Federation Folio - Volume 2, Number 1 - June 1998



THINK GLOBALLY, ACT LOCALLY, Editor's Perspective. By Lee M. Cassidy

This extract from Federation Folio, a publication of the National Federation of Nonprofits, was reprinted with the permission of Lee Cassidy and Geoffrey Peters.



By Geoffrey W. Peters

Our legal system is remarkably flexible. Our Constitution was written in a time long before the automobile, much less electronic commerce, and yet we have managed to adapt and evolve through interpretive decisions by courts and the application of over-arching principles to new technology. This flexibility will be tested in the next several years as courts grapple with questions surrounding the Internet. Of particular relevance for nonprofit organizations is the question of whether and how charitable solicitations via the Internet will be regulated.

Two Underlying Principles

To understand two of several underlying principles, one must first understand that, currently, the rule is that states may not regulate in such a way as to unduly interfere in interstate commerce, nor can they exercise jurisdiction over persons or organizations which have no connection or "nexus" with those states.

The first principle comes from a 1992 Supreme Court decision known as the Quill case. There, the Supreme Court said it would violate the commerce clause of the Constitution to allow North Dakota to force the Quill corporation to collect North Dakota sales taxes on goods shipped from outside the state to customers in North Dakota. The reasoning was that since Quill's only contact with the customers was by mail, telephone and by shipping orders to customers, there was not a sufficient nexus with North Dakota to permit North Dakota to make Quill collect sales tax.

The second principle goes back to the 1945 International Shoe decision of the Supreme Court. There the court said that the International Shoe Corporation could not be hauled into court and sued in a state where the company did not have "minimum contacts." Later decisions have made it clear that use of the mail or telephone alone does not constitute "minimum contacts," unless such contacts are purposefully directed at the state seeking jurisdiction.

This leads to the question of how these two principles might apply to the case of a charity which "publishes" a web page that includes solicitations for donations. Some state and local regulators are taking the position that they may require registration and reporting in such cases. Others suggest that registration can only be required by the states in which the charity "does business." In other words, where there are both minimum contacts and a sufficient nexus.

An Example and Some Questions

To illustrate these issues, let us assume that a Virginia based charity creates a web page which includes a solicitation for donations and contracts with a Virginia based Internet service provider ("ISP") to "publish" that page on the Internet. Once that page is on the Internet, anyone with Internet access, anywhere in the world, can "hit" or connect to and display that page on their own computer monitor. The charity, of course, has no idea of who might hit the page. Nonetheless, according to some, the charity must register or otherwise comply with charitable registration and regulation of every state and local unit of government in the United States, and presumably each other country which has such regulations (fortunately very few do).

Did the Virginia charity have "minimum contacts" outside of Virginia? Was there a sufficient nexus with the other jurisdictions seeking to regulate this activity? With the Internet, such questions become both technical and complex. The method used by the Internet to transmit information, such as the charity's page, is by taking all of that information: the words, the artwork, the colors, and the spaces between objects; and coding those data into small "packets" of information. These packets are then sent through telephone lines and/or via satellite transmission to their destination where they are electronically reassembled into the image that appears on the users' computer monitor.

Such packets may be routed through many states and over or under the oceans to other countries. If there is a bottleneck, they may be re-routed through other telephone lines, so there is no entirely predictable path which they might take. Intermediary computers may receive and re-send these packets as well, and these intermediary computers may be located anywhere. Thus when a Florida resident "logs on" to the charity's page, the signal could conceivably be routed through a computer in Ohio or Tennessee or Georgia.

One could determine that merely having the information pass through a state is insufficient for minimum contacts or nexus but what if the information is "stored" in that state? To avoid congestion at frequently accessed sites on the Internet, sometimes copies of information are, unbeknownst to the originator, stored or "cached" at intermediate computers located elsewhere, or even at the destination computer. Is storage of these "packets" of electronic signals sufficient to allow regulation, even though the user cannot distinguish between the copy of the information and the original?

One could also determine that only when the donor makes a gift has there been a minimum contact or nexus with another state or country, but then regulation is left to the random success of the solicitation. Further, many state regulators view the act of solicitation that which triggers their oversight, and not the act of donating.

Is the act of publishing a web page which asks for donations the same as "purposefully directing" one's efforts toward the citizens of each and every state and local jurisdiction that seeks to regulate charitable solicitations? American Charities for Reasonable Fundraising Regulation, in its litigation against Pinellas County, Florida, advances the view that when a fundraising mailing is addressed to citizens throughout the entire country, including Pinellas County, it is not "purposefully directed" at the residents therein. Certainly if that is true, the relatively more passive activity of publishing a web page for anyone in the world to see, if they search for and find it, is even less "purposeful" or "directed."

