Exempt organizations are subject to a tax on trade and business regularly carried on that is not substantially related to furthering the organization’s exempt purposes. This tax is referred to as “UBIT,” or unrelated business income tax. UBIT exists to prevent unfair competition between tax-exempt organizations and taxable businesses.
There are several exceptions to UBIT, including certain income generated by volunteer labor, bingo games, corporate sponsorships, and selling donated merchandise. In this blog, we will explore the exception for trade show and convention activity.
Which Organizations Qualify for the Exception?
First, it is important to note that this exception does not apply to every type of tax-exempt organization. Only 501(c)(3), (4), (5), and (6) organizations qualify for the exception. Further, for the exception to apply, the 501(c)(3), (4), (5), or (6) must regularly conduct as part of its exempt purposes a trade show or convention which stimulates interest in, and demand for, the products of a particular industry or which educates persons in attendance regarding new developments or products and services related to that industry.
Which Activities Qualify for the Exception?
Activities traditionally conducted at conventions, annual meetings, or trade shows qualify for the exception. Typically, the exception is broadly construed in that almost all activities, including those done for the purpose of attracting persons of a particular industry and/or members of the general public to the show or convention, qualify.
Common examples include:
- Show ticket sales
- Leasing booth space to exhibitors
- Onsite concessions
- Onsite merchandise sales by the hosting organization
- Commissions from area hospitality providers
Does Online Activity Qualify?
Certain online activities conducted by 501(c)(6) organizations will be considered qualified convention and trade show activity if conducted on a special supplementary section of the organization’s website in conjunction with a trade show or convention held by that organization. The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show or convention.
For example, the section of the website might make available the same information available at the trade show or convention during the period in which the trade show or convention is being held.
Conversely, online activities that are not conducted in conjunction with qualified convention and trade show activity and that do not augment and enhance the trade show or convention are not within the scope of the exception.
Conclusion
The trade show or convention activity exception to UBIT offers tax-exempt organizations a valuable opportunity to generate income without incurring additional tax liabilities. However, it is important to be aware of the challenges and ensure compliance with IRS and other guidelines to avoid potential pitfalls. Tax-exempt organizations should consult with tax professionals or legal advisors to navigate the complexities of UBIT and the trade show or convention activity exception. With careful planning and execution, these organizations can maximize their impact while maintaining their tax-exempt status.
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Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.