Most nonprofits rely on fundraising to support programs and operations. Fundraising can be simple (a donation link on a website) or complex (events, raffles, corporate cause-marketing, paid solicitors, and multi-state campaigns). What many organizations do not realize is that fundraising is regulated primarily at the state level, and states often apply these rules based on where donors are located and where solicitations occur.
This article provides an educational overview of the main fundraising compliance issues for organizations seeking to operate as, or apply for recognition as, Section 501(c)(3) public charities.
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Fundraising generally includes requests for donations or charitable support, whether direct or indirect. Common examples include:
Fundraising is usually distinct from unsolicited gifts (where you did not ask) and from program service revenue (fees charged for the nonprofit’s exempt programs). The line between “fundraising” and “program revenue” can matter for state registration and federal reporting.
Fundraising is regulated for three practical reasons.
States commonly regulate the nonprofit and other parties involved in solicitations, including professional fundraisers, fundraising counsel, and cause-marketing partners. Even when a third party is involved, the nonprofit should assume it will be accountable for solicitations conducted in its name.
In many states, nonprofits must register with a state agency (often the Attorney General, Secretary of State, or consumer protection office) before soliciting donations from that state’s residents. Requirements vary significantly by state, and multi-state fundraising adds complexity.
A typical registration process may request information such as: basic organizational details; directors and officers; EIN and tax status; governing documents; and financial information (including federal filings if available). Many states also impose annual renewals and annual reports.
Many states provide exemptions, but they are not uniform. Common categories include churches and certain religious organizations; small nonprofits below a revenue threshold; and some educational institutions. Even where an exemption exists, states often require an exemption filing (and sometimes an annual renewal). “Exempt” does not always mean “no paperwork.”
Many states require specific disclosures in fundraising materials. These rules vary by state and may apply to print, email, websites, and phone scripts. Disclosures often address the nonprofit’s identity, how donors can obtain financial information, and statements clarifying that registration does not imply endorsement by a state.
Donations may be unrestricted (usable for general charitable purposes and operations) or restricted (usable only for a specific purpose). Restricted gifts require careful tracking and compliance. If a restriction cannot be honored, the nonprofit may need donor consent (or, in some cases, court involvement) before changing the purpose. Many organizations adopt a gift acceptance policy to clarify what restrictions they will accept and when a written agreement is required.
Federal tax rules require certain written acknowledgments for donors to claim deductions. Separately, “quid pro quo” rules can require disclosures when donors receive goods or services in return for a payment. Even when the legal burden is on the donor, charities typically provide acknowledgments as a best practice to support donor relations and reduce tax-season issues.
Online fundraising can create multi-state exposure. If a nonprofit routinely receives donations from residents of a particular state, or targets residents through outreach, registration may be expected. States differ in how they evaluate online solicitations.
Gaming-based fundraising can require licenses or permits and may be restricted or prohibited depending on the jurisdiction. These activities also raise tax and internal control considerations because they often involve cash handling.
Auctions can raise sales tax and unrelated business income issues depending on structure and frequency, and they implicate donor substantiation and valuation considerations for certain donated items and purchases.
If a business advertises that purchases will benefit a nonprofit, many states regulate the arrangement. Written agreements and consumer-facing disclosures are often important, and some states require specific contract terms or filings.