Does the local benefit to Pinellas County of being able to regulate Internet solicitations outweigh the burden on interstate commerce imposed by all such state and local jurisdictions also being allowed to require registration and regulation of charities who have such web pages?

The preceding questions should at least give one pause before one quickly concludes that state and local jurisdictions can regulate charitable solicitations made via the Internet. Yet an increasing number of jurisdictions are claiming the right to do so, and are doing so. Pinellas County, Florida claims to have the right to regulate all charitable solicitations via the Internet regardless of the location of the charity. Can they require the Princess Diana fund in London, England to register in Pinellas County, Florida, simply because the fund (may) solicit Pinellas County residents via the Intemet?

A Third Principle

Clearly these issues will have to be sorted out in court. Asking your lawyer for his or her opinion is probably not enough (some say that if you put two lawyers into a room they can often come out with six opinions). My own opinion is that the states will not finally be successful in exercising jurisdiction over out of state Intemet solicitations. First, I believe that the minimum contacts and nexus analyses will lead to that answer. A third, and even stronger argument is that charitable solicitations have been considered by the courts to be "pure" free speech, since the Supreme Court so held in 1980 in the Schaumburg case.

In addition to the two principles discussed above, this third "Free Speech" principle comes into play whenever there is any regulation of charitable solicitations. The government must show that it seeks to accomplish a "compelling" governmental interest, using a regulatory scheme which is "narrowly tailored" to effectuate that interest, where alternative measures less damaging to First Amendment interests are unavailable, and where there the regulatory scheme is "content neutral" and does not allow government bureaucrats to favor one charity's speech over another. If there were doubt about the constitutionality of regulation of Internet based charitable solicitations on the basis of the first two principles, there should be even more doubt once one applies the third principle.

Almost all state and local regulation is said to be for the purposes of prevention, detection and prosecution of fraud. Those who engage in fraud are, of course, not protected by the First Amendment. There is no constitutional right to defraud others. But does registration of charities that plan to solicit on the Internet prevent fraud? Do those bent on fraud comply with registration requirements only to then defraud the public? It seems unlikely that those whose purpose is fraud would not also risk non-compliance with registration requirements. Further, some of the largest fraud cases in recent memory (the New Era case and the United Way-Aramony case) involved charities that were "properly" registered.

One More Principle

This leads to a fourth principle. The due process clause of the Constitution has been interpreted to mean that there must be a rational relationship between a compelling governmental interest and the means used to achieve that interest. In the case of registration of charitable solicitations via the Internet (or by direct mail or telemarketing) it seems that such a rational relationship might well be strained at best.

Are there any examples of regulators successfully detecting charitable fraud as a result of registration? Most cases of fraud are reported by an alert board of directors, by current or departing employees, and by the press making inquiries. Is there a rational relationship between registration and detection of fraud? I have yet to see a case made that there is. Without evidence that such regulation is rationally related to the goal, it is probably unconstitutional.

So Why Regulate?

Another debatable question, however, is: Why would the states and localities want to regulate Internet solicitation? Just as regulation costs the regulated, so does it cost the regulator. To be sure, jurisdictions can charge fees reasonably related to defray the costs of regulation, but wouldn't the energy and effort of the regulators be better spent in efforts to detect and prosecute actual fraud, rather than detecting and prosecuting violations of registration requirements?

Since the Internet is truly global and not restricted to the United States, what is the interest in U.S. state and local regulators attempting to exercise control over charity web pages based in the U.S. when it seems clear that they cannot effectively exercise such jurisdiction over charity web pages based elsewhere in the world?

In my view it makes more sense for each charity to publish its IRS tax return (Form 990) on the Intemet, register with its "home" state, and have that state publish its registration on the Internet, and then let prospective donors decide whether they want to support a charity or not. After all, the last and best chance to prevent charitable fraud rests in the hands of the prospective donor. He or she can "just say no."

Geoffrey W. Peters, Esq. is Managing Director of Creative Direct Marketing, International., a Maryland-based firm which assists charities in their international fundraising campaigns. Geoff has an A.B., M.A., and J.D. degrees, and is expert on the regulation of nonprofits and their fandraisers in the United States. His 20 years of management and marketing experience has been heavily in or working with the nonprofit sector, including having served as president of one of the nation's oldest direct mail fundraising agencies, and as president of a fully-accredited law school and college.


Editor's Perspective

By Lee M. Cassidy

The headline of this column was created, I believe, by an environmental organization which suggested that each of us as individuals should consider the effect our environmental decisions and actions have on the entire world, and then act the only way we can: locally, in our own sphere of operation. If each of us did what we could to protect the environment, the entire world would be doing so, and the environment would be better protected and preserved.

