Regulation of Charitable Solicitations

By Richard R. Hammar, J.D., LL.M., CPA

© Copyright 1991, 1998 by Church Law & Tax Report.  All rights reserved.  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.  If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08

Several states have enacted laws regulating the solicitation of charitable contributions. Presumably, the purpose of such laws is “to protect the contributing public and charitable beneficiaries against fraudulent practices in the solicitation of contributions for purportedly charitable purposes.”¹

The typical statute requires certain charitable organizations to register with the state government prior to the solicitation of contributions within the state and imposes various reporting requirements. Such statutes ordinarily give the state authority to revoke the registration of any charitable organization upon a finding that the organization has engaged in a fraudulent or deceptive practice, or that it has expended more than a prescribed or “reasonable” amount of solicited funds for administrative and fund raising costs, and that the public interests so require.

Religious organizations, including churches, are insulated from regulation in many states either because of an exemption² or because no charitable solicitation law has been enacted.³ Many charitable solicitation laws exempt only some religious organizations. To illustrate, some laws exempt only those religious organizations (1) that are bona fide religious institutions,⁴ (2) that solicit funds only within the county where the religious organization is located or within an adjoining county that is less than six miles away,⁵ (3) that do not receive their financial support primarily from persons other than members,⁶ or (4) that have received a declaration of current tax--exempt status from the government of the United States.⁷ Further, many states have laws requiring registration and regulation of “professional” fund raisers.⁸

The application of state charitable solicitation laws to religious and charitable organizations has been challenged in a few cases. In Larson v. Valente⁹ the United States Supreme Court invalidated a section of the Minnesota Charitable Solicitation Act that exempted from registration only those religious organizations receiving more than half of their support from members. The Court emphasized that “the clearest command of the Establishment Clause is that one religious denomination cannot be officially preferred over another,”¹⁰ and concluded that “the fifty percent rule . . . clearly grants denominational preference of the sort consistently and firmly deprecated in our precedents.”¹¹ Such a law, observed the Court, must be invalidated unless (1) it is justified by a compelling governmental interest and (2) it is clearly fitted to further that interest. The “tripartite” establishment clause analysis formulated by the Court in the Lemon case¹ was deemed inapplicable in this context, since that analysis was “intended to apply to laws affording a uniform benefit to all religions, and not to provisions, like the . . . fifty percent rule, that discriminate among religions.”²

The Court acknowledged that the State of Minnesota had a significant interest in protecting its citizens from abusive practices in the solicitation of funds for charity, even when the solicitation was conducted by religious organizations. However, it rejected the state's contention that the 50 percent rule was closely fitted to further that interest.

Would a state charitable solicitation law requiring all religious organizations to register be constitutionally permissible? Such a law obviously would avoid the “denominational preference” that tainted the Minnesota statute. The Supreme Court even observed in Larson that it was not suggesting that “the burdens of compliance with the Act would be intrinsically impermissible if they were imposed evenhandedly.”³ This more difficult question was addressed in 1980 by the Supreme Court of North Carolina in the Heritage Village decision.⁴

The Supreme Court of North Carolina, in striking down a state charitable solicitation law exempting all religious organizations except those whose financial support came primarily from nonmembers, concluded that the first amendment (to the United States Constitution) prohibits any state from subjecting religious organizations to the administrative requirements of a charitable solicitation law. The Court noted:

[F]or a statute to pass muster under the strict test of Establishment Clause neutrality, it must pass the three--prong review distilled by the Supreme Court from “the cumulative criteria developed over many years”: First, the statute must have a secular purpose; second, its principal or primary effect must be one that neither advances nor inhibits religion . . . ; finally the statute must not foster an excessive government entanglement with religion.⁵

The court concluded that the first part of the Supreme Court's three--prong test was satisfied, since the Act had a valid secular purpose of protecting the public from fraud. It found, however, that the Act violated both the second and third elements since it inhibited certain religious groups and constituted an impermissible governmental entanglement with religion. As to the second element, the Court observed:

[T]he Act grants an exemption from the licensing and reporting requirements to a broadly defined class of religious organizations. . . . The proviso, however, which immediately follows in the same section denies the benefits of the exemption to those religious organizations which derive their financial support “primarily” from contributions solicited from “persons other than their own members” . . . . [T]he effect of the proviso is to alter the original exemption's religious neutrality. The result is a qualified exemption which favors only those religious organizations which solicit primarily from their own members. The inescapable impact is to accord benign neglect to the more orthodox, denominational, and congregational religions while subjecting to registration those religions which spread their beliefs in more evangelical, less traditional ways. This the state may not do.⁶

As to the third element of the test, the Court observed:

