- What is Unrelated Business Income Tax and how does it related to eCommerce activities?
- Will the nonprofit be subject to Unrelated Business Income Tax?
- How do you setup an eCommerce store for a nonprofit organization?
- What shopping cart platforms are ideal for nonprofits?
- Where do we find products for our nonprofit’s eCommerce store?
- How do we continue to meet Internal Revenue Services (IRS) regulations to maintain our tax exempt status?
- Are there any legal requirements for my state?
- And so many more……
The following slideshow was developed specifically for nonprofit’s in the Memphis metro area. However, the same concepts apply for any nonprofit organization within any state. If you have any questions please fill free to contact me (Jodie).
Presentation for this specifically deals with 501(c)(3) organizations. Other 501(c) organizations may have additional information to research.
e-Commerce has been a black hole topic for many nonprofit organizations. Topics of discussion during session include:
– What prevents nonprofits from engaging in e-Commerce (not fundraising)
– Arguments for and against e-Commerce for nonprofits
– Aligning e-Commerce store with your organization’s mission, goals, and and vision
– Laws governing nonprofits and e-Commerce
– IRS rules and Unrelated Business Income Tax-note seek professional assistance to understand how e-commerce could effect your organization’s tax status!
– Collecting Sales Taxes (know if and when you must collect sales taxes, and remitting to appropriate authorities)
– Various types of e-Commerce merchandise and other considerations
– Customer service
– e-Commerce Platforms, Security, & Payment Processing
– Handling shipping and getting product to consumer
– Coupons & Marketing your nonprofit
– Social media marketplaces
Goals the Nonprofit eCommerce Presentation:
- Increase knowledge about laws about e-Commerce for nonprofits.
- Provide a foundation & tools to build an e-Commerce site
- Provide mechanisms to plan strategic growth with e-Commerce.
Laws, Taxes, & Other Issues
What’s covered in the powerpoint:
- Unrelated Business Income Tax
- Collecting Sales Tax (Tennessee), TN Business Taxes
- How Social Enterprises Effect Tax Exempt Status
- PCI-DSS (Payment Card Industry Data Security Standards
- Business License & Permits (Shelby County, City of Memphis, Other Municipalities), Insurance
- Depending on what you sell, it may have extra taxes (plastic recycling for example)
- Fighting Fraud
- Trademarks, patents and copyrights (especially images, brands, etc)
- Federal Trade Commission and Selling Abroad/Buying Abroad- Export and Import Taxes
- Cannot ship certain items (USPS, UPS, & FED Ex have restrictions on what they will ship.
Unrelated Business Income Tax & Nonprofits
The IRS has many Internal Revenue Bulletins (IRB) and Internal Revenue Rulings (IRR) about unrelated business income tax. I am not a tax attorney, and I strongly suggest you talk with a tax attorney and nonprofit lawyer who are qualified to give advice about UBIT. Please only take the information provided as a guide and not as legal advice. Read the IRS Unrelated Business Income Tax tax guide first. There is also an interactive video about UBIT on the IRS website as well.
But here are some things to know about UBIT:
- If you report $1,000 or more in UBIT, you must file for 990-T.
- 990-T is subject to inspection by the public
- The organization has to pay the estimated tax due (full corporation rate)
- If the business is substantially unrelated to the nonprofit organization’s mission statement,the organization is subject to Unrelated Business Income Tax
- Nonprofits can own other nonprofits and/or for-profit entities. However, depending on the structure of the ownership, the nonprofit could be subjected to UBIT.
Here are a few exceptions to the UBIT rules:
This UBIT exception was pulled directly information is directly from the IRS website.
- Dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are excluded when computing unrelated business income
- Example: if a nonprofit owns a for profit entity and is paid dividends
- Nonprofit publishes a book and transfers right to publisher and receives royalties
- Rental income from venue nonprofit venue space may be excluded from UBIT
- Volunteers: When a substantial amount of work is carried on by volunteers
- Compensation such as meals, drinks, and other fringe benefits could be considered in what is considered substantial.
- Convenience for members, students, employees, or officers: cafeterias,
- Selling donated products: Example-Thrift stores
- Bingo (we won’t talk about bingo!)
The Internal Revenue Code contains a number of modifications, exclusions, and exceptions to unrelated business income. For example, dividends, interest, certain other investment income, royalties, certain rental income, certain income from research activities, and gains or losses from the disposition of property are excluded when computing unrelated business income. In addition, the following activities are specifically excluded from the definition of unrelated trade or business:
- Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
- Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
- Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.
