That’s the Ticket! “Suggested Donations,” Admission Fees, and the Real Price of Tax-Exempt Status

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Everyone loves a great deal.  Except, perhaps, the New York Metropolitan Museum of Art these days, and those who aren’t as creative as the Met.  Last week, the Met found itself in hot water for sponsoring a Groupon discount admission coupon, for $7 off the regular $25 “recommended donation” for adults.  Why would anyone need a coupon, if the admission is only suggested, and a tax-deductible “donation” to boot? 

As a tax-exempt cultural institution, the Met faces significant restrictions under state tax exemption law from charging any admission fees (and its City lease for free space prohibits fees on certain days of the week).  This constraint is consistent with many state property tax exemption laws, such as in Illinois, that condition a charity’s exemption qualification on making its benefits available to all “without undue obstacle.” By barring the door completely unless payment is tendered, the charity’s actions thus would be inconsistent with its privileged tax-exempt status (i.e., more like a commercial business).  The result could be loss of the charity’s tax exemption.

Earlier this year, a few disgruntled museumgoers sued the Met and expressed additional objections to the suggested donation approach. Their argument?  Such practice defrauds consumers by falsely presenting the “suggested donation” as an actual fee.

So when is a “suggested donation” really a fee, jeopardizing a charity’s tax-exempt status?   Does this admission practice additionally constitute illegal fraud?

For a variety of reasons, the “suggested donation” approach is not uncommon and can actually work quite effectively – and legally – for many nonprofits that enjoy state exemption privileges.  Careful attention, though, is well warranted to make sure that the nonprofit’s admissions practices neither jeopardize its state tax exemptions nor result in actionable legal fraud upon its beneficiaries.

The nonprofit may use a suggested donation approach in order to draw a broad range of participants, rejecting none for financial reasons and yet raising money from those who can pay and would like to do so.  That approach is fairly understandable.  Think of a community dinner or musical performance, where the proverbial hat is passed so that all can enjoy and the expenses can get covered.  With enough generous folks in the mix, things generally work out well.  No fees, no fraud.  The charity sincerely wants many people to attend and enough people to cover the expenses.

With that approach, a charitable organization should be careful to exercise some common-sense truth in advertising.  If the suggested donation is truly “suggested,” then do not engage in any misleading communications – in print, online, or verbally.  If money is collected, make sure that people can easily see and understand that they do not necessarily have to pay.  Do not make it a game.

Another approach that has worked well, at least in Illinois, is to provide for fee waivers, fee reductions, and other opportunities to help people gain access “without undue obstacle.”  Give tickets away, sponsor a free night, or have a scholarship fund that is actually used.  These approaches are all great opportunities to also build significant good will, both with participants and donors.

Rather than using tricky admission practices, as some may say the Met did, why not leverage a charitable organization’s valuable resources into expanded availability, increased community influence and good will, and better legal protection of its exempt status?   Now that’s really creative!