From the legal perspective, nonprofit fundraising typically requires an initial “charitable solicitation registration” (CSR) form filed with the state Attorney General’s office or similar state agency, along with subsequent years’ financial reports, for each state in which a nonprofit is active. Leaders of nonprofits operating in multiple states may ask: What, more registrations?! Aren’t our IRS tax-exemption filings and secretary of state annual reports enough? Sorry – the answer is no (or at least, probably not).
Each state in which a nonprofit engages in fundraising has its own rules for mandatory CSRs. Most states require an initial CSR, but with varied threshold financial and charitable activity standards. Many states provide for religious exemptions from CSRs. And some states do not require any CSRs. Question about whether a nonprofit must file CSRs in multiple states thus may depend on both specific state law and the nonprofit’s activities, as explained below.
CSRs are generally intended as consumer protection measures for the general public, with the state Attorney General (AG) offices acting to protect donors against unscrupulous fundraisers. Given this underlying rationale, such government regulators generally have very broad powers over nonprofit organizations soliciting their residents. State AG involvement can include extensive questioning of a nonprofit’s fundraising and its governance, more drastic measures, and even appointment of a receiver in egregious cases.
In actual practice, state AG offices differ in manner and aggressiveness of legal enforcement. It is generally rare for AG offices to investigate nonprofit organizations’ practices. On the other hand, it is quite common for AG offices to insist on correctly filed CSRs, properly paid registration fees, and timely filed annual reports. Failure to comply with CSR requirements can thus result in substantial administrative fines and other penalties.
Threshold Constitutional Aspects, Statutory Exclusions and Exemptions
CSRs raise significant constitutional issues related to sufficient contacts, or a “nexus,” between a nonprofit, its donors, and each state involved. These issues continue to evolve, particularly with changing technology. While states vary in their legal interpretation of this constitutional dimension, a state cannot require a nonprofit to file CSRs simply because it receives and accepts a donation from a resident of another state - without any solicitation from the nonprofit itself. There must be more, as explained below in terms of relevant questions for triggering CSR requirements in specific states.
Notably, no CSRs whatsoever are required in a handful of states (e.g., Delaware, Indiana, Iowa, Nebraska, and Texas). In other states, CSR exemptions are available for religious institutions, schools, and membership organizations soliciting only from their members. Some of these exemptions are automatic, while others may require an application to the state regulator to confirm the exemption. Some states also provide exemptions for certain small organizations, typically based on an annual donations threshold somewhere between $5,000 and $25,000. It can be unclear, however, whether this financial threshold refers to nationwide donations or donations from residents of that state.
Where to File?
Subject to specifically available state exclusions and exemptions, the general rule for CSRs is that a nonprofit will need to register if it will ask for donations to use for a “charitable” purpose. The use of “charitable” is very broad here, encompassing many activities that organizations may see more as educational, religious, or social. The following questions should help guide a reasoned evaluation for CSR decisions.
- How does the organization solicit donations? If the organization’s only method of asking for donations is to post a “donate” button on its website with no further action to suggest that the public donate, this may not be enough to require registration, even if the organization receives substantial donations. On the other hand, if the organization hires a company to solicit donations on its behalf in a state (commonly called a “professional fundraiser”), either in person or through direct mail programs, the organization will most likely need to register in that state, even if the donations are very minimal. (Professional fundraisers are highly regulated by states in order to protect consumers from fraud.) Other methods of fundraising generally fall somewhere between these two extremes.
- From whom does the organization solicit? As indicated above, many states exempt organizations from registration requirements if they only solicit members of the organization. Additionally, even without an explicit exemption, registration may not be necessary if the only donations from a state resident are from a board member or officer of the organization. State regulations often turn on whether the organization is soliciting the “general public,” and this definition can vary from state to state.
- How much does the organization receive from residents of the state? Organizations with funds coming from several states should track donations on a state-by-state basis in order to help assess whether their fundraising activities would require registration. The state-by-state records should include such information as the monetary value of the donations and how many different donors contributed. It could also include the method of soliciting specific gifts (e.g., a one-time online donation or a recurring gift from someone responding to a mailing), which would be particularly helpful if the organization regularly uses multiple methods of soliciting donations.
- Does the organization have other activities in the state? While a key factor in determining where to register is the level of fundraising activity in a state, other activities can also make a difference. For example, a one-time fundraiser in a state may not automatically make registration necessary on its own, but it is much more likely to trigger the need to register if the organization also has ongoing charitable programs in the state.
Next Steps: Practical CSR Considerations
The cost of CSRs is not insubstantial, in terms of both government fees and accompanying legal expense. CSRs and their subsequent annual filings can involve a significant administrative burden too, involving tracking of deadlines, completion of forms, payment of annual filing fees, and sometimes an audit of the organization’s financial statements. Note too that some states require that the organization retain a registered agent in the state who will accept service of any legal process on behalf of the organization (i.e., any action in court either against the organization or otherwise related to the organization, such as a subpoena of records). Others require that the organization first obtain authority to “do business” in the state.
Most CSR annual filings require inclusion of the organization’s IRS Form 990 annual information return. So if the organization has filed only a Form 990-N (the “e-postcard”), extra reporting must be completed. In addition, a new (and troubling trend) is to require organizations to submit lists of significant donors, such as in California. If the organization files its IRS Form 990 under an extended deadline, further work also may be necessary obtain corresponding state filing extensions.
Given all of these considerations, all nonprofits – even organizations engaging in nationwide fundraising - should carefully consider each state in which it may need to file CSRs. Ongoing evaluation may also be extremely important for potential de-registrations and other adjustments, based on actual charitable fundraising activity. Legal counsel can be extremely valuable for these critical preliminary and periodic evaluation steps.
Also Watch Out for Charitable Trust Registration Requirements for Holding Assets
Some states such as Illinois, New York and Michigan impose a CSR-type requirement if a nonprofit simply holds any assets to be used for charitable purposes. The underlying rationale is that the organization is considered to be holding those assets in trust for the benefit of the public. Thus the state regulator has similar power to oversee the organization’s handling of these “charitable trust” funds. Such charitable trust statutes may apply in any state where the organization is incorporated or otherwise organized, has its principal office, or regularly conducts programs. Typically, charitable trust registration is completed through the same process and using the same forms as required for CSRs.
Organizations with exemptions under charitable solicitation acts should be particularly careful here – charitable trust acts generally have fewer and stricter exemptions than charitable solicitation statutes. For example, a membership organization that solicits contributions only from members may be exempt from registration under a solicitation statute but may still have to register as a charitable trust holding those contributions for use in charitable programs.