Bingo: Certain bingo games are not unrelated trade or business.
How UBIT could effect Tax Exempt Status:
If you cannot prove public support two years in a row, your nonprofit could be reclassified from a public charity to a private foundation. The IRS public support rules that at least 33.333% of revenues must come from public support to prevent being reclassified from a public charity to a private foundation.
You could lose your tax exempt status if cannot meet the public contributions 2 years in a row.
Seek additional guidance from a nonprofit or tax attorney or/and Certified Public Account that specializes in nonprofits to understand UBIT. Do not take the information contained about Unrelated Business Income Tax within presentation as final.
Internal Revenue Services definition of Unrelated Business Income Tax is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. IRS Guide 598 gives further examples of UBIT and non-UBIT.
Complying with State & Local Jurisdiction Regulations/Laws
Beyond meeting the IRS rules, you must also comply with your state and local laws and regulations. Within the slideshow I go over Memphis, Shelby County, Tennessee regulations. However, the information could be used to formulate an understanding for your own local laws. Please not the issues on property taxes, sales tax collection, and any environmental taxes imposed. Depending on what you sell (food items), you may also have additional health department rules to comply with.
But here are a few examples of information with the eCommerce presentation:
- Tennessee Sales Taxes
- Mississippi Sales Tax
- Other States selling over $1 million per year -multi-state sales tax certificate. Must collect sales tax in any state your organization has representation
PCI-DSS Compliance: What Nonprofits Need to Know!
If your nonprofit wants to have have an eCommerce store, there is one important thing you must know: Payment Card Industry Data Security Standards (PCI-DSS compliance). Yes, having an eCommerce store adds a lot of new regulations. But here’s how to reduce your burden with PCI-DSS
- How nonprofits can reduce PCI-DSS burden!
- Don’t store credit card data.
- Let your payment processor & gateway, shopping cart handle PCI-DSS.
- Get a shopping cart that is PCI-DSS compliant. If the shopping cart is not PCI-DSS compliant and does not have methods the get the platform into compliance, do not use it!
- Periodically scan your website for malware (viruses, trojans, others)
- Secure your website with an SSL certificate and make all transactions use https:// (whole website should really use https)
- Check your databases for malicious information.
- Update your computer’s software.
- Update shopping cart from one secure computer
- Minimize who has access to sensitive information (Access control levels).
- Suspect a data breach? What’s the organization’s liability?
Best Practices for Maintaining PCI-DSS compliance is a 51 page document. I suggest you read it to understand what your burden is with PCI-DSS compliance. If you plan to collect donations, PCI-DSS rules apply too. Best Practices for Securing e-Commerce should be read to understand the different methods of implementing e-Commerce and issues with securing each method. If you do plan to store credit card data in the future, servers must undergo extensive penetration testing, which will get expensive. All merchants that store, process or transmit cardholder data must be PCI compliant. Each merchant that is categorized as a Level 1, Level 2 or Level 3 merchant is required to report its compliance status directly to its acquiring bank.Here are a few PCI Common Setups. Get a feel for how you think you want to manage your eCommerce store.
Using Trademark & Copyrighted Assets
Simply put, if you want to use trademarked or copyright assets, get permission from the brand in writing. Assests include images, trademarks, and so much more. Don’t get caught in a legal lawsuit over trademark infringement. Take your own photos of products you sell. The photos are much more personable and you have the ability to do what you want with them.
But here are a few key points within the slides:
- Other financial and legal liabilities exist if you sell products that have a patents, trademarks, or copyrights
- Get written permission to use brand names on your website
- Product images are not excluded from copyrights -get permission from your vendor or take use your own photos
- Must have a brand license agreement – don’t resale items which you have no license -Disney, Marvel, Colgate,etc
- The organization is liable for any infringement lawsuits
FTC, Selling Abroad, Importing Goods
Your nonprofit is responsible for anything (including promises) written on it’s website. One law you need to be familiar with is “Truth in Advertising”. Any product you sell should have a clear and detailed description. I won’t go into this in detail, but I will give an example.
Years ago, I sold clothing that the manufacture produced as “organic clothing”. The website I managed had the item as a “bamboo organic material”. It was later ruled by the courts that after the material underwent a “chemical bath” the fabric was no longer organic, but a rayon. I had to change all of the advertising (website copy, print ad copy, and more) to remove the “bamboo organic material”. Truth in adverting ruled as the item was no longer organic. See the problem?
