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IRS Clarifies Royalty Income Considerations for Job Board Revenue

Associations are logical places for individuals and employers to connect about job opportunities. With both individuals and employers coming to associations for information, it makes sense for associations to try to facilitate these connections and a common way to do that is through a job board. In addition to being great resources for individuals and organizations within a profession, job boards can also be a good source of non-dues revenue to the association. However, the Internal Revenue Service (IRS) has re-affirmed non-dues revenue from a job board can be taxable as unrelated business income (UBI) even if designated as a royalty.
 

Non-Dues Revenue and UBI

Since non-dues revenue generally encompasses revenue from sources other than membership fees, it is important to make sure that the activity generating the non-dues revenue is evaluated properly to determine whether the revenue may be taxable as UBI. Generally, if a particular activity is (1) a trade or business, (2) that is not substantially related to the organization’s tax-exempt purposes, and (3) is regularly carried on by the association, then the revenue from the activity may UBI. However, non-dues revenue can also be exempt from tax. Section 512(b)(2) of the Internal Revenue Code (IRC) states that royalties are excluded from UBI.

Non-Dues Revenue as Royalties

Courts have identified certain circumstances when exempt organizations may treat non-dues revenue as royalties.  In Sierra Club, Inc. v. Commissioner, the Ninth Circuit stated that royalties can be payments that are received for the right to use intangible property rights, such as payments for the rental of a mailing list. However, in Arkansas State Police Ass’n v. Commissioner, the Eighth Circuit found that substantial participation and control of the activities negated the Association’s claim to exempt royalties. Following these court decisions, the IRS has generally held that payments for the use of trademarks, trade names, service marks, copyrights, and the right to use an intangible asset are ordinarily classified as royalties. However, royalties are not payments for services.
 
In order to reconcile these requirements, some associations have outsourced functions like a job board that generate non-dues revenue to a third party. The third party manages and controls all of the operations of the job board and pays the association a royalty for the use of the association’s name, logo, and membership list, while the association maintains an entirely passive role in the function of the job board. Under these circumstances, the association can make an argument that its treatment of payments from the third party administering the job board as royalties complies with the IRS requirements detailed above.
 

When “Royalty” Income is Taxable

In 2020, the IRS issued a Technical Advice Memorandum (TAM) that found the “royalty” income from exempt organization’s online job board to be taxable income. A few of the factual issues that the IRS identified included the following:

No Licensing of Trademark or Other Intangible Property

In the contract between the organization and the vendor, there was no mention of the use of the organization’s property by the vendor. In fact, the online resources, including the website used for the job board, belonged to the organization and not the vendor.

Organization Received Most of the Income Generated from the Job Board

Almost all income from certain uses the job board, including advertising income, went to the organization. Although there was a fee charged by the vendor, and also a credit card transaction fee, those fees were only a small percentage of the revenues generated by the job board. In certain cases, 100 percent of the income was distributed to the organization.

Vendor Provided Services to the Organization, Not the Job Board Users

In the agreement between the organization and the vendor, the parties unfortunately referred to users of the job board as the organization’s rather than the vendor’s “clients.” Also, the agreement included fees that the organization would pay to the vendor for services such as billing and collecting payments from users, and providing technical support/customer service to users. The IRS concluded that because of the language of the agreement, the vendor was actually servicing the organization and not the users, and that the funds paid to the organization were not royalties, but instead were the fees that the vendor was collecting from users on behalf of the organization.

Conclusion

Simply designating non-dues revenue as royalties does not allow an association to exclude that revenue from unrelated business income, particularly when, as noted in the TAM discussed in this article, the revenue is generated as a fee for services. However, there may be circumstances that may allow an association to treat non-dues revenue, such as revenue from a job board, as royalty income excluded from UBI. If you have any questions or concerns about the way your association is currently utilizing non-dues revenue, our attorneys can help you review your situation to identify and address any potential UBI considerations.

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