No Donations Please

There is the beginning of a rather icky problem in open source software to do with Donations. You’ve seen those shiny Donate buttons on many software projects’ websites, maybe you’ve even clicked on one to support a software project you like. Well, Paypal and Amazon are becoming renowned for NOT HANDING OVER THE MONEY to the developers. Why not? Well, according to the fine print, the Donate button is supposed to be for registered non-profits only.

Unfortunately, this fine print has been so small that many people haven’t noticed it (I think they’ve made it larger recently), and Paypal and Amazon don’t get around to checking until you try to withdraw the donations generously provided by the community. (As far as I know the donations eventually get returned to the people who made them if the recipient is found to be ineligible.)

This is clearly upsetting and worrying for the developers in question, especially if they are counting on these donations to help support themselves while they work on projects that benefit the wider community. I have heard some people make technical arguments that Paypal and Amazon should not be in the business of checking the credentials of whoever is using the Donate button. I don’t know about that, but I’m going to make an entirely different sort of argument here.

Paypal and Amazon have a policy that you should not use the Donate button unless you are a registered charity. I can understand where they are coming from in that the word “Donate” carries with it a specific meaning that will trigger people to assume that they are, in fact, making a bona fide charitable donation. It’s certainly possible to imagine that some people would take advantage of this and add a “Donate” page to an existing business, tricking people into making donations for a fictional charity.

However, that’s their logic. My logic is this: you should not use a Donate button because it’s a bad idea financially, for you and for the people donating to you. Let’s start with the donors. Let’s say there’s a great little open source project that has saved me a huge amount of time and money, and I want to support this project by way of “thank you” and also to help the developer make more awesome stuff. I go to the project website, click on Donate, and send off my $100. A few months later, I’m doing my taxes and I see a charge for $100 on my company credit card. Now I’m stuck. I donated to a project which isn’t a registered charity, so I can’t get a tax write-off for this $100. I’ve also messed up by putting this on my company credit card since I treated it as a business expense and didn’t really think it through all the way. So, I have a minor admin headache to deal with. Maybe I’ll think twice next time about donating money.

Now let’s take you, the developer, and your software project. Unless you are a very large organization like the Apache Foundation with 501(c)3 status (or your country’s equivalent), if you are taking “donations” for an open source software project then you are running a business. You are making money off your code. You need to take this seriously and figure out the implications, and run it like a business. Maybe it’s a micro-business that will only ever make a few hundred dollars in pizza and hosting money, but if you start out treating it like a business then you will save yourself a lot of trouble.

People don’t donate to a business, they buy from a business. So, if you want people to support your open source project then CREATE PRODUCTS and SELL THEM. These can be real products, like books you write, or fake products which are just proxies for the donations people are going to send you. But, you act as though they are products and you sell them to people who want to support your software.

Now as your supporter, I have a receipt for the $100 “set your own price e-book” I bought. This is a valid business expense and you gave me a receipt. I have no more admin problem. You as the developer have THOUGHT THROUGH THE IMPLICATIONS of receiving money for your open source software, you have recognized that you want to run it as a business, you have made enquiries for the tax implications and you are keeping good records of your income and expenses. This makes more sense for everybody, and it also avoids the headaches of the evil, shiny, Donate button.




MikeTheBee 01 Oct 2010

You make some good points about the issue of charity donations, and that a business should be a product business but there are business models that fall between product sale and charity ones. In the world of art and creativity there has always been patronage prior to or as an alternative to product sales.

Paypal T&C's have a category of "non-profit, but not a charity" and the people I have spoken to, who use the donate

button, believe that is a valid use of it. Unfortunately while it is mentioned in the T&Cs, the Help Pages are ambiguous about the use of the button for other than registered charities. Paypal suggest that one asks for clearance of the use before implementation, but I understand that they rarely reply to such queries.

The difference being that a charity is registered and tax relief can be claimed by the donor (in the US) or the charity (in the UK). Just making a gift to someone else should be a valid transaction for all financial transaction service providers and I don't see why the e-banking service providers should refuse/mess up such transactions when processors of cash, cheques or postal orders would be quite happy with them.

If I recall correctly to accept donations as a Charity you must supply Paypal with a registration number for the country you are accepting donations in, but the non-profit category does not require that.

Certainly if I Donate a gift to someone I do not expect to claim tax relief as a charitable donation, but it could still be recorded as a business expense transaction, in the same way as hospitality.

I think it wrong that people should be encouraged to create 'dummy' products & services to collect donations and the issue of sales tax needs to be considered, but it sounds as though this is the preferred model.

I believe it is the money laundering and traceability rules that discourage a non-charity donation button from being offered.

One business model that I am thinking would benefit from such a payment method is the 'micro-patronage' one. In this model a person of note is sponsored for the work they do by one-off or recurring payments. This certainly seems a valid model to me and if supporters want to help in such a way Paypal should process the transaction without concern.

Just my tuppence worth (VAT @ 0%:)

Thank you for such a provocative post, Mike

Ana Nelson 01 Oct 2010

Mike,

Thanks for your thoughtful remarks.

I do take on board what you say about it being inappropriate or unsatisfying in some cases to convert sponsorship into 'products'. Perhaps if I said 'products or services' it would be a little better.

I think it would be great if there were a clear tax status and general recognition for 'micro-patronage' as you call it, with "Sponsor" buttons available as standard from web payments companies.

However, until that happens, my concern is that people stumble into this, make assumptions, don't clearly define how they are going to account for the money they receive, and potentially leave themselves open to tax liability if their revenue authority should happen to decide "well, that's really consulting and hence liable for VAT, oh and here are some penalties for failing to account properly and in due time" etc.

I think it will be possible for creative people to define real or virtual products based on their open source content which don't compromise the spirit of their work and allow their fans to support them. In some cases this will be a slightly clumsy social work-around, whereas in others it will probably reflect the true nature of the enterprise.

MikeTheBee 01 Oct 2010

Thank you for your expansion regarding my comments.

Your key phrase is 'I think it will be possible for creative people to define real or virtual products', given your experience and knowledge it gives me hope, as it seems to me that these are products are not being offered by the 'new bankers' any more than the 'old bankers' failed model did. It seems to me that new technology is being used to 'enforce' obscure rules and the 'flexible bank manager in a your wardrobe' is no longer (RIP).

Your concern for the lacsidaisyical (sp?) approach yo business is well grounded, the current pressures on would-be entrepreneurs and the encouragement to students to create such swift startups is likely to entangle them and others in tax messes that no parties really want or intended.

This is why the pages of legaleezed T&C's and EULA's should not just be foils that allow any of the 'new banks' to make the real rules up as they go along.

It seems as though start-ups are between a rock (proper banks that are now gov owned and won't lend) and a hard place (new pseudo banks that will but won't define the rules and then take the money away)

With hope springing....

Mike.

@AlisonW 02 Oct 2010

Replace the word "Donate" (which seems to be taken to have a specific legal meaning in some jurisdictions) with the word "Support".

There.

JLS 23 Nov 2010

What are the tax implications, if any, for the supporter and the supportee when "donate" becomes "support"?