The Internal Revenue Service (IRS) has not caught up to many of the issues raised by Web advertising and merchandising. Yet.
As Jeffrey S. Tenenbaum and Lisa M. Hix of Venable LLP point out, it is likely that the IRS will eventually catch up, and it has already said that its position will be consistent with its policies on off-line revenue.
That could have serious implications for nonprofits, especially where unrelated business income (UBI) is involved. They offered several other tips about IRS scrutiny of the Web, especially as it relates to UBI and advertising.
- The IRS defines advertising in a sponsorship context as including messages containing qualitative or comparative language, indications of value, endorsements or inducements to purchase.
- Internet advertising is taxable, even when used to generate donations to an exempt organization.Internet listing of member-benefit programs is not taxable.
- Periodical advertising is almost certainly taxable. The IRS does provide a favorable method for allocating expenses against advertising income.
- “Qualified sponsorship payments” are exempted from the definition of UBI. Payments received for advertising are characterized as UBI, however.
- Hyperlinks that lead to a website that features the nonprofit’s endorsement of the sponsor’s products is more likely to be considered advertising. Be certain that when hyperlinks are provided in exchange for payment to have a written agreement, for tax and general liability reasons. Exercise oversight of the location of the hyperlink, both on the relevant tax-exempt Web page and the linked-to page.