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Vol. IV, No. 2
March - April 1996
State Bureaucrats Add Burdens to Nonprofits, Fund
Raisers
Government overregulation of nonprofit
organizations, at both the federal and state levels, has
drawn significant attention in recent years. Nevertheless,
politicians and bureaucrats continue to press for more
regulation, notwithstanding overwhelming evidence that such
regulation does not work, serves no legitimate government
interest, and is constitutionally objectionable. Below are
several examples which illustrate the dangers posed to
nonprofits (and those who help them raise funds) by
unnecessary regulation.
WASHINGTON
Bureaucrats in the State of Washington are preparing to
recommend sweeping changes to the state's charitable
solicitation requirements. Ironically, one change is even
being touted as regulatory relief: Washington's Secretary of
State, Ralph Munro (R), characterizes the proposed increase
in the minimum threshold of annual revenue required for
registration (from $5,000 to $25,000) as a liberalization of
the law. In reality, however, the effect of such
"liberalization" will be negligible, only applying to
nonprofits which have no paid staff and no paid fund
raisers. All others must register regardless of the
organization's annual revenue.
Specifically, the new burdens proposed
include:
Nonprofits
New and expanded reporting requirements for
nonprofits. Nonprofits must:
Provide an audit performed by an
"independent certified public accountant" if "the annual net
amount allocated to charity" exceeds $500,000. Nonprofits
reporting between $250,000 and $500,000 in net revenue would
have a choice between an audit and a "financial review" by a
CPA. Those with an annual revenue under $250,000 would be
required to comply with current regulations, which require a
financial statement signed by the organization. This
proposed new audit requirement appears to have no basis
whatsoever in existing statutory authority. Rather, the
proposed audit provision seems to be a radical expansion of
the enabling law, which provides merely that, "The secretary
may provide by rule for the filing of a financial statement
by registered entities." Why is Washington Secretary of
State Munro proposing such a change? We suggest that he is
acting out of a misguided or uninformed sense of what is
right for his state and its citizens.
Provide the name of the case, the
court, and the case number for all legal actions, if any,
against the nonprofit related to charitable
solicitations.
List all states where the nonprofit is registered for
solicitation.
List the name and address of individual(s) with
expenditure authority who can respond to questions regarding
the expenditure of funds. (The language of the proposed rule
does not identify, however, who may ask the questions, e.g.,
state government employees, public interest groups, members
of the general public.)
Provide a detailed report for the preceding fiscal
year listing gross revenue, gross solicitation expenditures,
cost of goods sold, net cost of solicitation, etc. This
information is then calculated in a formula (P=E/(A-C)x100)
to calculate a new government-mandated "efficiency" rating
to be imposed upon nonprofit organizations.
List the name, physical address and telephone number
of any commercial fund raiser used by the
organization.
Commercial Fund Raisers
The Washington Secretary of State did not stop at
creating new burdens for nonprofit organizations. He also
has devised a new burden on commercial fund raisers.
Commercial fund raisers whose solicitation receipts total
under $350,000 for all charitable organizations, defined
broadly to include virtually all nonprofits soliciting
contributions, would be required to conduct a "financial
review" or an audit performed by an independent certified
public accountant. Those whose solicitations raise over
$350,000 would be required to pay for a full audit. Although
not stated expressly in the proposal, the dollar thresholds
appear to apply to all income received by nonprofit clients,
not just income received from sources within the state.
Regulators estimate new regulations will cost each fund
raiser from $6,000 to $18,000 depending on the status and
the revenue of the fund raiser.
Hearing
The proposed regulations in Washington will be the
subject of a hearing in that state's capital, Olympia, on
March 27, 1996. FSC will submit, and urges others to submit,
testimony against the proposals.
IOWA
The State of Washington is not the only state creating
new burdens upon nonprofits' efforts to raise funds. The
Iowa legislature is currently considering amendments to that
state's charitable solicitation law that would create a
special fund for bureaucrats: segregating into a separate
budget all revenues and expenditures related to the state's
oversight of charitable solicitation (e.g., registration,
investigation, enforcement). This would create a separate,
charitable solicitation "fiefdom," over which the state
legislature may effectively lose control. Bureaucrats would
have the incentive to impose the highest registration fees,
to enforce the most rigorous regulatory requirements, and to
collect large fines from nonprofits and fund raisers.
