Q&A #67 – When does sponsorship cross the line into advertising?
Question: My nonprofit organization is planning its annual conference that will be held later this year. Our sponsorship package includes recognizing the highest tier sponsors on signs throughout the conference area. One of our corporate sponsors recently sent us images for their signage. The signage includes language that looks very much like advertising. When does sponsorship cross the line into advertising?
Answer: The difference between sponsorship (or more precisely, acknowledgment of your corporate sponsors) and advertising is addressed in the unrelated business income tax (“UBIT”) rules. While revenue from advertising typically triggers UBIT, revenue from sponsorship is shielded from UBIT if you adhere to specific rules. The key principle is that the acknowledgment of the sponsor must generally avoid qualitative or comparative descriptions of the sponsor’s business, products, or services.
For context, tax-exempt organizations are sometimes required to pay UBIT on revenue from business activities that are regularly carried on and unrelated to the organization’s tax-exempt purposes. This general rule is subject to numerous modifications and exceptions.
One of the most important of these exceptions is for “qualified sponsorship payments,” as defined in Section 513(i) of the Internal Revenue Code and Section 1.513-4 of the Treasury Regulations. These provisions provide a “safe harbor,” ensuring that sponsorship packages that adhere to the rules are clearly not subject to UBIT. It is important to follow these rules closely when designing your sponsorship packages.
The main requirement of a “qualified sponsorship payment” is that the sponsor cannot receive a “substantial return benefit” in exchange for their sponsorship. Acknowledgment of the sponsor is not counted when analyzing whether the sponsor has received a “substantial return benefit” (with the exception of an acknowledgment that appears in a “periodical” of the organization). This is why sponsor acknowledgments are such an important part of the sponsorship package.
An acknowledgment can include the sponsor’s name, logo, and slogan, so long as the logo or slogan does not contain a qualitative or comparative description of the sponsor’s products or services. Sponsorship can cross the line into advertising when it includes praise or claims about the quality of a sponsor’s products or services.
For example, if your sponsor is a bank, it would generally cross the line into advertising to display a slogan that claims the bank offers “affordable mortgage interest rates” or “the lowest bank fees in town.” However, a logo or slogan that is an established part of the sponsor’s identity is not considered to be a qualitative or comparative description. But beware that this is a relatively narrow exception that is reserved for very well-known and recognized branding.
An acknowledgment can also include value-neutral descriptions (including displays and visual descriptions) of the sponsor’s products or services, a list of the sponsor’s locations, the sponsor’s telephone number, website address, and similar information, as well as reference to the fact that the sponsor is an “exclusive” sponsor.
Planning Tip – It is good to avoid UBIT when possible, but don’t be so anxious of reporting and paying UBIT that your organization misses an opportunity to bring in additional funding. However, be aware that having unrelated business taxable income likely means additional tax returns need to be filed, including the Form 990-T and state corporate tax returns. Most states do not require nonprofits to file a corporate income tax filing unless and until UBIT is owed.
In your case, explain to the sponsor that your organization is subject to tax rules that discourage the use of qualitative and comparative language like the kind that they have proposed for their signage. In the future, this kind of misunderstanding can be avoided by including clear guidelines in your corporate sponsor agreements and reviewing these guidelines with sponsors before finalizing each new sponsor agreement.
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