1

Avoiding Tax Pitfalls in Cyberspace

American Chamber of Commerce Executives

DIALogue — ACCE’s Executive Speaker Series

Presented by George E. Constantine, III, Esq

Venable, LLP

Washington, DC

2

George E. Constantine, III, Esq.

• Counsel to tax-exempt trade associations, professional societies, chambers of commerce

• Former Staff Counsel for the American Society of Association Executives

• Concentrates practice on tax, contracts, intellectual property licensing, election law, corporate governance and other issues affecting tax-exempt, nonprofit corporations.

3

Today’s Program

• Who’s visiting your web site?• UBIT basics• Specific Activities

• Advertising• Sponsorships• “Virtual” trade shows• Affinity programs• Hyperlinks• Others

• Conclusion

4

Who’s Visiting Your Web Site?

• Members• Prospective members• Visitors• Prospective visitors

But that’s not all…

5

Who’s Visiting Your Web Site?

• Competitors• Disgruntled former employees• Internal Revenue Service agents• State revenue agents

6

Unrelated Business Income Tax — The Basics

• Chambers of commerce are exempt from federal income tax under Section 501(c)(6) of the Internal Revenue Code of 1986.

• Chambers of commerce are not exempt from all taxes, only from those taxes that would otherwise apply to income received from activities that are substantially related to their exempt purposes.

7

Unrelated Business Income Tax — The Basics

• A 501(c)(6) organization must meet certain basic tests to qualify for exemption:

• Must not be organized for profit• Must be a membership organization and have

meaningful membership support.• No “private inurement.”

8

Unrelated Business Income Tax — The Basics

• When will a chamber of commerce be liable for tax on its unrelated business income?

• If it receives net income from a trade or business,

• that is regularly carried on, and

• that is not substantially related to its exempt purposes

• Exceptions may apply!

9

Unrelated Business Income Tax — Exceptions May Apply

• Interest income• Royalties• Qualified sponsorship payments• Qualified convention and trade show activities

10

Revenue-Generating Chamber Internet Activity — Advertising

• Income from the sale of advertising is almost always taxable to a chamber of commerce.

• Income may be offset by expenses.

11

Revenue-Generating Chamber Internet Activity — Sponsorship

• History — Mobil Cotton Bowl• “New” safe harbor created in the tax code

and applied through 2002 regulations.• Income that is in the form of a “qualified

sponsorship payment” will not be subject to UBIT.

• Income that is not in the form of a qualified sponsorship payment still might not be subject to UBIT.

12

Revenue-Generating Chamber Internet Activity — Sponsorship• Definition of qualified sponsorship payment• Definition of substantial return benefit• Use or acknowledgment• Advertising• Hyperlinks• Exclusivity arrangements• Fair market value

13

Revenue-Generating Chamber Internet Activity — “Virtual” Trade Shows• Specific exemption in the tax code• Applies to “qualified convention and trade show activities” of

501(c)(6) organizations (as well as to certain other types of exempt organizations)

• Key is whether activity is of the type “traditionally” carried on at convention and trade shows — watch out for calling something a “virtual” trade show

• IRS view of “virtual” trade shows

14

Revenue-Generating Chamber Internet Activity — Affinity Programs and Endorsements• Credit card programs• Insurance programs• Other types of programs where chamber licenses its name and

logo in exchange for a portion of revenue received by the licensee• Not merely “member benefit” programs• Taxability will depend on contents of contract, reality of relationship• IRS looks to the amount of activity that a tax-exempt organization is

exerting in support of a program• IRS position is “evolving,” thanks to a push from the judicial system

15

Revenue-Generating Chamber Internet Activity — Affinity Programs and Endorsements

• Single agreement, mere license• License agreement with chamber, separate services

agreement with chamber’s for-profit subsidiary• License agreement with chamber, separate services

agreement with chamber• License and services contained in the same

agreement

16

Revenue-Generating Chamber Internet Activity — Hyperlinks

• Recent private letter ruling, corporate sponsorship rules show direction IRS is heading.

• Be certain that when hyperlinks are provided in exchange for payment to have written agreement (for tax and general liability reasons).

• Exercise oversight over the location of the hyperlink (both on the relevant chamber web page and on the “linked-to” page).

17

Revenue-Generating Chamber Internet Activity — Others

• Amazon.com example• Sales of products and services• Political activities and related foundations

18

Questions????