If you cannot ship an item within 30 days of the order date, do yourself a favor; inform the customer the product cannot ship within the allotted time frame. If you have an alternate, ask the customer if they would be okay with an alternate.
It’s up to you to know what goods and services can be imported and exported to what country. If you don’t know research it. Certain foods (vegetable, food products, and clothing cannot be imported or exported to US.
Shipping: Prohibited from shipping certain goods:
Each carrier has a list of prohibited items that it will not ship. The best thing I can do is provide the links to each carrier:
eCommerce & Fraud
Fraud exist for every business, including within eCommerce. Strategically planning an eCommerce social enterprise for you nonprofit requires understanding all of the risk associated with the venture. The board of directors, staff, and management should sit down prior to undertaking an eCommerce venture. A written document dealing with fraud from the staff level to the payment processing is a must. I don’t want to go too much into this topic, but do some research and to find out how to mitigate the risk with eCommerce.
Product Development For Nonprofit Organizations
You will need a good understanding of financial accounting when managing an eCommerce store. If your nonprofit is subject to UBIT, then you will need to have your cost outlined to compile the 990-T. The 990-T will ask for specific information. Make sure your board and accounting team track the numbers. It will make the 990-T easier.
Your product manager will need to know the current and future Cost of inventory (product cost +shipping from vendor + barbs, pricing tags, and labor to get product ready for market +any additional cost to make the product sell ready (dry cleaning, app production cost)). Cost of inventory could also include warehousing and insurance expenses associated with storing unsold merchandise.
Depending on how and where you store merchandise, it’s probably a good idea to have Liability and property insurance on the inventory (as your commercial insurance carrier about these added additions to your policy).
Pricing strategies are computed based on the cost of inventory and other factors. In general most product are marked up 2-4 times the product cost. But note, consumers determine the actually value of your product. You may offer discounts, coupons, or other initiatives that decrease profit margins significantly. You want to price the product to sell at a reasonable price. You can look at related organizations and businesses to find products that are similar to your products to determine fair market value.
Profit margin is calculated by dividing the net profits by net sales, or by dividing the net income by revenue realized over a given time period. Profit margins should be calculated at least monthly. You can break profit margins down by categories or individual products. Breaking these numbers down will give you a broader insight about best selling and worst selling products. You can then make a decision as to eliminate a product from your product mix/inventory.
You will also need to know a product’s Net profit (associated expenses, including costs towards raw material, labor, operations, rentals, interest payments and taxes) minus total revenue generated). Ask an account about what’s included. There are many other accounting cost factors to consider. I just have given you a few.
Any product your nonprofit sell has to have a pricing strategy. The current market (consumers) dictate pricing. In a pricing strategy consider what profit margins the organization we need to achieve for the e-commerce venture to be successful. Also consider the profit margins. Profit margins change based on what is included with the sale of the product. This is not a powerpoint on accounting for eCommerce, so I cannot go into details about account principles.
How Nonprofits Can Source Products to Sell
Certain products have regulations that you must adhere to. An example is children’s night clothing. An example of a social enterprise, that probably had to adhere to certain regulations: Westin Hotels Project Rise:Threadfoward . The catch 22 is that if you sell children’s pajamas in the United States of America, then the pajamas are required to meet certain regulations and pass flame retardant testing and provide certification. Just think about the regulations the organization must meet to sell certain products.
- Types of products tangible
- Print on Demand
- Product development crowdsourcing
Unique Idea: Assist visually impaired comic fans can access the comic book experience through new website Comics Empower.
Intangible & Intangible (Digital Products Included):
- books (print self publishing)
- workbooks (downloadable and print)
- software as a service
- liquidation stock (source the service)
- clearance stock (via donations from companies)
- wholesale stock (bulk purchase -AliExpress)
- t-shirts (in house, print on demand)
- drop shipping (doba,orberlo)
- coaching (services, intangible)
- email or online courses
- digital bootcamps
- online community
- group coaching
- subscription service
- digital templates
- membership list
- video courses
These are just a few examples. But, look at how your nonprofit can develop value add products to increase it’s revenue stream.
Order Fulfillment & Returns- Getting the Product to the Customer + Handling Returns
Set Up Shipping Accounts with the following (it’s free):
-Consider whether you are exporting or importing products- you need an shipper who can clear your imported goods, for example Fed Ex
-Do you need a freight carrier for oversized items? UPS or Fed Ex
-Do you need reliable consistent rates? United States Postal Service
– What shipping promises do we make to customers? Within 7 days of order? Overnight? You need a reliable shipper!
