As the demand for charitable services increases, and with the surge of donations seen in 2020 and 2021, charities need to get creative with the ways they fundraise. Fundraising is a crucial part of charities' ability to function. One potentially successful way to increase funding is through charitable sales promotions. This is when non-profits partner with for-profit businesses and use the power of brand recognition to bolster donations and revenue for both companies.
If you are a charity or a for-profit organization interested in charitable sales promotions, you must understand how they work and what federal and state laws apply. This article describes what charitable sales promotions are, their benefits, what contracts should include, and relevant tax requirements. You should always consult with an experienced contract lawyer when engaging in sales promotions to ensure you meet all legal requirements. Our team of experienced non-profit lawyers can help answer any questions you may have.
What are charitable sales promotions?
The technical definition of a charitable sales promotion is when a commercial business represents that the purchase of goods or services will benefit a charitable organization or purpose in whole or in part. Of course, the goal is to increase funding and resources for the charities to continue providing necessary services to the community. However, another goal can also be to boost sales for the for-profit business and create or maintain an image of goodwill.
What are the different types of charitable sales promotions?
Charitable sales promotions can occur in various ways. However, a major form is cause-related marketing.
American Express Cause-Related Marketing
The earliest official “cause-related marketing" campaign dates back to the early 1980s when American Express coined the term to describe an effort to fundraise for restoring the Statue of Liberty. The credit card behemoth pledged to donate one cent every time someone purchased during the campaign. The company raised approximately $1.7 million on behalf of the restoration project. This is a classic campaign strategy for charitable sales, known as pledge-per-purchase.
This can either be a fixed-term promotion, such as a certain number of months (or a single month), or it can be ongoing. Typically, ongoing campaigns exist if the company has the resources and capital to invest in community services in this way.
Ongoing Sames Promotion - AmazonSmile Campaign
An example of an ongoing charitable sales promotion is the AmazonSmile campaign. Anyone shopping through the specialized link can make a selection from a variety of philanthropic organizations, and Amazon will donate 0.5% of the purchase price to that organization. This requires no donation from the customer, and the customer can feel even more empowered to spend more on order knowing the charity of their choice is being supported.
A second example is the more direct donation solicitation method. At this point, we have probably all seen those little clear money boxes near the cash registers at McDonald's all over the country. This direct solicitation encourages patrons to drop their change after ordering their food with phrases like “Your spare change adds up to a lot of help!” These are donation boxes for Ronald McDonald House Charities, a non-profit organization that helps families with sick children.
Another example you might be familiar with is that question during checkout at the grocery store when you pay: "Would you like to donate to Save the Animals today?" Sometimes the cashier asks you directly, or you're prompted to select 'yes' or 'no' on the card reader. This is another form of charitable sales promotion that is becoming increasingly common.
These are the “round-up-your-total” or “donate-your-change” kind of campaigns, which might remain in place for many months or even years, as in the case of McDonald's, and when conducted at checkout stands for food or other retail establishments, they can be very lucrative.
Percentages of Proceeds
Another way to conduct cause-related marketing is to have a percentage of sale proceeds go towards a charitable cause. Unlike the donate-your-change campaigns, these tend to be shorter-term and are run as a fixed marketing campaign targeted at driving sales to reach a fundraising goal.
There are, again, many variations of this. Sometimes the products are donated, allowing 100 percent of the proceeds to go to the charity. Sometimes the products might be specially designed with the charity's mission or logo incorporated, and even the amount of money donated per purchase can vary. The portion of sales made during the promotional period that gets donated is completely up to the business and non-profit, and they can agree on any number.
Benefits of Charitable Sales Promotions
The most obvious benefit of executing a charitable sales promotion or cause-related marketing campaign is that they raise funds for non-profit organizations. In turn, this fundraising benefits the community at large by supporting the charities that support the community.
Of course, there are plenty of benefits to the for-profit companies that also take part in these types of campaigns. Both entities can benefit from increased reach to each other's audiences and positive publicity. Remember the highly successful American Express Restoration Fundraiser? Not only did they donate a hefty sum of money to the restoration, but their card usage also skyrocketed during the campaign.
As reported by Georgetown University’s Center for Social Impact Communication, the 2015 Cone Communications Millennial CSR Study found that “[m]ore than nine-in-10 Millennials would switch brands to one associated with a cause (91% vs. 85% U.S. average)." Although the study targeted the millennial-age population, it would be a safe bet that most adult consumers would follow this trend.
However, one thing to keep in mind is that consumers in today's world have a keen eye for "performative activism.” Consumers can typically decipher when companies are simply virtue signaling to gain profits. Generally, customers can sense when businesses are taking advantage of their goodwill or tragic social issues, so pursuing a charitable sales campaign must be done with genuineness and as little commercialism as possible.