Considerations of the excessive entanglement between church and state threatened by the Act's substantive requirements additionally compels us to conclude that plaintiffs may not constitutionally be denied an exemption. . . . Should plaintiffs or any other religious organization be subjected to the full panoply of strictures contemplated by the Act, we would be faced with precisely the sort of “sustained and detailed administrative relationships for enforcement of statutory and administrative standards” that have been repeatedly condemned by the Supreme Court.⁷

Both the Larson and Heritage Village decisions were based on the establishment clause. Neither court directly addressed the applicability of the first amendment's free exercise of religion and free speech clauses in analyzing the constitutionality of applying charitable solicitation laws to religious organizations. The free exercise and free speech clauses have been relied upon by several courts in invalidating municipal charitable solicitation ordinances.⁸ In 1980, the Supreme Court observed in the Village of Schaumburg decision that:

Prior authorities, therefore, thoroughly establish that charitable appeals for funds . . . involve a variety of speech interests—communication of information, a dissemination and propagation of views and ideas, and the advocacy of causes—that are within the protection of the first amendment. Soliciting financial support is undoubtedly subject to reasonable regulation but the latter must be undertaken with due regard for the reality that solicitation is characteristically intertwined with informative and perhaps persuasive speech seeking support for particular causes or for particular views on economic, political, or social issues, or for the reality that without solicitation flow of such information and advocacy would likely cease.⁹

Such reasoning buttresses the conclusion reached in Heritage Village. Not only would a state charitable solicitation law that applies to religious organizations be constitutionally suspect under the establishment clause, but it also would clash with the free exercise and free speech clauses.

As the Supreme Court noted in Larson, a state unquestionably has a significant interest in protecting its citizens from abusive practices in the solicitation of funds for charity. However, such an interest alone does not determine constitutional validity. The state must also demonstrate that its charitable solicitation law is “closely fitted to further the interest that it assertedly serves.”¹⁰ As the Court noted in Village of Schaumburg, “[t]he Village may serve its legitimate interests, but it must do so by narrowly drawn regulations designed to serve these interests without necessarily interfering with first amendment freedoms.”¹¹ Can a state serve its legitimate purpose of preventing fraud in the solicitation of funds by religious organizations in a less drastic way than by registration under a charitable solicitation law? The answer clearly is yes. In an analogous case, the Supreme Court in the Village of Schaumburg decision observed that the government's legitimate interest in preventing fraud can be served by less intrusive measures: “Fraudulent misrepresentations can be prohibited and the penal laws used to punish such conduct directly.”¹² Another court has noted that less restrictive alternative means of fulfilling the government's interests include “enforcement of existing laws against fraud, trespass, breach of the peace, and any other substantive offenses which might be committed. The [government] may adopt appropriate registration and identification procedures to protect its residents against wrongdoing by spurious solicitors.”¹³

In summary, the Heritage Village decision strikes a reasonable balance of the competing interests of church and state. It frees religious organizations from entangling administrative supervision by the government; it acknowledges that the government remains capable of asserting that a particular organization is not in fact a bona fide religious organization entitled to exemption; it does not insulate religious organizations from private or penal actions; and it gives due weight to the principle that the solicitation of funds for the support of religious organizations is often an expression of religious faith.¹⁴

A similar result has been reached in the related context of securities regulation. Most state securities laws, while designed primarily to prevent fraud, exempt religious organizations from the securities registration requirement. Religious organizations are not exempted from the anti--fraud provisions of such laws, and thus they remain liable for fraudulent conduct even though they are exempt from registration. Further, the state is free to deny an exemption to religious organizations that have engaged in fraud in the past or that are not bona fide religious organizations. Such a balance between the competing interests of church and state serves as a model for the related contexts of state and municipal charitable solicitation laws. The government's interests can be served by less restrictive means than registration.

The constitutionality of applying such charitable solicitation ordinances to religious organizations has been challenged in several cases. In Village of Schaumburg,¹⁵ the Supreme Court struck down an ordinance prohibiting the solicitation of contributions by charitable organizations that did not use at least 75 percent of their receipts for charitable purposes. The ordinance excluded solicitation expenses, salaries, overhead, and other administrative expenses from the definition of “charitable purpose.” The Court conceded that charitable appeals for funds involve a variety of speech interests that are within the protection of the first amendment, and that any ordinance interfering with such interests would be constitutionally valid only if it (1) served a compelling governmental interest and (2) was narrowly drawn to serve that interest without necessarily interfering with first amendment freedoms. The Court acknowledged that a city has a substantial interest in protecting the public from fraud, crime, and undue annoyance. However, it concluded that a municipal ordinance banning solicitations by any charity that did not expend more than 75 percent of solicited funds for charitable purposes could not be upheld, since the city's legitimate interests could be “better served by measures less intrusive than a direct prohibition on solicitation.”¹⁶ The Court also noted that there was no evidence that “organizations devoting more than one--quarter of their funds to salaries and administrative expenses are any more likely to employ solicitors who would be a threat to public safety than are other charitable organizations.”¹⁷

