The transition from in-person to virtual events during the COVID-19 pandemic has raised a critical question for associations seeking to maximize sources of nondues revenue while also minimizing unrelated business income tax (UBIT): How is virtual tradeshow revenue treated for UBIT purposes?

Guidance issued 17 years ago by the Internal Revenue Service was the last time the association community received direction on this issue. Applying it to today’s world is challenging, to say the least—leaving associations that hold virtual or hybrid tradeshows exposed to UBIT risk unless and until the IRS issues clarifying guidance.

Although associations are granted a general exemption from federal corporate income tax for income derived from activities that are substantially related to their tax-exempt purposes, income from unrelated business activities is potentially taxable. Unrelated business income comes from a trade or business that is regularly carried on and that is not substantially related to the organization’s tax-exempt purposes. The most common form of unrelated business income for associations, by far, is advertising income.

However, there are numerous statutory exclusions and exceptions that can exempt otherwise taxable income from UBIT. Since 1976, one of those exceptions is for income received from “qualified convention and tradeshow activities.” To qualify for this exception, an association must “regularly conduct as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of an industry or which educates persons in attendance regarding new developments or products and services related to the exempt activities of the organization.”

The safe-harbor exception applies to 501(c)(6) tax-exempt entities, as well as to 501(c)(3), (c)(4), and (c)(5) organizations. Before 1976, the IRS had started to treat associations’ tradeshow exhibit fees as subject to UBIT, arguing that such fees were akin to taxable advertising income.

2004 IRS Revenue Ruling

In 2004, the IRS issued Revenue Ruling 2004-112 on the subject of virtual tradeshows. With the then-increasing prevalence of the internet and the ability to offer virtual tradeshows, questions began to arise as to whether the offering of a web-based tradeshow is the type of activity that is “of a kind traditionally conducted at … tradeshows.” The guidance describes two hypothetical scenarios: one involving a Section 501(c)(6) association that offers a semi-annual virtual tradeshow in connection with each in-person tradeshow; the other involving a Section 501(c)(6) association that offers a virtual tradeshow only.  

The Revenue Ruling made clear that the key factor in the IRS’s analysis of the applicability of the UBIT exception to a virtual tradeshow is whether or not the virtual show is conducted ancillary to a live show.

Today’s virtual tradeshows are interactive and, in many respects, resemble their in-person counterparts for which the safe harbor was written. But with no guidance since 2004, it is difficult to say how the IRS would interpret the safe harbor today.

In the first hypothetical scenario, an association conducts two tradeshows a year. The in-person shows are similar to most trade or professional association shows—they include members of the association and suppliers to the industry, and exhibitors are charged a fee to participate. 

During those shows and for three days before and after, the association’s website includes a virtual tradeshow section containing “information and visual displays … and links to the websites of exhibitors represented at the [in-person] tradeshow.” The site also contains order forms and has a function that allows online purchases from exhibitors. The association charges a fee to exhibitors that wish to be listed on the site.              

According to the IRS, these web activities fit within the safe harbor for qualified convention and tradeshow activities because:

• The web activities are “ancillary” to the in-person tradeshows.
• The content of the web page serves to “augment and enhance” the in-person tradeshows by making available “in an alternative medium the same information available at the show.”
• The web page is available “during essentially the same limited time period that each tradeshow is in operation.”              

Thus, income generated by the web page will not be subject to UBIT in this scenario.              

In the second hypothetical scenario, the organization offers two-week-long virtual tradeshows without any connection to in-person events. According to the IRS, such activity will not qualify for the safe harbor because the show website is “not itself a convention, annual meeting, or tradeshow” within the meaning of the tax code, due to the lack of an in-person component.               

Today’s Virtual Tradeshows

Fast forward to 2021. Today’s virtual tradeshows are much more interactive and, in many respects, resemble their in-person counterparts for which the safe harbor was written. But with no guidance since 2004, it is difficult to say how the IRS would interpret the safe harbor today and apply it to the 2021 virtual or hybrid tradeshow.   

As the COVID-19 pandemic starts to abate, it is likely that at least for 2021, and perhaps into 2022 and beyond, associations will plan to hold hybrid conferences and tradeshows featuring both in-person and virtual elements. The virtual tradeshow in the Revenue Ruling’s first example featured only “the same information that is available at the [in-person] show” and a function that allowed purchases from “members and suppliers represented at the tradeshow.” But if an association offers a virtual show in connection with a live show and allows companies that are not exhibiting at the live show to participate in the virtual show, for example, would the IRS determine that the virtual show is no longer “ancillary” to the live show and thus not covered by the safe harbor? This is unclear, as is the application of the 2004 Revenue Ruling to the modern-day virtual-only or hybrid tradeshow.

It should be noted that a failure to qualify for the safe harbor does not necessarily mean that the income generated from a virtual tradeshow will be subject to UBIT. In most instances, the IRS likely would take the position that the net income is generated by the sale of advertising-type services and thus is subject to UBIT, but there may be instances when an association can demonstrate that its activity is substantially related to its tax-exempt purposes even without the help of the safe harbor. 

Further, if the arrangements with potential exhibitors are restructured accordingly, other exceptions from UBIT may apply. For instance, it may be possible to convert potentially taxable virtual tradeshow exhibit fees to tax-free corporate sponsorship income or royalties, allowing associations to retain more of their much-needed revenues.

Unfortunately, the 2004 Revenue Ruling will continue to pose UBIT risks to associations in the virtual or hybrid tradeshow environment. That being said, the ruling does not supersede the clear intent of the federal tax code to provide a safe-harbor exception to unrelated business income where an association conducts an event to educate attendees or stimulate interest and demand for products or services of the membership. Therefore, it may not matter whether the activities traditionally conducted at tradeshows are done in person or virtually. Until the IRS provides new and updated guidance—which is not likely anytime soon—it would be advisable for associations to document how the activities of their tradeshows meet the tax code definitions of the safe harbor.