COVID-19 has required many nonprofit organizations to change their planned in-person events into virtual events, including their trade shows. However, guidance published by the Internal Revenue Service (IRS) in 2004 suggests that income received from these virtual trade shows may be taxable to the nonprofit organizations that host them. Associations and other nonprofits seeking to lessen their exposure to unrelated business income tax (UBIT) should plan carefully when moving events to fully virtual.
As a general rule, net income received by a nonprofit organization may be subject to federal corporate income taxation if such income is generated by the performance of an activity that is a trade or business, regularly carried on, and not substantially related to the organization's tax-exempt purposes. In many instances, income so generated will be subject to UBIT. For nonprofit organizations exempt from federal income taxation under sections 501(c)(3), (4), (5), or (6) of the Internal Revenue Code (the Code), income received from "qualified convention and trade show activities" is subject to a safe harbor that excuses it from UBIT under section 513(d) of the Code. In order to qualify for the safe harbor, the organization must "regularly conduct as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of such industry or which educates persons in attendance regarding new developments or products and services related to the exempt activities of the organization."
Existing (Early) Guidance on Virtual Trade Shows
In 2004, the IRS published Revenue Ruling 2004-112 on the subject of virtual trade shows. It describes two different virtual trade show scenarios: Scenario A, where an organization hosts three days of virtual trade show activities book-ending a ten-day in-person trade show, and Scenario B, where an organization hosts a two-week trade show entirely online. In both cases, the online trade show activities were identical: the websites allowed members and the interested public to access information and visual displays. They also included links to the websites of members of the association and the suppliers of goods and services to members, as well as order forms, and a function that allowed for online purchases from members and suppliers represented at the trade show.
The IRS held that the income received from the virtual trade show in Scenario A, the one that accompanies a traditional in-person trade show (with networking, education, and sales activities), qualifies for exclusion from UBIT under the section 513(d) safe harbor. However, the income from the virtual trade show in Scenario B, the one held entirely online, did not qualify for the safe harbor from UBIT. As a result, income received from the trade show that was held entirely virtually was potentially taxable as unrelated business income. Although the ruling does not say this explicitly, the IRS seems to place a great importance on the networking or educational components normally associated with an in-person trade show.
Recent Tech Developments Blur the Line Between In-Person and Virtual
Virtual trade shows are now much more interactive than the online events described in either Scenario A or Scenario B. Particularly for organizations that have had to pivot their in-person trade shows to virtual events because of the COVID-19 pandemic, networking and educational activities will likely occur online in a form that would not have been possible in 2004. However, without recent guidance we do not know exactly how the IRS would characterize income received from interactive virtual events. In the absence of any further IRS guidance on the topic, it is important to learn what we can from this ruling.
Critical to the IRS's 2004 guidance was a description of the features of an online trade show based on the limited capabilities of the internet at that time. The websites described would have included static websites with hyperlinks to suppliers and vendors, while the in-person component of Scenario A included conferences, seminars, and exhibits and the opportunity for "members, suppliers and potential customers to meet together in person, and interact face to face." Today's virtual trade shows are not bound by the same technological limitations as their 2004 counterparts. Virtual trade shows now offer networking, video chatting, real-time interactions between attendees and exhibitors, and webinar presentations that allow for many of the same interactions that distinguished Scenario A from Scenario B. In other words, today's virtual trade shows share many of the same benefits of their in-person trade show predecessors.
The key question is whether the IRS would interpret modern virtual trade shows as equivalent to the event in Scenario B. They are both held only online, but their features are very different. If trade shows are impermissible, from either a public health or legal perspective, and, even if they are permitted, attendees are not permitted to "interact face to face" in an in-person setting (e.g., within six feet of each other, in violation of COVID-19 restrictions), would the IRS view face-to-face interaction via a virtual video call as an analogous substitute?
In order for the IRS to find a virtual trade show to be a qualified convention or trade show activity, it is likely the IRS would look to a number of factors that would further establish an activity as eligible for the safe harbor from UBIT for qualified convention and trade show activities. These include the following:
- The purpose of the virtual show is to promote and stimulate interest in, and demand for, the products and services of an industry or profession or to educate persons in attendance regarding new developments or products or services related to the exempt activities of the organization.
- The virtual show is designed to achieve the above purpose through the character of the exhibits and products/services on display.
- The time availability of the virtual trade show is limited in length such that it can be interpreted to be a "specific event" (i.e., not available year-round or even for a substantial amount of time); groups should consider limiting trade show accessibility in a manner reasonably similar to how they would do so with an in-person event.
- The design of the virtual trade show prominently highlights one or more of the following components: networking, sales, or education; virtual shows that allow visitors to be interactive with exhibitors and that offer online educational opportunities will likely have a better chance at qualifying for safe-harbor treatment.
- The organization has a history of hosting regular in-person trade shows, and the virtual show maintains much of the look and feel of those in-person events.
- The organization uses revenue from the virtual trade show to defray the show's operating costs, and any excess revenues over expenditures are used in furtherance of the organization's exempt purposes. (While how revenue is spent by an organization is not a factor generally considered by the IRS in a UBIT analysis, the IRS included it in the Revenue Ruling's Scenario A.)
Absent clear additional guidance from the IRS, organizations are forced to rely on existing Internal Revenue Code language, applicable regulations, and the terms of Revenue Ruling 2004-112 as best they can in their current circumstances. Because many organizations are faced with no choice but to replace their in-person events with virtual trade shows, we will likely see increased interest from the IRS in whether these activities qualify for exemption from UBIT.