But that same advice, to Think Globally and Act Locally, comes to mind when considering the complex web of charity regulation which has built up in the United States over the last 30 years or so. The huge majority of states, and an increasing number of counties and municipalities, under the guise of protecting the public from fraud, have acted to adopt regulations requiring any charity which takes any action to raise funds within the Jurisdiction's boundaries, to register before soliciting. The charity must also pay a fee, and annually report on the charity's activity within that jurisdiction (and often on activity outside that jurisdiction as well). Attorney Geoffrey Peters, in the main article in this edition of Federation Folio, describes the intent of some state and county officials to regulate all fundraising, even that which is done on the Internet.

Consider the possibilities: a charity publishes its Website, available to everyone in the world who has Internet access. Suppose every jurisdiction in the entire world claimed the right to regulate that Website! There are only 50 states in this country (plus DC, Guam, Puerto Rico, Virgin Islands, and probably some others I can't remember), but there are more than 3,000 counties, probably more than 50,000 municipalities, an unknown number of townships, conservation districts, water districts, school districts, etc. And that's just the United States! Then we have each town, city and shire in England, every town, city and county in Ireland, all the German burgs, and on and on and on. Then, we get to the really large countries like China and Russia. The possibilities are literally beyond imagination! Then, suppose every one of them wants to require every charity with a Website that solicits contributions to register, pay a fee, and report annually. But why not semi-annually? Why not monthly? And besides, isn't there such a thing as implied solicitation? After all, the charity didn't put up its Website just to be nice. They want contributions? Let's regulate them!

Obviously, no charity could possibly use the Internet to raise funds with even a small fraction of that level of regulation. The paperwork (or electronic work), plus the filing fees, attorneys' fees, accountants' fees, etc. would cost far more than could possibly be raised in contributions. But, closer to home, there is a smaller, but similar and continually growing problem .... that of regulation of fundraising by states, counties, and municipalities. In addition to the requirements of filing and reporting, many states have additional requirements, complex exclusions, and multi-page reporting forms. As Geoff Peters documented a few years ago, a medium-sized national charity spends a minimum of $25,000 each year simply to comply with registration requirements. Larger charities can spend much more, using contributed funds, to accomplish nothing but create files in state capitols.

Fortunately, some jurisdictions, spurred on by suits against Pinellas County, Florida, and the State of Utah, are beginning to recognize that there is a point of diminishing returns. Massachusetts plans to eliminate the requirement that fundraising agencies with no clients or offices in the state must register and report. The city of Columbus, Ohio apparently has taken the same position. And the two lawsuits (Pinellas County and Utah) almost certainly will succeed, reducing by a small amount the level of regulation, at least in those jurisdictions. To their credit, several charity regulators have worked for years to standardize registration forms among their states. But in a milieu where states and counties believe that their own desire to regulate and tax every conceivable activity including charitable solicitation overrides the protection of a slew of Supreme Court rulings, one is bluntly reminded of the admonition that maintenance of liberty and freedom demand constant vigilance.

Think Globally - Consider the chilling effect (and significant expense) on charitable solicitation caused by the proliferating web of charity regulation in this country alone, and then consider what the situation would be if fundraising on the Internet were to be regulated by every jurisdiction in the world.

Act Locally - Consider what can you do, as a regulator, charity executive, or small-dollar contributor, to reduce the existing level of regulation to one which is more reasonable, and which makes more sense.

Words of wisdom were spoken along those lines in May of 1997 by the City Attorney of Los Angeles. A federal judge had recently found major portions of the Los Angeles Municipal Code to be invalid, because they potentially granted the City unfettered discretion to restrain protected First Amendment activity. The City Attorney, recommending adoption of a new ordinance governing charitable solicitation over the objections of the agency charged with charity regulation, said, "Consequently, the City should utilize existing penal law and ordinary police investigation to uncover and prosecute fraud rather than attempting to restrain protected first amendment activity through a licensing ordinance which operates as a prior restraint of speech." (emphasis added).

A reasonable level of regulation is suggested by Geoff Peters in his article: Charities should register and report in their "home" jurisdictions, which can and should make copies of financial reports available to other jurisdictions, and to interested donors. That way, the charities can return to the purposes for which they were created: doing good works, both globally and locally.

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The National Federation of Nonprofits is an advocacy organization, working to improve the legislative and regulatory climate for charities and other nonprofits. As part of its work, NFN attempts to educate charity regulators and "watchdogs" regarding aspects of nonprofit management, and to influence the way they view critical issues affecting nonprofits. This issue of Federation Folio is the fifth in a series that will explore many of those issues in depth, in the hope that doing so will stimulate broad discussion of those and other issues.

The articles in this, and in past and future issues, represent the opinions of the authors, and do not necessarily reflect the position of the National Federation of Nonprofits. Readers are encouraged to send written comments on the issue(s) discussed. Comments will be excerpted in future issues of Federation Folio.

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