What else should you keep in mind regarding charitable sales promotions?
As a for-profit company, before rolling out your first cause-related campaign, there are a few things to prepare beforehand.
The first may seem obvious, but it's important: which charities are trustworthy? Of course, this doesn't apply if the charity you want to support is run and organized by someone you know and trust in your local community. Always ensure that the non-profit is already established with its 501(c)(3) designation.
However, the larger ones, or ones that you aren't personally familiar with, require some vetting before you partner with them. A great place to start is the Better Business Bureau website give.org where the BBB Wise Giving Alliance allows you to look up reports on most charitable organizations across the country.
Which regulations apply to charitable sales promotions?
There are also regulations in each state that apply to charitable sales promotions and cause-related campaigns. Besides regulatory requirements, there are also several general legal requirements that you need to be aware of, whether you're a company or a non-profit. These include:
- Advertising/marketing disclosures
- Charitable solicitation registration and reporting
- Contract requirements
- Federal income tax considerations (which we will discuss briefly later)
Generally, your initial meeting when planning the campaign should include discussing what the promotion will entail, what language will be used in the advertisements, and ensuring both parties are on the same page concerning compliance.
It could reflect badly on your business if the non-profit, for example, does not hold up its end of the requirements, and vice-versa.
One overarching legal rule to keep at the forefront of planning and execution is not to mislead. This is broadly speaking; your campaign, advertising, and reporting should be as transparent as possible. The goal is never to mislead the public, each other, or the state and federal governments when conducting the campaign. It would be helpful to consult with an attorney familiar with charitable sales promotions to ensure compliance.
Contract Requirements for Charitable Sales Promotions
Again, check with an attorney or look into your state's laws to ensure that any written agreement contains everything required. You also should consult with an attorney to determine whether or not the contract itself needs to be reported.
Typically, a comprehensive contract will outline:
- The goods or services that are part of the promotion
- Where the goods or services come from
- The geographic territory of the campaign
- The amount of the donation and how it is triggered
- The campaign timeframe
- A requirement that a final accounting is provided to the charity.
The agreement may also need to include certain state-required provisions applicable to commercial co-venturer (CCV) agreements.
What should non-profits be aware of?
Non-profits must likewise ensure that their corporate partners are on the up and up during the campaign. It is vital that the promotion advertisements “clearly disclose how the charity benefits from the sale of products or services… that state or imply that a charity will benefit from a consumer sale or transaction.”
The BBB Wise Giving Alliance has outlined standards for charity accountability that relate specifically to cause-related marketing, the most important being Standard 19. This is a list of reporting and conduct standards for charities. During initial planning meetings, you should review this list with a corporate partner and ensure you comply.
Be sure that all of the following information is clearly visible to customers at the point of sale:
- Amount donated per purchase
- Minimum guarantee, if any
- Donation cap, if any
- Campaign length/timeframe
- Any other required actions or restrictions (based on local laws)
Every state has different requirements for reporting and disclosures; check your state's local codes for the applicable statute. Certain states require companies to register and file contracts and campaign reports if the company is acting as a commercial co-venturer (CCV). A commercial co-venturer is generally defined as any company “who for profit… advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization.”
Tax Requirements for Charitable Sales Promotions
Charities and businesses need to be aware of unrelated business income tax ("UBIT"). Although most (or all) charities are designated as tax-exempt organizations, they could potentially be liable for tax payments if their "unrelated business income” meets certain criteria and is above a certain threshold.
The Internal Revenue Service (IRS) states that an exempt organization with $1,000 or more gross income from an unrelated business must file Form 990-T. The IRS defines “unrelated business income” as any “income from a trade or business, regularly carried on, that is not substantially related to the charitable . . . purpose that is the basis of the organization's exemption.”
Generally, when deciding whether to apply the UBIT, the IRS will assess if the trade or business that is “regularly carried on” is not substantially related to the organization's exempt purpose. Specifics on this can be found under Special UBIT Rules for Organizations Under Code Section 501(c)(7); (c)(9); (c)(17); and (c)(20). However, for a more in-depth explanation of these rules and definitions, seek out an attorney who can help unpack this a bit more.
Charitable sales promotions and cause marketing partnerships can be a great way to achieve social and financial goals. However, they require solid preparation to ensure that you comply with all rules and regulations. Some of the most common pitfalls, whether intentional or not, are:
- Lack of campaign oversight
- Deceptive advertising, and
- Misuse of restricted funds.
These campaigns can be highly rewarding when done the right way and with the right people and organizations.
If you have any questions, contact our legal team here at Newburn Law for a free consultation to learn how we can help you.