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Avoiding Tax Pitfalls in Cyberspace

Avoiding Tax Pitfalls in Cyberspace. American Chamber of Commerce Executives DIALogue — ACCE’s Executive Speaker Series Presented by George E. Constantine, III, Esq Venable, LLP Washington, DC. George E. Constantine, III, Esq.

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Avoiding Tax Pitfalls in Cyberspace

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  1. Avoiding Tax Pitfalls in Cyberspace American Chamber of Commerce Executives DIALogue — ACCE’s Executive Speaker Series Presented by George E. Constantine, III, Esq Venable, LLP Washington, DC

  2. George E. Constantine, III, Esq. • Counsel to tax-exempt trade associations, professional societies, chambers of commerce • Former Staff Counsel for the American Society of Association Executives • Concentrates practice on tax, contracts, intellectual property licensing, election law, corporate governance and other issues affecting tax-exempt, nonprofit corporations.

  3. Today’s Program • Who’s visiting your web site? • UBIT basics • Specific Activities • Advertising • Sponsorships • “Virtual” trade shows • Affinity programs • Hyperlinks • Others • Conclusion

  4. Members Prospective members Visitors Prospective visitors But that’s not all… Who’s Visiting Your Web Site?

  5. Who’s Visiting Your Web Site? • Competitors • Disgruntled former employees • Internal Revenue Service agents • State revenue agents

  6. Unrelated Business Income Tax — The Basics • Chambers of commerce are exempt from federal income tax under Section 501(c)(6) of the Internal Revenue Code of 1986. • Chambers of commerce are not exempt from all taxes, only from those taxes that would otherwise apply to income received from activities that are substantially related to their exempt purposes.

  7. Unrelated Business Income Tax — The Basics • A 501(c)(6) organization must meet certain basic tests to qualify for exemption: • Must not be organized for profit • Must be a membership organization and have meaningful membership support. • No “private inurement.”

  8. Unrelated Business Income Tax — The Basics • When will a chamber of commerce be liable for tax on its unrelated business income? • If it receives net income from a trade or business, • that is regularly carried on, and • that is not substantially related to its exempt purposes • Exceptions may apply!

  9. Unrelated Business Income Tax — Exceptions May Apply • Interest income • Royalties • Qualified sponsorship payments • Qualified convention and trade show activities

  10. Revenue-Generating Chamber Internet Activity — Advertising • Income from the sale of advertising is almost always taxable to a chamber of commerce. • Income may be offset by expenses.

  11. Revenue-Generating Chamber Internet Activity — Sponsorship • History — Mobil Cotton Bowl • “New” safe harbor created in the tax code and applied through 2002 regulations. • Income that is in the form of a “qualified sponsorship payment” will not be subject to UBIT. • Income that is not in the form of a qualified sponsorship payment still might not be subject to UBIT.

  12. Revenue-Generating Chamber Internet Activity — Sponsorship • Definition of qualified sponsorship payment • Definition of substantial return benefit • Use or acknowledgment • Advertising • Hyperlinks • Exclusivity arrangements • Fair market value

  13. Revenue-Generating Chamber Internet Activity — “Virtual” Trade Shows • Specific exemption in the tax code • Applies to “qualified convention and trade show activities” of 501(c)(6) organizations (as well as to certain other types of exempt organizations) • Key is whether activity is of the type “traditionally” carried on at convention and trade shows — watch out for calling something a “virtual” trade show • IRS view of “virtual” trade shows

  14. Revenue-Generating Chamber Internet Activity — Affinity Programs and Endorsements • Credit card programs • Insurance programs • Other types of programs where chamber licenses its name and logo in exchange for a portion of revenue received by the licensee • Not merely “member benefit” programs • Taxability will depend on contents of contract, reality of relationship • IRS looks to the amount of activity that a tax-exempt organization is exerting in support of a program • IRS position is “evolving,” thanks to a push from the judicial system

  15. Revenue-Generating Chamber Internet Activity — Affinity Programs and Endorsements • Single agreement, mere license • License agreement with chamber, separate services agreement with chamber’s for-profit subsidiary • License agreement with chamber, separate services agreement with chamber • License and services contained in the same agreement

  16. Revenue-Generating Chamber Internet Activity — Hyperlinks • Recent private letter ruling, corporate sponsorship rules show direction IRS is heading. • Be certain that when hyperlinks are provided in exchange for payment to have written agreement (for tax and general liability reasons). • Exercise oversight over the location of the hyperlink (both on the relevant chamber web page and on the “linked-to” page).

  17. Revenue-Generating Chamber Internet Activity — Others • Amazon.com example • Sales of products and services • Political activities and related foundations

  18. Questions????

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