In summary, the Village of Schaumburg decision may be reduced to the following two principles: (1) The right to solicit funds for religious and charitable purposes is protected by the first amendment's free speech clause, and (2) this right is not unconditional, but may be limited by a municipal ordinance if the ordinance (a) serves a compelling government interest and (b) is narrowly drawn to serve that interest without unnecessarily interfering with first amendment freedoms.

Village of Schaumburg has been followed in several other cases.¹⁸ In most of these decisions, municipal ordinances attempting to regulate charitable solicitations were invalidated. The courts generally concede that a city has a legitimate and substantial interest in preventing fraud, crime, and undue annoyance, but they often conclude that a particular charitable solicitation ordinance too broadly serves that interest since other, less restrictive, alternatives exist which serve the same interest. The Supreme Court in Village of Schaumburg noted:

Frauds may be denounced as offenses and punished by law. Trespasses may similarly be forbidden. If it is said that these means are less efficient and convenient than . . . deciding in advance what information may be disseminated from house to house, and who may impart the information, the answer is that considerations of this sort do not empower a municipality to abridge freedom of speech and press.¹⁹

In conclusion, a municipal ordinance purporting to regulate the solicitation of funds by some or all religious organizations should presumptively²⁰ be unconstitutional unless the city can demonstrate that the ordinance serves a legitimate and compelling interest and that this interest cannot effectively be protected by less intrusive, more narrowly drawn, alternatives. Several courts have concluded that the availability of private causes of action for fraud and trespass, together with penal prohibitions of such conduct, sufficiently protect a city's legitimate interests in safeguarding its citizens from abusive charitable solicitations by religious organizations. A city also of course may make a determination that a particular “religious” organization is spurious and therefore not entitled to an exemption, and it is free to deny an exemption to otherwise bona fide religious organizations that have been proven to have engaged in frauds upon the public.²¹  Further, any municipal charitable solicitation ordinance exempting only some religious organizations from registration would be suspect under the establishment clause, since some religious groups are singled out for favored treatment while others are not. All of these factors indicate that most charitable solicitation laws cannot constitutionally be extended to religious organizations.

Certainly any charitable solicitation law that gives a licensing body or official effective discretion to grant or deny permission to solicit funds for religious purposes is likewise unconstitutional:

The solicitation of funds for religious purposes is protected by the first amendment. Any law restricting the exercise of such rights must do so with narrow, objective and definite standards. If a certificate is required for one to solicit funds for religious purposes, the discretion of the official granting the certificate must be bounded by explicit standards. If the decision to issue the certificate “involves appraisal of facts, the exercise of judgment, and the formation of an opinion” the ordinance violates the first amendment. Ambiguities in the application process which give the licensing official effective power to grant or deny permission to solicit funds for religious purposes is likewise unconstitutional. In other words, it is not enough that an official is directed to issue the license forthwith; if the official may deny the application because of unclear requirements in the application process, the law is unconstitutional. Laws allowing an investigation into the financial affairs of religious institutions have been held unconstitutional as an impermissible entanglement of the affairs of church and state. Finally, any prior restraint on the exercise of first amendment freedoms must be accompanied by procedural safeguards designed to obviate the dangers of prior restraint.²²

Finally, the Supreme Court has held that the fund raising activities of religious organizations, “like those of others protected by the first amendment, are subject to reasonable time, place, and manner restrictions.”²³ It is doubtful that these restrictions are of any practical relevance in the context of charitable solicitations by religious organizations. One court specifically held that the Supreme Court's decision in Heffron “has a rather narrow applicability” because of its “somewhat unusual factual situation” involving solicitation at a state fair.²⁴ The court observed that “the flow of the crowd and demands of safety are more pressing in the context of the fair.”²⁵ The Supreme Court's decision in Village of Schaumburg strongly intimated that “time, place and manner” restrictions do not justify regulation of charitable solicitations.²⁶

Limitations on Charitable Giving

Federal and State Securities Laws

Copyright Law

Zoning Law and Churches

Building Codes

Nuisance

Government Investigations

The Civil Rights Act of 1964

Judicial Resolution of Church Disputes

Church Landmarking

Eminent Domain

The Civil Rights Restoration Act of 1987

Americans with Disabilities Act

Political Activities by Churches and Other Religious Organizations