Cause-Related Marketing: When Helping Others Helps Your Bottom Line Sarah Duniway, J.D Business Law Institute May 2010

2 Agenda What is cause-related marketing Overview of key issues Case studies and analysis

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

4 Key Issues Use of charitable assets Charitable solicitation regulations Unrelated business income tax Attribution of income Managing risk Sales tax

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

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

7 Use of Charitable Assets: Application, Con’t 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

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

9 Charitable Solicitation Regulations: Legal Principles, Con’t Many states regulate professional fundraisers Definitions vary by state Example: Minnesota defines “professional fundraiser” as: –Person or entity (other than charity’s 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

10 Charitable Solicitation Regulations: Application, Con’t 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

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 organization’s tax-exempt purpose

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

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

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

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)

16 UBTI Exceptions: Corporate Sponsorships Substantial return benefit, con’t –Right to use nonprofit’s logo, trademark or goodwill –Exclusive provider arrangements

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?

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

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 charity’s exemption?

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 charity’s exemption for purchases to benefit the charity?

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

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

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

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 charity’s name? –Should have permission

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 HeartCo’s name, logo, web site, tag line –HeartCo has booth with models of devices and educational materials

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

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

28 Case Study: Co-Branding Environmental group, CleanUP, and home cleaning company co-brand a cleaning product Brand includes CleanUP’s 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

29 Co-Branding Analysis Are CleanUP’s 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

30 Co-Branding Analysis Is income UBTI? –Is endorsing and marketing an eco-friendly cleaning product substantially related to CleanUP’s exempt purposes? Close call If not substantially related, is there an exception? –CleanUP’s promotion activities eliminate ability to classify income as a royalty, so no exception

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

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

33 Sarah Duniway, J.D. Gray Plant Mooty (612)

34 GP: v1