Avoiding Tax Pitfalls in Cyberspace

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Avoiding Tax Pitfalls in Cyberspace

• American Chamber of Commerce Executives
• DIALogue ACCEs Executive Speaker Series
• Presented by George E. Constantine, III, Esq
• Venable, LLP
• Washington, DC

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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.

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Todays Program

• Whos visiting your web site?
• UBIT basics
• Specific Activities
• Advertising
• Sponsorships
• Virtual trade shows
• Affinity programs
• Hyperlinks
• Others
• Conclusion

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Whos Visiting Your Web Site?

• Members
• Prospective members
• Visitors
• Prospective visitors
• But thats not all

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Whos Visiting Your Web Site?

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

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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.

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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.

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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!

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Unrelated Business Income Tax Exceptions May
Apply

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

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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.

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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.

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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

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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

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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

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Revenue-Generating Chamber Internet Activity
Affinity Programs and Endorsements

• Single agreement, mere license
• License agreement with chamber, separate services
  agreement with chambers for-profit subsidiary
• License agreement with chamber, separate services
  agreement with chamber
• License and services contained in the same
  agreement

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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).

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Revenue-Generating Chamber Internet Activity
Others

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

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Questions????