A Web of Confusion

Non-profit groups urge state charity regulators to clarify the rules governing fund raising over the Internet

The number of fund-raising appeals on the Internet has exploded in recent years, with little oversight from state or federal officials, non-profit representatives told a gathering of state regulators here last week.

Non-profit leaders, speaking at the annual meeting of the National Association of State Charity Officials, said organizations involved in on-line fund raising currently are confused about what they must do to comply with state and federal laws. They urged charity regulators to move quickly to clarify a range of Internet-related issues, such as spelling out which states, under which conditions, require organizations to file registration forms when they appeal for donations via their Web sites or electronic mail.

But speakers also cautioned regulators not to take an approach that would unnecessarily hamper charities, especially small organizations.

“For the first time, the small charity has a medium that’s just for them,” said Arthur Schmidt, Jr., president of Philanthropic Research, an organization that runs a Web site known as GuideStar, which serves as a clearinghouse for financial information on charities. “It’s critical that we respect that.”

Internet fund raising can be extremely inexpensive and easy to do. A tiny charity with a very simple Web site can include a request for donations that can be viewed by computer users around the world. As a result, the charity has little way of knowing in advance which residents of which states it is reaching — a situation that makes state regulation more complicated than regulation of conventionally mailed appeals or telephone solicitations.

Even small charities with seemingly local missions have sometimes received money from faraway donors. Nick Allen, president of Donordigital.com, a consulting company in Berkeley, Cal., that works with non-profit groups, said a Girl Scout troop in Honolulu recently raised $35,000 on the Internet by selling merit badges. Many of the buyers, he said, surprisingly turned out to be collectors and others who lived in Japan.

Of the states that so far have attempted to impose registration requirements on charities that raise money via the Internet, most do so based on a group’s expectation that it will raise at least a certain amount in donations from within their states. But many participants at the meeting argued that such an approach doesn’t work when it comes to raising money on line because groups may get large sums from an unexpected source.

“I don’t think that it’s possible for people to anticipate what the effect of their Web page is likely to be,” said Putnam Barber, president of the Evergreen State Society, a Seattle group that works to strengthen non-profit and civic organizations.

As an alternative, Mr. Barber proposed that states let charities themselves select the geographic areas from which they expect to raise most of their money. That way, groups that tend to raise most of their money from within a given state could follow only that state’s registration requirements, even if they received a few large donations from people who lived elsewhere in response to on-line appeals.

Some speakers suggested that charities could use software on their Web sites that would only accept donations from residents of specific states in which the organizations had registered.

But Mr. Allen of Donordigital called such an idea impractical. “As a fund raiser, I’d say, Give me a break. You want to get money from anybody who’s interested in you,” he said. “That’s the kind of regulation that nobody in their right mind would accept.”

Any attempts to neatly define which charities must comply with which state requirements are likely to run into problems, predicted Harriet Bograd, founder and coordinator of the Nonprofit Cyber-Accountability e-mail discussion group, which examines how technology can help make tax-exempt groups more accountable to the public.

“Whatever exceptions we make, there won’t be very bright lines to tell whether a group is in or out of the exception area,” she said. “So if I were advising a charity, even a small one, I’d rather be able to suggest to them that they comply with the requirement rather than that they call for exceptions. But for that to work, we need a much less expensive way for people to comply with many states at once.”

Ms. Bograd said she has heard two suggestions that would accomplish that goal. The first is to change national law to give some federal agency the authority to regulate Internet fund raising and impose a single filing requirement on groups that raise money on line.

The other option, she said, is for states to voluntarily agree on one organization with which charities could file their financial information and have it shared with regulators in all states.

David Horn, assistant attorney general of Washington State, said he’d be willing to consider a variety of regulatory options as long as they met two criteria. First, a national reporting requirement must include the same information his state currently requires of charities. And second, it must not restrict his ability to punish fraud. But, he added, “anything that works good, works for me.”

John Henderson, Jr., an official with the state of Pennsylvania, said he was hopeful that the Internet might ultimately help regulators get out of the registration business altogether so they could spend more time and money policing abuses.

“Should we eliminate the middleman and have an exemption for registration if a charity’s going to make the information available anyway?” he asked. “And then should our concentration really be on insuring the integrity of that information and the quality of that information?”

In the meantime, while state regulators sort out how best to handle on-line charitable appeals, some regulators recommended that charities come up with some way to regulate themselves.

John A. Murphy, administrator of charitable trusts in Rhode Island, suggested that non-profit groups might devise something along the lines of a Good Housekeeping seal of approval for organizations that voluntarily meet certain standards, such as posting their federal informational tax forms on their Web sites. Other participants likened such a step to the work done by the Evangelical Council for Financial Accountability, a national organization that requires groups that wish to join it to subscribe to a stiff code of responsible stewardship and to undergo an annual, independent audit.

INTEREST RATES FOR PLANNED GIFTS

Following are the interest rates, provided by the Internal Revenue Service, for computing charitable deductions for charitable remainder trusts, gift annuities, charitable lead trusts, and some other deferred gifts.