While much of the rest of the world has changed since COVID-19 first hit earlier this year, the old saying that nothing is immutable other than death and taxes still holds. This means that, even though trade show organizers were forced to go hybrid or online only due to pandemic-related restrictions, the Internal Revenue Service will still be looking at your online events’ taxable income through the lens of a ruling put in place 16 years ago: Revenue Ruling 2004-112.

What exactly does that mean?

First, the bad news: Yes, even trade shows held by tax-exempt organizations still can be classified under taxable income. But the good news is that that taxable income, called “unrelated business income tax (UBIT),” can be your friend, said Attorney Paula Cozzi Goedert, partner, Barnes & Thornburg, LLP, on a Professional Convention Management Association webinar, “UBIT: How US Tax Rules Impact Virtual Exhibits and Sponsorships” (now available on demand).

You Are Now Entering the Gray Zone
Fortunately, the applicable federal tax law is still somewhat of a gray zone, which gives lawyers like Cozzi Goedert room to make arguments in favor of non-taxability, she said. The current rules allow tax-exempt organizations to engage in business activities — not too much, of course, she said, giving 20% as a conservative estimate — without losing their tax-exempt status as long as they pay the UBIT.

“But we want to minimize taxes,” she said. “It is, after all, the American way.”

There are some exemptions that live in the gray zone that can help you do that. For example, since 1969, revenue from exhibit booths has been excluded from tax liability. Of course, when we think of exhibit revenue, we traditionally have been talking about in-person trade shows.

However, back in 2004, the IRS caught onto the fact that nonprofits were getting into the business of holding virtual exhibits on the Internet, some of which are year-round affairs. So the IRS issued ruling 2004-112, to provide guidance on what is and is not taxable when it comes to virtual exhibits.

When Is a Trade Show Exempt?
Under Ruling 2004-112, exemptions for exhibitions include those that fall under “qualified convention or trade show activity:” “a convention and trade show activity carried out by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show conducted by a qualifying organization, if one of the purposes of such organization in sponsoring the activity is (1) the promotion and stimulation of interest in, and demand for, the products and services of that industry in general, or (2) to educate persons in attendance regarding new developments or products and services related to the exempt activities of the organization, and the show is designed to achieve such purpose through the character of the exhibits and the extent of the industry products displayed.”

This means that it’s carried out by an organization in conjunction with an international, national, state, regional, or local convention annual meeting or show, she said. The show must stimulate interest or demand for the products and services of the industry being served, and/or educate those in attendance about those products and services.

The show also must be designed to achieve that through the character of the exhibits and the extent of the industry products on display. “The IRS recognized that trade shows are a big activity in the U.S., and they don’t want to be in the business of getting too picky about how you can or cannot conduct your trade show activities,” she said. “They don’t want to mess with micromanaging trade shows.”

But do virtual trade shows deserve that same consideration, or are they just advertising in trade show clothing? Advertising is, after all, considered to be taxable income, with some limited exceptions. The ruling states, “It is the nature of the activities and their connection to a specific convention, annual meeting or trade show that distinguishes the non-taxable revenue from the taxable revenue.” In other words, the reason the organizer is accepting the income has to be primarily based on education, not primarily to generate revenue, to fall under the exemption.

Learning by Example
To help clarify, the IRS included two examples in its ruling. “I’d like to tell you that this revenue ruling absolutely gives you cover for excluding exhibit booth revenue from a virtual event tied educational meetings or something live going on,” Cozzi Goedert said. “But I can’t tell you that.”

Example 1: The show organizer holds a virtual trade show during a 16-day period that coincides with a 10-day live meeting or trade show. That 16 days is important because the online event was held three days prior and three days post the in-person event, she said. The online aspect is considered supplementary, in effect being an extension of the in-person event.

Example 2: A trade show that is held online not in conjunction with any international, national, regional annual meeting or event — it’s a virtual standalone exhibition. Unlike in the first example where the online portion is supplementary to an educational event, it’s going to be taxable, she said. Why? The website isn’t a specific event where the organizer’s members, suppliers and customers gather at one physical location to interact face to face.

“The bad language in the room is ‘one physical location,’” she said. “If they had just left that out, this wouldn’t be a gray area.

Then Along Came COVID
The rub is that back in 2004 when the IRS made this ruling, no one was thinking about a pandemic that would force all conference and trade show activity to go online, she added.

Cozzi Goedert said she would argue that income from the virtual trade show is not taxable income as long as it is being held in conjunction with an educational event — even if that event is now also being held online, as long as it is being held during a specific period of time during which people are interacting in real time in an online annual convention, committee meeting, or other event that falls under the “qualified convention or trade show activity” definition.

“I think [the IRS was] not presented with this question when it created this ruling. I do not believe that this ruling precludes an organization from claiming as non-taxable income the revenue from virtual exhibit booths when they are tied to a live event and extends for no more three days on either side” since they didn’t specifically consider the question of the annual meeting itself being live and interactive but also online.

Just don’t push your luck and extend the virtual trade show more than three days pre or post, she said.