Jul 26, 2021

Commercial Co-Venture Compliance Critical to Charitable Sales Promotion Success

James GilmerBy James Gilmer

Commercial co-ventures – (CCVs, also known as charitable sales promotions) are an increasingly popular form of cause marketing. One common arrangement is when a portion of every retail sale (for a contractually specified time) is donated to a nonprofit.

For many nonprofits, a well-planned promotion can provide substantial income and increased visibility. Likewise, for-profit companies have an opportunity to align their brand with a social cause.

In most states, CCVs are a regulated form of charitable solicitation. Both the for-profit and nonprofit organizations, as well as their advisers and CPAs, should understand both the mutual and individual obligations involved with CCV compliance. Understanding these responsibilities is key to launching a successful promotion.

Nonprofit Charitable Solicitation Registration

Forty-one states require nonprofits to register annually to solicit using both traditional and online methods. Prior to engaging in CCV activity, a nonprofit must register to solicit contributions with the appropriate state charity officials.

Working for a charity collecting noncash donationsMany charitable sales promotions – particularly those online – potentially reach consumers in every state, triggering widespread charitable registration requirements. Furthermore, successful reporting on CCV promotion activity cannot successfully occur unless the nonprofit has registered or obtained exemption in the states with such a requirement.

Organizations should make proactive efforts to register, regardless of whether they use a CCV, and certainly before they enter into one.

For-Profit CCV Registration

In five states, a for-profit company may be required to register and obtain its own license to engage in CCV activity. Two states, Alabama and Massachusetts, require the applicant to obtain and submit surety bonds during registration. Companies are required to reregister annually until it no longer operates as a CCV, except in Mississippi, which does not require annual renewals.

Promotion Reporting

Thirteen states require co-ventures to report on each individual promotion. These generally consist of filing notices of charitable sales promotion prior to any CCV activity beginning and financial reports at the conclusion.

Because the duration of a given CCV promotion is established in the contract, deadlines for initial notices and financial reports can take place throughout the year. Co-venturing parties should be aware of the increased effort involved in the tracking of reporting and record keeping requirements associated with each promotion.

Notices of Charitable Sales Promotion

Notices of charitable sales activity inform state charity officials of impending CCV activity. These notices are typically due up to 30 days prior to the promotional period established in the contract.

In some states, simply submitting the signed agreement fulfills the requirement. In others, a separate notice is required. It is usually required to contain the following:

  • Names, addresses, and contact information of the co-venturing parties
  • Planned duration and geographic scope of the CCV promotion
  • A description of the products or goods being offered to the public
  • Specific amount or percentage of each sale that will be donated to the nonprofit
  • A description of the nonprofit’s mission and any additional representations made to the public about what their donation supports
Financial Reports

At the conclusion of the promotion, seven states require financial reports that summarize the following:

  • Total number of products sold
  • Total sales revenue
  • Expenses associated with the promotion
  • Amount donated to the nonprofit
  • The date a final accounting was (or will be) provided to the organization

Final financial reports are due as early as 30 days following the conclusion of the promotion. For multiyear promotions, most states require reports containing similar information on an interim, annual basis.

In all cases, organizations should keep accurate sales and donation records for each promotion to facilitate timely reporting.

Additional Considerations

Many states enforce specific statutory language in the CCV agreement as well as disclosures in public-facing advertising. These disclosures are designed to inform the public at the point of sale about which organization benefits and how much of their purchase, if applicable, is donated. Co-venturing parties are strongly encouraged to speak with an attorney who can advise and prepare the necessary language for any advertising materials and contracts associated with the promotion.

While most CCV income can fall under the umbrella of public support, parties should be aware of unintentionally triggering unrelated business income taxes (UBIT). In general, UBIT occurs when the nonprofit no longer plays a passive role in promotion. UBIT can also be triggered if the for-profit partner receives a “return benefit” from the organization. CPAs can advise on the tax implications associated with CCV activity and ensure the promotions are appropriately structured.

CCV requirements exist to protect the public. CPAs and other tax and legal professionals play a vital role in this process, helping ensure co-venturing parties adhere to their obligations before engaging in CCV activity. Overall, this fosters a sector of greater trust and transparency.

James Gilmer is a compliance specialist with Harbor Compliance, a provider of compliance solutions for companies of all types and sizes. He is also a cofounder of Berks Sinfonietta Inc., a nonprofit chamber orchestra in Reading, Pa. He can be reached at jgilmer@harborcompliance.com.

Harbor Compliance does not provide tax, financial, or legal advice. Use of services does not create an attorney-client relationship. Harbor Compliance does not review information  provide to us for legal accuracy or sufficiency.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.