State Registration for Nonprofits
A CPA who has just secured tax-exempt status for a nonprofit organization from the IRS should recognize that their initial compliance work might not yet be done. The vast majority of states require nonprofits to register with the applicable state agency if they are soliciting contributions in that state, or if they plan to do so. This includes online solicitation, such as websites allowing for electronic donations via a “Donate Now” button. Furthermore, many states require soliciting nonprofits to provide specific disclosures to donors, others have additional rules regarding the use of professional fundraisers and arrangements with so-called “commercial co-venturers” and others still require out-of-state nonprofits to file for permission to conduct business in the state and to appoint an in-state registered agent.
Determining Where to Register
First, the nonprofit should be registered in its state of organization, if that state requires it. Next, identify whether the nonprofit has donors residing in other states or expects contributions from the same in the near future. If the number of such donors is more than a few, the nonprofit should register with the relevant states. Subsequently, confirm the amount of contributions from outside of the nonprofit’s primary state of operations, and, here again, if the amount (or expected amount) of contributions is more than trivial, or otherwise exceeds a statutorily specified limit, the nonprofit should register with the applicable states. Finally, some donors’ states require a nonprofit to register based on its annual budget, irrespective of the contribution amounts from those donors, and the CPA must verify any need to register in such states as well. Given the disparate laws of every state and their associated nuances, it can make sense to simply register in all of the states that require it, especially if the nonprofit’s activities will be widespread. Otherwise, instead of performing extensive state-by-state research, it is often easier to simply register in the nonprofit’s state of incorporation, in the states where it solicits or intends to solicit and in the states where more than a handful of donors reside.
How to Register
A nonprofit registers with a state by completing, signing and mailing certain forms and questionnaires (available on the websites of states’ nonprofit or charities divisions), though some states, like New Jersey, now mandate online registration, while others permit filing by email or fax. Additionally, various supplemental documents, including a nonprofit organization’s articles of incorporation (or other organizing document), bylaws, IRS determination letter and financial statements, among others, are generally required. A registration fee may also need to be paid. An officer of the nonprofit must usually sign the submission documents, sometimes under penalty of perjury, so it becomes especially important for CPAs to make sure that the information provided to the states is complete and current. Should any questions arise during the registration process, it is often prudent to contact the state’s nonprofit division (which is often an agency under the state Attorney General’s office) for assistance.
Once the nonprofit is registered with a state, that registration must typically be renewed on annual basis. This renewal process can also be complicated, often necessitating submission of the nonprofit’s most recently filed IRS Form 990, any updated governing documents and, in some cases, the nonprofit’s most recent financial audit, the rules for which again vary state to state. Some states permit online renewal in lieu of mailed submissions and many impose a renewal fee as well. Renewal deadlines vary among the states and are subject to change.
Failing to Register
Nonprofits that fail to register in states where they are engaging in solicitation face monetary fines, state investigations, loss of exemption from state income tax and potential personal liability for corporate officers who knowingly allow a nonprofit to solicit in a state without registering there. Moreover, because many states have online databases of registered nonprofits, a failure to register may result in foregone donation opportunities, while state investigations for unregistered activity can reflect poorly on the nonprofit and its board of trustees.
Conversely, complying with state charitable solicitation laws, such as through registration and renewal, will continue to qualify a nonprofit for contributions and grants, maintain its legitimacy, foster positive donor relations and, of course, avoid penalties for non-compliance.
Len Sprishen, J.D. LL.M. is a tax manager at MSPC Certified Public Accountants and Advisors, P.C., a Moore Global firm.
This article appeared in the July/August 2020 issue of New Jersey CPA magazine. Read the full issue.