My recent findings on this ...
IRS Rules on Internet UBIT Issues
In a recent Private Letter Ruling, the Internal Revenue Service determined that a tax-exempt organization can use its web site to provide banner advertising and links to a third-party service provider without incurring Unrelated Business Income Tax (UBIT).
The Basics of UBIT
Generally speaking, exempt organizations are subject to UBIT on revenue produced by (1) trade or business activities that are (2) regularly carried on and (3) not substantially related to their charitable, educational or other exempt purposes. The sale of advertising in an exempt organization's periodical or on its web site is an unrelated trade or business and any resulting net revenue is subject to UBIT.
In contrast, the Internal Revenue Code specifically excludes royalty payments from UBIT. An exempt organization may license its name, logo or other intangible property for use by a commercial provider of services or products, such as a credit card company or internet provider. Income from a passive licensing agreement is royalty income and is not subject to UBIT. However, if the organization takes an active role, such as advertising or promoting the commercial provider's products or services, or providing any other "substantial return benefit" to the commercial entity, this may result in UBIT.
Corporate Sponsorship
The exempt organization may publicly acknowledge a commercial entity without payments from it being subject to UBIT. However, this special exemption for acknowledgment of commercial sponsorship does not apply to income from the sale of acknowledgments placed in an exempt organization's periodicals.
I cannot say that I am much less confused by this ruling.
> we stick pretty close to the typical
> fundraisers and activities that support our
> mission and goals
The IRS doesn't care if the fundraising is to support your goals (that they have made clear enough). What is relevant to UBIT is how the fundraising is conducted (and that part is not so clear). It seems to me that most all product sales fundrasing would trigger UBIT but that most PTOs are flying under the radar of the IRS.
Sorry, I didn't see your second post. Yes, UBIT does become an issue for PTOs when they get into certain transactions like this. I'm not an expert, but I've had a few conversations with the IRS about it.
One common area seems to be the selling of advertising space in PTO publications. If it's something like the directory - once a year, then it doesn't meet the "regularly carried on". But if you have a monthly newsletter and sell ads, that could invoke UBIT.
Most PTO's (that I've talked to) don't own their own facilities. But with other none-profits, facilities rentals may be a common area of UBIT.
Definitely whenever a PTO thinks about getting involved in the routine sale of something not related, UBIT is a consideration. Again - I'm not a professional - but something like selling school T-shirts or school supplies within the school all year would be okay as it ties to the mission. Just selling things for profit gets into conducting trade as a business.
As for our PTO, we stick pretty close to the typical fundraisers and activities that support our mission and goals. So we don't consider those areas. I think we've had situations where reported some UBIT in the past, but always under the $1000 mark.
Income Tax is the other area.
You might have income tax issues at the state level if your state has an income tax. (We don't).
At the federal level, I think you'd need to check into "Unrelated Business Income Tax".
Even though an organization is tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the performance by the organization of its exempt purpose or function except that the organization needs the profits derived from this activity. An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return. ...
An activity is an unrelated business (and subject to UBIT) if it meets three requirements:
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It is a trade or business,</font>
It is regularly carried on, and</font>
It is not substantially related to the furtherance of the exempt purpose of the organization.</font>
The IRS website will have more information. (www.irs.gov
)
Note - These issues are not by themselves a show stopper. Millions of organizations pay sales tax every day. Lots of organization pay UBIT. You just need to investigate what your legal obligations are and decide if the return on investment is worth the time and the taxes you need to pay.
My question is about the Amazon Associates program (since I am just creating a site - the PTO gets money from Amazon). I assume that associate revenue such as Amazon falls under UBIT. Or is there some loophole to avoid UBIT. If UBIT, is this an issue for PTOs or do they just consider it part of the cost of "doing business"?
Can you explain how this is different from the Amazon.com Associates program, if it is? (With the Associates program, someone sets up a link to Amazon on their site, and a percentage of any purchases made through that link go back to the organization posting the link--sometimes it's just a link, sometimes it's more elaborate. It's similar to buying through SchoolPop or the BoxTops for Education marketplace, for those of you familiar with those two. Amazon dropped out of all those affiliate marketing arrangements and just does its own thing with the Associates program.) If it's not any different, and it's not that substantial in relation to your other revenue sources, I've usually seen it just lumped into other miscellaneous income on the tax return. There's no special treatment of which I am aware.
I am setting up an Internet storefront as a fundraiser for my school. Someone mentioned to me that there may be tax implications for the school or the PTO (depending on who sponsors it) at both the state and federal level. I have started to do research on this and am finding it to be murky area of tax law - probably because Internet fundraising is relatively new. I am hoping that there are some people here who have dealt with this issue and can point me at more definitive answers and resources on this topic.
Also, I'd be interested in feedback on my site design ( www.activecircle.com/ar.htm?foxchapel
). It uses Amazon on the back-end, but the web interface is my own design.
