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September 20, 2012

Cause Marketing Can Boost Your Charity’s Fundraising and Public Awareness (article)

Cause marketing, or cause-related marketing, refers to the collaboration between a corporation and a nonprofit organization for the purpose of promoting the interests of each entity. (These arrangements are sometimes referred to as commercial co-ventures.) The organizations combine their assets to create shareholder and social value; connect with specific audiences, such as consumers, employees or suppliers; and communicate the shared values of both organizations.

Cause marketing differs from corporate philanthropy in that the corporate dollars involved are not outright gifts to a nonprofit organization, and therefore they are not treated as tax-deductible charitable contributions.

The benefits of cause marketing to nonprofits include increased fundraising opportunities and public exposure, while corporations reap rewards from the enhanced brand loyalty and employee morale that spring from their philanthropic involvement. American Express first used the phrase "cause-related marketing" in 1983 to describe its campaign to raise money for the restoration of the Statue of Liberty. Since then, myriad companies have launched cause-marketing campaigns. One notable example: Yoplait's "Save Lids to Save Lives" campaign, which supports Susan G. Komen for the Cure. For every lid mailed, Yoplait donates 10 cents, which has resulted in $30 million over the past 13 years.

While there are significant benefits to these types of collaborations, nonprofits must exercise great care when embarking on a cause-marketing program. There are numerous registration, reporting and disclosure requirements for both the corporation and nonprofit. Further, if the campaign is national in scope, there are likely additional state requirements — beyond those mandated by the charity's home state — that must be met.

Since this arrangement affects at least three parties — the charity, the corporation and the individual — state attorney generals are wary of deceptive trade practices, false advertising and consumer fraud.

Despite the hurdles involved, cause-marketing campaigns have met with great success, generating significant revenue for the charities involved. The success is due in part to human nature: people like to feel good by "doing good" and in turn they embrace corporations associated with what they perceive as worthy causes.

If you think a cause marketing campaign or commercial co-venture might be right for your charity, there are several issues you should consider before inking an agreement.

Here are a few:

What is the definition of a commercial co-venturer in your state?

Approximately 20 states regulate commercial co-venture promotions. For example, in Massachusetts, it is defined as, "An individual or business, which for profit or other commercial consideration, advertises that an event or sale to the public of a good or service will benefit, to any extent, a charitable purpose." SeeM. G. L.c. 68, s. 18.

In many states there are no applicable counterparts. This does not mean that charities have free reign in those states. Many other states do have laws covering "professional fund-raising counsel" and "professional solicitor." Still, most experts will agree that cause-marketing programs are likely not covered by these professional fundraiser or solicitor statutes. Speak with your tax advisor for specifics on these requirements. Many of these states will require the same information requested by Massachusetts as provided below.

In Massachusetts, a commercial co-venturer must file the following:

  1. Registration Statement: Form 10 (RTF)
  2. $25,000 bond: Form 9 (RTF)
  3. Filing fee of $200, made payable to the Commonwealth of Massachusetts; and
  4. A copy of each fundraising contract along with Form 10B (RTF) (to be filed with registration or within 10 days of signing and prior to the commencement of any co-venturing activity).

To access the forms listed above, please visit:http://www.mass.gov/ago/doing-business-in-massachusetts/public-charities-or-not-for-profits/legal-findings-forms-and-publications/non-profits-and-charities-forms-and-publications.htmland scroll down to the desired form.

Massachusetts requires various disclosures, including:

  1. Name, address and telephone number of charity
  2. Description of the charitable purpose(s) benefiting from the solicitation
  3. Method by which charity/charities will be determined
  4. Summary of the solicitation campaign, even if a contract is attached (for example, "Company will contribute 20% of the gross proceeds from its sales of product X to charity Y in a lump sum payment at the end of the campaign," or "Store will contribute $5 to charity Y on a monthly basis for every unit of product X sold during a five-month campaign.")
  5. Anticipated duration of solicitation
  6. Projected gross receipts to be raised by this solicitation
  7. Approximate percentage of gross receipts that the charitable organization will receive or retain
  8. A statement that the effort is being conducted by a "paid fundraiser"
  9. A prepared response to prospective contributors in the event they ask how much of their contributions will go to the charitable organization

Is the income generated subject to UBIT?

The benefit of a commercial co-venture for the corporation is increased sales. For the nonprofit it is tax-free revenue. But it is critical to determine whether that income is truly tax free.

In the case of Sierra Club ("SC"), Inc. v. Commissioner, the court ruled that the charity's agreement with a credit card company to have its name and logo appear on a credit card constituted royalty and thus was not subject to unrelated business income tax ("UBIT"). The SC received a small percentage of total amounts charged on the credit card. According to the court decision, the agreement between SC and its for-profit credit card partner allowed the credit card company to use SC's name, marks, logo, and certain other intangible property in marketing campaigns, as well as provided the credit card company with access to SC's members by way of mailing lists. The court ruled that the financial consideration SC received under the agreement was, at least in part, for the use of valuable intangible property. As such, it constituted royalties within the meaning of I.R.C. 512(b)(2) and therefore was not subject to tax.

Whether in Massachusetts, elsewhere, organizations should take these important steps when establishing a commercial co-venture or cause-marketing program:

  • Seek legal counsel
  • Develop a written contract that includes any statutorily mandated provisions
  • Ensure any product advertisements arising from a commercial-nonprofit relationship do not mislead, deceive or confuse the public about the effect of the consumer's purchase on charitable contributions by the commercial sponsor
  • Make clear in the contract that the arrangement is not a partnership or a joint venture
  • Review marketing materials carefully for required disclosures and ensure compliance with applicable state disclosure laws and BBB Standard 19
  • Register and bond the program in any applicable jurisdictions as noted above for Massachusetts
  • Clearly state the terms of the agreement, including payment terms
  • Safeguard confidentiality and restrict access to email or mailing lists
  • Avoid providing any endorsement or personal services when licensing your charity's logo and name
  • When choosing a for-profit to work with, protect your reputation by steering clear of companies in less socially desirable industries, such as tobacco and alcohol

Use Cause Marketing to Your Advantage

For a nonprofit looking to gain widespread exposure and bring in vital fundraising dollars, consider the impact of visible placement on a major for-profit vendor's website — think Amazon — with the note "A portion of your purchase price will go to XYZ Charity."

For more information on the tax implications of a commercial co-venture or cause-marketing campaign,please contactyour local CBIZ office.

Copyright © 2012, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that-unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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