Charitable Solicitation Registration: What Nonprofits Need to Know
FRANK DeVITO
Senior Counsel and Director of Content, Napa Legal
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Most states regulate nonprofits’ fundraising activities through charitable solicitation registration requirements. Basically, that means in order to fundraise in a state, you must fill out an application and be approved to solicit or receive funds. Some states have exemptions to these requirements — more on that in just a moment.
First, though, it’s important to understand that failing to comply with state law can seriously impact your nonprofit, both in terms of its reputation and its legal liability. If you fall behind deadlines, your tax-exempt status can be revoked (without notice) or your organization can be dissolved.
In a recent tax court case, a California nonprofit called XC Foundation lost its 501(c)(3) status. The organization neglected a state compliance filing which resulted in loss of many of its powers, including the power to stand as a party in a lawsuit. Thus, in court, it discovered it couldn’t challenge the IRS’ decision because it no longer legally existed.
In addition to avoiding legal consequences, following state and federal law is important for the culture of your nonprofit. Major donors and grant foundations often look closely at an organization’s adherence to the law before making gifts. Sadly, many have lost grants when a grant-making organization discovered their noncompliance. So while sometimes quite tedious, maintaining a spirituality of compliance is important to foster organizational excellence and donor trust.
Note: If your organization employs a professional fundraiser (a non-employee, outside fundraiser who often takes a percentage of funds raised), there will usually be additional legal requirements and registrations that are beyond the scope of this article. You may want to consult an attorney and make sure all legal requirements are being satisfied as this is a strict area of law.
Where might my organization need to register?
While there are exemptions available for certain organizations in certain states, the default is that all nonprofits that solicit or receive donations are subject to charitable solicitation registration requirements in most states. Thus, whether you’re just starting off or have served your community for decades, now is a great time to evaluate your status.
You should start by making a list of states where you may need to consider registration. Begin with the state where your organization is incorporated, then include any states where your organization has an office, employees, or some kind of physical presence. Next, add all the states where your organization receives contributions or has other contacts (such as states where you send direct mail or where you hold events or programs). That composite list is the starting point for your analysis.
Do all states require registration?
If a state is on your list, it does not necessarily mean you have to register there. Currently, there are 12 states that have no general charitable solicitation registration requirements.
Additionally, several states have an automatic exemption available for certain nonprofit organizations, which is particularly relevant for organizations organized and operated for religious purposes. Note that you must read and interpret these statutes carefully (and possibly consult with a professional), because they are not always clear. For example, some states have exemptions available for “bona fide religious institutions.” That term, however, may be defined narrowly as referring only to churches or places of worship.
If I have states on the list that do not have automatic exemptions, what do I do next?
Some states that have exemptions for religious organizations (or for certain subsets of religious organizations, such as religious schools) will still require you to fill out a one-time application or exemption. Depending on the state, this may be as simple as sending a brief cover letter to a state agency accompanied by your organization’s IRS determination letter. In other states, the exemption request may be more complex.
What if there are no exemptions available?
Some states have very few exemptions to their charitable solicitation registration laws — for example, only exempting organizations that do not file IRS Form 990 (essentially churches, integrated auxiliaries of a church, and religious orders). In those states, you will likely need to register if you solicit or receive donations there.
Keep in mind that if your organization registers in a state, there will always be some type of periodic reporting or renewal requirement.
How do I know whether my donor contact in a state is sufficient to require registration?
First, while these laws are called charitable solicitation registration laws, many times you will be subject to the law even if you don’t actively solicit donors in that state. Donations received from residents often suffice to require registration.
Some states have adopted rules about how much donor contact is enough to require registration, especially for situations where the only contact with a donor is through a “Donate Now” button on the organization’s website. While some organizations may interpret a small, occasional donation from a state as insufficient to warrant registration, some states are getting stricter about enforcing those laws, even against smaller nonprofits. Additionally, the penalties for noncompliance can be severe. Erring on the side of caution (i.e., registering your organization) — is likely the prudent way to approach this issue.
So what should my organization do?
Some organizations prefer to simply hire an attorney or another professional organization to analyze this issue and file all necessary charitable solicitation registration and exemption forms. While this may be the best way forward, especially for larger or more complex organizations with substantial compliance obligations, it can also be quite costly.
A more economical way forward is to begin with Napa Legal’s resources. The subscription fee is modest (and True Charity members get a discount), and our organization provides important resources that will help you understand this issue more fully, analyze your organization’s needs and potential requirements, and understand what might come next.
For a comprehensive approach to charitable solicitation registration, Napa Legal’s toolkit is the place to start.
And for state-by-state information on charitable solicitation registration and many other laws that affect faith-based nonprofits, check out Napa Legal’s Multi-State Compliance Matrix.
The information contained in this article is for educational purposes only and should not be construed as legal advice.
To continue learning with True Charity Resource Partner Napa Legal, join us on May 28 for a clear overview of recent national and state nonprofit law and policy updates from the past year.
FROM THE TRUE CHARITY TEAM: We appreciate the perspective of our knowledgeable guest contributors. However, their opinions are their own, and do not necessarily represent positions of True Charity in all respects.
