Cause-related marketing has matured and become all but a must for many companies. The novel approach pioneered by organizations like Marriott and Famous Amos Cookies in the 1970s – the former teamed up with and supported the March of Dimes, and the latter Literacy Volunteers of America – now powers identity and marketing initiatives in industry after industry.
Think about TOMS’ effort to help one person in need with every pair of shoes sold, and eyeglass maker Warby Parker’s commitment to get eye care and glasses to deserving people in developing countries. Both initiatives involve multiple partnerships with service organizations.
While cause-related marketing programs have become highly sophisticated in terms of marketing, business and public-benefit effectiveness, it’s worth pondering whether they are structured with tax implications in mind. From a tax and legal standpoint, are the company and its charitable and social impact partners well served?
That is where legal and accounting departments come in. Stated another way, they should probably take a seat at the marketing and planning table sooner than they usually do.
Too often, the keeper of the brand – the marketing department – forges ahead with a strategic partnership and doesn’t consult legal or accounting until later on in the process. That practice and timing can increase the likelihood that potential tax benefits aren’t realized and that some potentially unnecessary tax liabilities are incurred – for both the company and the charitable or social impact partner.
Indeed, there are a number of factors that make it advantageous for legal and accounting departments to insert themselves into cause-related marketing planning at an early stage. A key one is Unrelated Business Taxable Income (UBTI).
Take the licensing of a charity’s logo. A section of the tax code – 512(b)(2) – allows charitable organizations to license their logo in a royalty arrangement. If structured correctly, the royalty is treated as “passive income” by the charity and would not be taxable. But, if the charity is directly involved in the promotion and marketing of the cause-related marketing venture, then the organization might not be eligible for the favorable royalty treatment offered by the code.
Product promotions combined with a donation element are another common cause-related marketing tactic. For example, if a hearing aid company advertises that $500 from each sale will be given to a charity that serves populations with hearing impairments, there are several ways to structure the arrangement – some more beneficial from a tax perspective than others. If the hearing aid costs $6,000 and the hearing aid company gives $500 to the charity each time it sells one, then the company is making the contribution, not the customer. In this case, the company is entitled to count the $500 as a charitable contribution. The customer is not entitled to a tax benefit; he or she simply bought a $6,000 hearing aid.
On the other hand, if the hearing aid was $5,500 and the customer was told that if he or she paid $6,000, then $500 would be passed on to a charity, the charity would record the amount as a contribution from the customer, and he or she would be able to take the $500 contribution for tax purposes if properly receipted. In this case, the company would not receive a direct tax benefit.
There are a range of other situations in which charitable organizations and companies embarking on cause-related marketing partnerships need to be sensitive to UBIT. They often revolve around the level of involvement and type of marketing effort. Making the optimal call on how to proceed is probably outside the realm of the marketing department; the timing and degree of involvement of legal and accounting teams are key and should be established prior to starting the campaign.
Other variables that make it useful for legal and accounting to be in the picture early include whether the products that are part of the cause-related marketing effort are sold directly or through a procurement house; issues with various states when it comes to collecting sales tax; and other filings with states related to the charity’s pursuit of a line of business separate from the tax exempt one.
The bottom line is that cause-related marketing should be approached as a collaborative effort among legal teams, accounting teams, marketing teams and even the general management of the charity and the company. The time spent up front to fine-tune arrangements can make all the difference when it comes to the financial success of the effort.
Published September 11, 2015.