Register Your Nonprofit Before Fundraising Out of State

Thirty-nine states and the District of Columbia require nonprofits that are not exempt to register with a state agency before soliciting contributions from state residents. Basically, the rule is that any nonprofit that makes, or intends to make, a charitable solicitation within a state that requires registration must register with that state. "Charitable solicitation" is defined broadly to include any request for a contribution by a nonprofit or someone working on its behalf in which:

  • an appeal is made for a charitable purpose
  • the name of a charitable organization is used, or
  • a statement is made that implies that all or part of the contribution will be applied to a charitable purpose or donated to a charitable organization.

The registration requirement is triggered by asking for donations--it is not necessary that your nonprofit actually receive a donation. That means you must register in any state before you actually solicit there (except for California where you have 30 days from the time you receive your first contribution to register). The only exception is for nonprofits that fall within an exemption from registration.

In most cases, it will be pretty obvious when your nonprofit is making a charitable solicitation--you'll be asking for money and a charity or charitable purpose will somehow be involved. For example, a nonprofit would have to register if it had a booth at a shopping center manned by volunteers asking for donations to help Haitian refugees. But registration would not be required if the volunteers were merely offering to register people to vote and not asking for contributions.

IRS Scrutiny of Fundraising Rules

Up until fairly recently, the Internal Revenue Service (the “IRS”) essentially had no involvement whatsoever with fundraising registration by nonprofits. Solicitation laws are state laws, enforced by state agencies, and there was no crossover or hook for the IRS to get involved in these state matters. Things changed when the IRS revised the annual information report that nonprofits are required to file each year. In that report—the Form 990 or Form 990-EZ—the IRS included items that now require nonprofits to answer questions about their fundraising activities and registrations. It is still up to the states to enforce their charitable solicitation laws but the IRS has become indirectly involved by asking questions about these matters on the IRS annual report. Now your nonprofit could suffer unpleasant consequences either by not registering properly with a state or by failing to provide accurate information about its registrations with the IRS.

Exemptions From Registration Requirements

All states exempt certain types of nonprofits from their registration requirements. In some cases, this is because they are already heavily regulated by other state agencies--nonprofit hospitals and educational institutions for example. In the case of religious institutions, states don't want to interfere with the free exercise of religion. In the case of very small nonprofits, it's because they are relatively harmless and it's not worth the trouble.

If your nonprofit is fortunate enough to fall into one of the exempt categories, your registration burden will be greatly lessened or even eliminated. Unfortunately, determining whether your nonprofit is exempt can be difficult. The list of exempt nonprofits varies from state to state. Thus, a nonprofit can be exempt in one state but not another. For example, a nonprofit that receives contributions under $25,000 per year is exempt from registering in New York, but not in California.

This means that you will have to look at the laws of each state to see if an exemption applies to your nonprofit. Moreover, the exempt categories are often defined differently in different states. For example, in most states, only accredited educational institutions are exempt. However, in Alabama, for example, there is no requirement that the school be officially accredited to be exempt.

In addition, in 12 states, exemptions are not automatic--a nonprofit must have its exemption confirmed by the state charity office. This involves filing an application and providing proof that your nonprofit qualifies for the exemption. This requirement is often not strictly enforced, but it is still the law. Some states also require nonprofits that are exempt to pay a fee.

If you're not sure whether your nonprofit qualifies for an exemption in a particular state, you may ask the state charity agency to confirm that your organization is exempt. You'll need to submit a letter explaining why you think your nonprofit is exempt and proof that you qualify for the exemption. For example, if your nonprofit is a religious corporation, you should submit a copy of your articles of incorporation. If you're exempt because you are a small nonprofit, provide a copy of recent financial statements.

Excerpted from Nonprofit Fundraising Registration, by Stephen Fishman (Nolo).  

 

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