Associations forced to transition in-person trade shows to virtual events as a result of the ongoing COVID-19 pandemic are carefully consulting existing guidance from the Internal Revenue Service (IRS) regarding virtual exhibit revenue and unrelated business income tax (UBIT).

Longstanding congressional statute holds that revenue from traditional trade shows is exempt from UBIT if certain conditions are met, such as being conducted in connection with an international, national, state, regional, or local convention and being designed to promote the industry’s products or services. As the pandemic has dragged on this year, however, many of these traditional trade shows have either been cancelled or converted to a virtual platform.

To help them understand exposure to UBIT with these virtual events, association professionals are relying on guidance on the subject issued by the IRS in 2004. The guidance is clear that when such virtual trade shows are conducted so they are ancillary to in-person trade shows, revenue will not be subject to tax. If a virtual trade show exists without an in-person component, however, then the net revenue is subject to UBIT.

Of course, this guidance is dated and could not foresee the COVID environment where virtual trade shows are unable to serve as companions to in-person events as nearly all in-person events have been cancelled. The 2004 guidance also does not consider technology improvements in more recent years that allow for networking and educational programming to exist in concert with a virtual trade show.

“While it is unclear how the IRS may apply its 16-year-old guidance to the modern-day virtual trade show and whether its guidance today might be different, taken literally, it would seem a virtual trade show of any kind would not qualify for the existing trade show safe-harbor exception from UBIT,” said association attorney Jeff Tenenbaum, managing partner of Tenenbaum Law Group. “That being said, that does not automatically mean that virtual trade show income would be taxable as UBI; it would simply be ineligible for the safe harbor and subject to the standard three-prong UBIT analysis. Moreover, while the UBI exception for corporate sponsorship income does not apply to ‘qualified conventions and trade shows,’ if virtual conferences are deemed to not fall within that definition, then it may well be possible to restructure some of these business relationships as corporate sponsorships. In short, this is clear as mud.”

While many associations would like to see the IRS update its guidance on virtual trade shows, most tax and legal experts agree that is unlikely to occur before the pandemic’s impact on in-person gatherings is mitigated. In this unique and challenging environment, associations have creatively addressed the ongoing need for education, networking and business development in a time when people can’t meet face-to-face. Mike Tryon, partner at RSM US LLP, said he continually advises association leaders not to let the absence of updated IRS guidance on virtual trade shows deter them from experimenting with new ways of content delivery and relationship-building.

“The reality at the end of the day is that COVID has forced upon us as a community a great period of experimentation and trying things differently,” Tryon said. “The message to volunteer leadership, especially the board, is that we’ve got to try things we’ve never tried before. Some are going to work, and a lot of things might fail. Board leaders should be telling management, ‘don’t be afraid to fail. Let’s see what the market dictates and what membership value can be created.’”