Wednesday, February 27, 2013

Ignorance Is Not Bliss: UBIT and the Museum Store

When it comes to legal issues for museums, ignorance is definitely not bliss. Instead, forewarned is forearmed. Make it a regular activity to research and seek advice before you deal with any legal issue. Along with learning how the law will impact your museum, policies and ethics are good prophylactics.
Disclaimer: The author is not an authority on the law, and this blog post is not a substitute for legal advice. Whenever you deal with legal issues, it is imperative that competent legal counsel be sought. In seeking out legal counsel, remember that many areas of museum law are specialty areas, from copyright and licensing to tax-exempt status and accessibility. An attorney who practices personal injury or bankruptcy law, for example, may not have the background or experience to deal with many museum concerns.
The chapter in the Small Museum Toolkit on museums and the law provides a brief introduction to many legal issue and then guides you to resources for finding more information and legal rulings.
Let's take unrelated business income tax as an example.
The IRS mandates that income produced at exempt organizations from “regularly conducted activities,” such as those conducted by museum stores and restaurants (as opposed to one-time or occasional activities such as fundraising events), be related to the organization’s exempt purpose or else become subject to the unrelated business income tax (UBIT). UBIT was established to protect nonexempt businesses from unfair competition. If a “substantial” percentage of a museum’s income comes from unrelated activities, it risks losing its tax-exempt status. And even if, for example, some museum store merchandise is substantially related to the museum’s mission, the IRS’s so-called fragmentation rule means that other merchandise that is not so related can be separated out for taxation.(1) Although the IRS has not ruled on the definition of “substantial,” “as a general rule . . . if unrelated income regularly falls within the range of 15–30% of museum revenues, you may wish to establish a for-profit subsidiary.”(2)
While more details about UBIT regulations are available on the IRS website,(3) a few rulings on UBIT regarding museum stores may be informative. Low-cost items (e.g., T-shirts, magnets) are not taxable if they promote the museum or provide an educational message.(4) The sale of note cards or postcards featuring images of museum collections has been deemed to be within the law.(5) “Merely affixing the museum’s name to an object [however] did not establish the requisite causal relationship with the museum’s exempt purpose. It makes no difference that many of the articles containing the name or logo are inexpensive souvenirs or trinkets.”(6)
There are some general rules about buying and producing merchandise to sell in a museum store with respect to UBIT. First, each sale item will be individually considered for UBIT by the IRS. Thus, “it can be helpful to consult curators and educators to evaluate which goods are related to the museum’s purposes and which are not.”(7) Merchandise featuring the reproduction of some- thing in the museum collections is less likely to fall under UBIT. Second, adding an accompanying small card or hang tag with educational information about the item (e.g., information about the artist, historical information about the craft, how the item relates to local history) increases the educational value and thus helps negate UBIT. Third, you can sell unrelated merchandise, but you will have to keep track of these sales in order to pay UBIT.(8)
Museum stores have great potential to support your museum's education mission and provide some earned income. This introduction to UBIT should help you to consider what legal ramifications having a store might mean for your museum.
Allyn Lord is the director of the Shiloh Museum of Ozark History in Springdale, Arkansas. Since 1982 she has served on the AAM board; been an accreditation, Museum Assessment Program (MAP), and Institute of Museum and Library Services (IMLS) grant reviewer; and worked on numerous committees, including those serving small museums with both AAM and AASLH. She has also been active in the Arkansas Museums Association and Southeastern Museums Conference. She believes in the power of networking, professional development, mentoring, and service to the field.
(1) “Museum Retailing—UBIT Issues,” Internal Revenue Service,
(2) Jeffrey Hurwit, “The Entrepreneurial Museum: Some Legal, Tax, and Practical Perspectives,” Hurwit & Associates, museum.php.
(3) “Unrelated Trade or Business,” Internal Revenue Service,
(4) Hurwit, “Nonprofit Governance.”
(5) Jim Bloom, “IRS Refines Its Position on Museum UBIT Sales of Inventory,” Free Library, April 1996,
(6) Bloom, “IRS Refines Its Position.”
(7) Laura Damerville, “BIT Focus: Museum Store Products,” Art Law Clinic Client Newsletter 1, no. 1 (fall 2005),
(8) Damerville, “BIT Focus.”


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