a qualified sponsorship payment? Yes.
Naming, inclusion in promotions is mere acknowledgement Booth also
qualifies as acknowledgement Slide 27 27 Walk for Heart Analysis
Contrast: heart association grants HeartCo license to use its logo
on promotions of HeartCo devices Right to use logo is a substantial
return benefit Must determine FMV of use of logo Only payment in
excess of FMV, if any, would be qualified sponsorship payments Logo
payment may be royalty Slide 28 28 Case Study: Co-Branding
Environmental group, CleanUP, and home cleaning company co-brand a
cleaning product Brand includes CleanUPs logo and endorsement
CleanUP gets % of profits from sales CleanUP promotes product to
its members, through its web site and materials Company promotes
product to public Slide 29 29 Co-Branding Analysis Are CleanUPs
charitable assets used for charitable purposes? Is there too much
private benefit? Allocation of $$ fairly reflect parties
contributions If product promoted as benefiting CleanUP, funds to
organization should be consistent with this claim CleanUP should
ensure product, company, use of its name are consistent with its
mission, reputation Slide 30 30 Co-Branding Analysis Is income
UBTI? Is endorsing and marketing an eco-friendly cleaning product
substantially related to CleanUPs exempt purposes? Close call If
not substantially related, is there an exception? CleanUPs
promotion activities eliminate ability to classify income as a
royalty, so no exception Slide 31 31 Co-Branding Analysis Other
issues Written agreement Responsibilities and rights of each party
How $$ allocated How project unwound if not successful Who bears
what risk No charitable contributions involved No sales tax
exemptions Slide 32 32 Conclusion Cause-related marketing can
benefit both parties Important to structure carefully at front end
Written agreement Consider registration, tax, UBTI, charitable
assets issues up front Benefit to charity must be reasonable
Representations to the public are key Must be consistent with
actual practices Slide 33 33 Sarah Duniway, J.D. Gray Plant Mooty
(612) 632-3055 [email protected] Slide 34 34
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