Category Archives: donated items

Can the State Require Financial Disclosure of How the Money is Distributed When You Donate Items to a Charity?

Texas recently passed a law that applied to professional resellers that collect clothing and household goods in the name of charities. The law imposed certain disclosure requirements on those resellers. The disclosures were meant to apply in three situations:
 
     (1) if none of the money will be paid to a charitable organization;

     (2) if only a percentage of the money will be paid to a charitable organization; and

     (3) if a flat fee for use of the charitable organization’s name will be paid by the reseller.

In each of those scenarios, the law required the information to be disclosed to the public.

A number of charitable organizations in Texas brought a lawsuit to overturn this law. They based their challenge largely on the grounds that it violated the First Amendment to the United States Constitution, as applied to the states through the Fourteenth Amendment. The First Amendment prevents the government from restricting free speech, which has been interpreted to apply to certain restrictions on fundraising by non-profit charities.

The United States District Court for the Northern District of Texas, Dallas Division decided the lawsuit, National Fed. of the Blind of Texas, Inc. v. Abbott, 682 F.Supp.2d 700 (N.D. Tx. 2010), on February 1, 2010.  In analyzing the issues, the District Court relied upon United States Supreme Court precedent in which the Supreme Court determined that disclosure requirements would interfere with fundraising by resellers on behalf of charities.  The District Court also held that the requirements discriminated against small charities that must use resellers out of necessity.  Larger charities that could absorb the costs and did not use resellers were able to avoid the disclosure requirements.  The Supreme Court also suggested alternatives to the disclosure requirements, such as: 1) requiring professional solicitors to disclose fundraising costs to the public; 2) vigorously enforcing anti-fraud laws; or 3) requiring resellers to disclose their identity and status as professional solicitors.

Following Supreme Court precedent, the District Court in Texas held that the disclosure requirements were not constitutional.  The requirement to disclose how they paid the charities and that donated items would be re-sold for profit was not constitutional because the requirements only applied to charities that used resellers.  However, the more limited aspect of the law requiring resellers to disclose their name and status as a for-profit entity was sufficiently narrowly tailored and, therefore, was constitutional.  The District Court stated:

Although charitable organizations are not for-profit entities, they are certainly selling the donations for and at a profit.  As passed, the Act’s disclosure requirements are unconstitutionally underinclusive because they discriminate against charitable organizations who hire professional resellers to solicit and sell donations in favor of charitable organizations who conduct the solicitation and resale in-house.  Texas is constitutionally permitted to put its citizens on notice that the clothing and household goods donated are going to be resold instead of being reused or donated.  But if Texas chooses to do so, it must require all organizations engaging in this resale activity to inform the public of this fact, not jut some of these organizations.

National Fed. of the Blind of Texas, Inc., 682 F.Supp.2d at 714-15.

The District Court also held that disclosure was not constitutional where only a percentage of the money would be paid to a charitable organization, nor where a flat fee for use of the charitable organization’s name would be paid by the reseller.  There were many reasons that this violated the Constitution. Two examples were that such requirements (a) were content-based restrictions of free speech which violated the First Amendment and (b) likely would be enforced against different classes of people unequally, thus violating the Equal Protection Clause of the Constitution.

Comments/Questions: ljm@gdnlaw.com

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