Packing materials cost money
-boxes, bubble wrap, labels, etc
-Do you provide gift wrap services and how much do you charge?
-Personalization & customization (specialized machine required for engraving, sewing, and embossing)
-What’s your return policy and how effective is it with payment platforms such as Amazon or PayPal?
– Who handles returns and how should those returns be processed? How do you refund payments?
-Are fulfillment services a viable option to reduce burden with storing and shipping products, what are the additional cost involved with a fulfillment contract?
– Set up shipping accounts! It’s not difficult.
-Who should pay the shipping cost and when do you offer free shipping? How does free shipping affect profit margins?
If you do not want to deal with the hassle of shipping products to customers, you can use a fulfillment service like Amazon. There are a ton of others that exist. Just do some research and you could probably find a few.
Handle Customers With Care
If you handle customers with care, they may convert from a one time shopper to a long term donor and purchaser. Have ways for customers to contact you about the product or service your provided. Chat, email, phone, using a call center, or SMS are great ways to handle customer service. Don’t neglect your customers after the purchase!!! Your organizations long term growth depends on relationship building.
Choosing the Right Shopping Cart-Order Management
Order management should be handled within the e-Commerce platform. Some hints on choosing the right shopping cart:
- Scalable shopping cart should be able to intergrate other platforms easily. You should be able to add new products without limitations. Don’t pay dual payment processing fees (one to the shopping cart and the other to the payment processor). When you start your research, some shopping carts charge their own payment processing fee plus the monthly hosting fees. These fees could be in addition to your own payment card processing fees.
- Completely integrated order management system (should be able to handle cart, tax calculation by state, payment processing, and almost real time shipping quotes using shipper APIs)
- Easily accessible exportation of data (just in case you want to move your e-Commerce solution and not have to do double work)
- The shopping cart should be flexible.
This is not an exhaustive list of PCI-DSS compliant shopping carts. Nor do I recommend on over the other. Do a cost & feature comparison when choosing a shopping cart.
- 3-D cart
- Shopify (offers nonprofit discount)
- Core Commerce
- WooCommerce (WordPress sites-plugin)
- Magento (paid & community edition)
- osCommerce (open source)
- Godaddy Online Store
For a your nonprofit’s eCommerce store, you will also need:
Merchant Account -financial institution or bank account used by a merchant specifically for the purpose of collecting proceeds consumer bank account or credit card payment transactions.
- It’s not your organization’s bank account
- As your bank whether it offers a merchant account
- Get several quotes, as prices vary
Payment Processor/Gateway here’s a few:
- Paypal (can act as a payment gateway and merchant account)
- Amazon Pay
- Brain Tree (Paypal Company)
- Apple Pay
- Google Pay
- Intuit Quickbooks
- Monetra /TranSafe
- PSF Web Inc
A payment gateway is the infrastructure that enables merchants to accept credit cards and electronic check payments from websites, terminals or mobile devices. Payment gateways also provide merchants with transaction management, reporting and billing services.e-Commerce is a Card Not Present (CNP). You must have a merchant account to receive payments electronically (i.e., online payments). Payment processor may have limits on country payment transactions can process (China, Europe, Russia,etc). Some payment processors can’t accept all credit cards (American Express). Choose based on cards accepted:Visa • MasterCard • Discover • American Express • JCB • PayPal • Visa Checkout • Apple Pay • E-check.
Do you plan to have retail store and accept payments in person? You need a point of sale to process payments. The payment processor should be able to serve multiple channels/roles in processing payments
Also note, that on a yearly basis the payment gateway will supply a 1099-K form. This will be a total of the payments processed through the gateway. This information is also used for IRS purposes. So make sure you keep this document with other accounting information.
This was not an exhaustive research about eCommerce for nonprofits. Outlined were the basic points you need to understand about eCommerce. Consider a strategic planning session with organization leaders to determine if eCommece is a viable revenue stream for your nonprofit organization. It takes time, planning, and a funding to dedicated to eCommerce.
Take time to develop products that your nonprofit’s stakeholders will consider valuable. I hope you read this information and took notes. If you need assistance with any part of your planning process, please feel free to send me an email.
More reading resources:
Public disclosure info https://www.irs.gov/pub/irs-tege/Entities%20Must%20Meet%20Inspection%20and%20Disclosure%20Requirements.pdf