Are Virtual Trade Shows Subject to Taxes?
Q: A fellow special interest group member recently suggested that the income an association receives from its virtual trade show could be subject to tax. Is that true?
A: Organizations exempt from federal income tax are not taxed on their income from activities substantially related to their exempt purposes. However, exempt organizations are subject to tax on “unrelated trade or business income,” i.e., income from a trade or business regularly conducted by an exempt organization that is not substantially related to its exempt purpose.
In defining “unrelated trade or business,” the Internal Revenue Code specifically states that “qualified convention and trade show activity” is not an unrelated trade or business. In other words, the activity is not taxed. To qualify, the organization conducting the convention or trade show activity first must be exempt under Section 501(c)(3), (4), (5) or (6) of the code. Second, one of the organization’s purposes in sponsoring the trade show must be to educate attendees regarding new developments or to stimulate interest in, and demand for, products or services related to the organization’s exempt activities or industry. Finally, the organization conducting the trade show activity must do so in conjunction with an international, national, state, regional or local convention, annual meeting or show designed to achieve its purpose “through the character of the exhibits and the extent of the industry products displayed.”
The last point — holding the trade show in conjunction with a convention or meeting — is key. It is unlikely that the Internal Revenue Service contemplated the emergence of virtual meetings or the impact of COVID-19 in adopting its rules on the treatment of trade show income, but it did issue a revenue ruling in 2004 to provide guidance on internet-based trade shows. The ruling looked at trade shows operated by two associations, “A” and “B.” Each placed product directories and listings, links to relevant external websites (e.g., of exhibitors and members), online order forms and a means to complete online purchases on its website for a limited time each year. Association A conducted its activities on a supplementary section of the organization’s website for 16-day periods that coincided with the organization’s on-premises semiannual trade show. Association B established a website that was available for a two-week period and then taken down.
The IRS identified one significant difference between the two situations. Association A’s website augmented and enhanced its in-person trade show by making the same information available live, both contemporaneously with and for three-day periods before the show opened and after the show closed. The IRS concluded that Association A’s website served as an extension of the live trade show, and, therefore, A’s internet and live trade shows both met the terms of the exclusion. In contrast, Association B offered exclusively virtual content, independent of “any international, national, state, regional or local convention, annual meeting or show.” The IRS determined that Association B’s website neither constituted a convention, annual meeting or trade show nor augmented or otherwise acted in conjunction with B’s operation of such an event. Thus, B’s activities did not fall under the scope of the statutory exclusion that qualified trade show income as tax-free.
While the ruling is instructive with respect to the fact patterns it describes, it doesn’t address the number or nature of virtual meetings and virtual trade shows in today’s environment. While Association A’s virtual show was connected to a “live” in-person show, both examples involved free-standing trade shows. Neither represented the trade show component of an annual scientific or educational conference conducted in-person or virtually. And, of course, the revenue ruling did not take into account the special circumstances raised by the global pandemic that has had dramatic consequences for today’s meetings industry.
What does all this mean for associations that would like to hold a virtual annual educational conference and trade show during the pandemic (or after) but want to avoid being taxed on their trade show revenue? The IRS has not specifically addressed those circumstances. Thus, the best approach for associations planning virtual trade shows in conjunction with annual conferences is to structure the shows to meet the requirements of “qualified convention and trade show activity” as set forth in the code and, at the same time, attempt to incorporate the factors considered determinative in the 2004 ruling.
For example, an association should promote its trade show as part of, and schedule it in conjunction with, the association’s educational conference. Although many associations are extending the virtual experience beyond the few days traditionally associated with an in-person annual conference, meeting planners should strongly consider holding the association’s trade show over the same, or substantially the same, days as the association’s educational sessions. The show may begin a few days before or continue a few days after the educational sessions, but it should be positioned to “augment and enhance” the conference.
In addition, show organizers should display exhibits and industry products at the show in a manner that stimulates interest in, and demand for, industry products and services or educates those in attendance regarding new developments. In other words, the virtual trade show should offer interactive networking and educational opportunities available with the latest technology.
It is important to remember that the only issue here is whether the convention and trade show activity will result in taxable revenue for the association. A trade show, virtual or in-person, will not jeopardize the organization’s exempt status. And, as an alternative, those organizations not interested in conducting a virtual trade show may generate revenue in conjunction with their annual conferences through other non-taxable revenue streams, such as expanded sponsorship opportunities. As with all matters having tax implications, it would be prudent to consult your legal counsel and tax professionals for guidance on designing a conference that best accomplishes your association’s goals. ￼