Iowa is also considering imposition of a
$50,000 bond on commercial fund raisers. No factual
justification has been offered for imposing such a
requirement, whose only real effect would be to raise the
costs of regulatory compliance by fund raisers.
CALIFORNIA
California legislators enacted a requirement that
"commercial fund raisers for charitable purposes" file a
financial report with the state attorney general and with
the sheriff of every county where the fund raiser "intends
to solicit funds." There are 58 counties in
California.
MINNESOTA
Typical of the bureaucratic mindset is Minnesota's "opt
in" or "positive option" law, which prohibits solicitation
of persons who have not given their prior consent.
Minnesota's law makes it unlawful for a "charitable
organization" or its agents to sell or furnish for
consideration any list of contributors that includes the
name of a contributor who has not already given consent to
receive additional mailings.
This law (and other bills modeled on the
Minnesota approach, under consideration in other states)
greatly increases the state's ability to restrict or prevent
the dissemination of ideas and information, or the
mobilization of grassroots support or opposition, by
advocacy groups on matters of public concern.
VIRGINIA
Increasing regulatory burdens are not inevitable. A
prominent example of regulatory reversal, illustrating what
can happen when the people's voice is heard, occurred last
year in the Commonwealth of Virginia. Virginia's
Solicitation of Contributions Law was amended in 1993 to
require nonprofits soliciting contributions in excess of
$25,000 to furnish an independent CPA audit in addition to
their IRS Form 990 when they registered in subsequent
years.
In mid-1994, Governor George Allen
instructed state executive agencies to solicit opinions from
the public on possible regulatory changes. FSC (and others,
including many nonprofits and agencies who were urged to
comment by FSC) submitted formal comments to the Virginia
Department of Consumer Affairs, pointing out the many
defects in the recently amended Virginia Solicitation of
Contributions Law, and specifically attacking the audit
requirement.
The upshot? With the support of the
Governor, the audit requirement was repealed by the Virginia
Legislature in 1995. An outstanding result? We think so, at
least in part. (FSC had also sought repeal of other elements
of the Solicitation of Contributions Law.) But all
interested parties need to work together if we are to have
any chance at making regulatory reversals like Virginia's
the rule, rather than the exception.
West Virginia Can Demand Disclaimers, Copies of
Solicitations
West Virginia successfully sued the
Christian Action Network (CAN), an IRC section 501(c)(4)
organization incorporated in Virginia, seeking a court order
to force CAN's compliance with the state's Charitable
Solicitation law. In its defense, CAN had argued that: (1)
it is not a charitable organization as defined by the West
Virginia Charitable Solicitation law; (2) the law's
requirement that CAN include a disclosure statement,
dictated by the statute, on all solicitations mailed to the
state is unconstitutional; and (3) the law's requirement
that CAN supply the West Virginia Secretary of State with
copies of all solicitations mailed into the state is
unconstitutional.
The state trial court ruled for West
Virginia. The court decided that CAN is a charity, under the
statute, because it "is, or holds itself out to be," an
educational, religious, philanthropic, benevolent, and
patriotic organization that "solicits and obtains monies
from the public for charitable purposes." The court ruled
that the law's statutory disclosure statement requirement
does not violate CAN's First Amendment rights because the
requirement promotes West Virginia's "substantial interests"
in informing the public and preventing fraud, and because
the requirement is "sufficiently narrowly tailored" to
further the state's substantial interests. Finally, the
court ruled that the statutory requirement forcing CAN to
supply its solicitation materials to the Secretary of State
is not an unconstitutional prior restraint on CAN's free
speech rights because the Secretary of State has a statutory
obligation to ensure that funds solicited from the public
are solicited for charitable purposes, and are spent on the
charitable purposes identified by the solicitation. The
court stated that the Secretary of State's statutory review
of solicitation materials is "content neutral."
CAN's attorney, David Wm. T. Carroll,
Esquire, is appealing this case to the West Virginia Supreme
Court.
The Free Speech Coalition, Inc. is a
nonpartisan, nonprofit 501(c)(4) organization which
educates, lobbies, and litigates to defend the rights of
advocacy organizations and their members. FSC needs your
support to continue its fight to protect the rights of
citizens to associate together and exercise their First
Amendment right to petition their government for redress of
their grievances. Contributions to the Free Speech
Coalition, Inc. are not tax-deductible.
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