Vol. VII, No. 3May - June 1999

So-called Sweepstakes Bill Passes Senate Unanimously
On August 2, a substitute version of Sen. Collins' (R-ME) more-than-just sweepstakes bill, S. 335, entitled the "Deceptive Mail Prevention and Enforcement Act," passed the Senate by a vote of 93 to 0. Hearings on this bill are scheduled to be held by the House Committee on Government Reform before the August recess.

To get a better sense of the reasoning behind this bill, it is useful to review the hearings conducted in support of the bill, which, unlike the bill, were limited to sweepstakes. On July 20, the Subcommittee on Investigations of the Senate Governmental Affairs Committee held hearings entitled "The Hidden Operators of Deceptive Mailings." This hearing included two members of the U.S. Postal Inspection Service (including Kenneth Hunter, Chief Postal Inspector) among the witnesses, discussing companies which the Postal Service had investigated and acted against for sending deceptive mailings. The hearings also included representatives of two small direct marketing firms: Neapolitan Consultants of Las Vegas, Nevada, and Lone Star Productions of Merrick, New York. (Representatives of Publishers Clearing House, American Family Publishers, Reader's Digest, and Time Inc. were mauled rather severely last March.)

During the hearing, senators called for a complete ban on the practice of sending multiple solicitations of the same sweepstakes using different graphic presentations. Further, addressing the president of Lone Star Publications, Sen. Carl Levin (D-MI) said "I hope we can put you out of business." It is not clear whether Sen. Levin expects that S. 335 will have this effect.

The sweepstakes hearings have made for great political theater. Unsurprisingly, it appears that the rights of the American people will be trampled as a result. Last May, FSC filed comments (see FSC web site) with the House Subcommittee on Postal Affairs pointing out various problems with the sweepstakes bill, including the fact that it covered much more than sweepstakes. The FSC comments also discussed: the dangers of a grant of additional, excessive discretion to the U.S. Postal Service to deny access to the mails to fundraising pieces -- not limited to sweepstakes mailings (remember that only 130 years ago postmasters had the power to refuse to accept mail advocating the abolition of slavery); the grant of arbitrary subpoena power to the Postal Service; and the power to levy "civil" fines of up to $2 million per incident (civil fines mean that the due process protections accorded criminal cases need not be complied with).

However, while changes were incorporated into the bill by the committee, these critical concerns raised by FSC were never addressed. Please visit the FSC web site to take action opposing this threat to our liberties.

FEC Publishes Final Rule Re-Defining "Membership"
On July 30, the Federal Election Commission ("FEC") published its final rule redefining "membership" of a "membership organization." As reported in the previous edition of FREE SPEECH, last March FSC Legal Co-counsel William J. Olson represented FSC in public hearings on this topic. The FEC's previous definition of "member" violated the First Amendment.

The Free Speech Coalition supported the FEC's proposed definition, with some modifications: (i) a membership organization should be able to waive the dues criterion in appropriate instances according to predetermined specific criteria (such as financial hardship) approved by the organization's governing body; and (ii) the definition of membership organization should reflect, rather than reject, state law definitions of "membership organization" and "member." In addition, FSC criticized the proposed requirements that membership organizations make all of their formal organizational documents (articles, bylaws and the like) available to members, that such organizations amend their governing documents, and that there be a strict annual affirmation of membership.

The FEC's final rule made the following changes:
the definition of membership organizations (and the FEC's regulation of them thereby) was expanded to include unincorporated associations;

membership organizations may have self-perpetuating boards of directors if all members of the board are themselves members of the organization, as long as the organization has chosen this structure;

the board of directors or other committees or groups of members may set specific membership requirements, such as the amount of dues or other qualifications or requirements -- however, dues must be paid annually (albeit payments within a flexible window or subject to a reasonable grace period would meet this requirement) unless there is (i) the affirmation of membership on at least an annual basis, and (ii) direct participatory rights in the governance of the organization;

membership organizations shall make their articles, bylaws or other formal organizational documents available to their members -- organizations may impose reasonable copying and delivery fees for this service, and may also make these documents available at their headquarters or other offices, where members choosing to do so may consult and copy them;

membership organizations shall expressly solicit members, and expressly acknowledge the acceptance of membership, such as by sending a membership card or including the member on a membership newsletter list;

 in response to comments by FSC and other commenters, the FEC reduced the annual affirmation requirement to be met by such activities as attending and signing in at a membership meeting or responding to a membership questionnaire; and

the determination of whether an organization has members for purposes of the FECA will be determined under these regulations, and not by the definitions of state law that may either include or exclude persons as members of an organization for reasons unrelated to the FECA.

The FEC did not adopt the staff proposal that only communications "subject to the direction and control of [the membership organization] and not any other person" may be treated as express advocacy that is not a campaign expenditure under federal law.

In response to concerns raised that some organizations may have to amend their bylaws to comply with these new requirements, and that this can be a lengthy process (for example, some organizations require approval of proposed changes at consecutive annual meetings), the FEC stated that it may consider such organizations to be in compliance with these rules while steps are underway, in accordance with the organization's rules, to come into compliance, assuming that the other requirements of the rules are met and necessary changes are made at the first opportunity available under the organization's rules.

Postal Service Reduces Nonprofit Periodicals Rates
On July 12, the U.S. Postal Service Board of Governors approved the Opinion and Recommended Decision issued by the Postal Rate Commission in Docket No. MC99-3. This case, originally filed by the Postal Service last April, arose when nonprofit periodicals rates were inadvertently set higher than regular commercial periodicals rates. The new nonprofit rates have now been reduced to be no higher than commercial rates.

The new rates become effective on August 1, and refunds will be available for nonprofit periodicals mailings dating back to January 10 (when the prior nonprofit periodical rates came into effect).

Eight States Now Have Do-Not-Call List Laws
Tennessee and Alabama have passed legislation creating their own Do-Not-Call lists, bringing to eight the number of states requiring telemarketers to subscribe and comply with such lists. Under such laws, a state selects one of its bureaucratic agencies to compile and sell such lists (made of up state residents who do not care to receive unsolicited telemarketing calls). This system is similar to the nationwide list maintained by the Direct Marketing Association -- except that it also provides three opportunities for state revenue enhancement: (1) charging residents a fee to have their names placed on the list; (2) selling the lists to telemarketers; and (3) enforcing the laws against unwary or mistaken telemarketers. Compliance with the current eight state laws will cost a company more than $2,000 per year -- plus implementation costs.

Tennessee's law will charge companies $500 a year to access the list, but does not mention a fee for consumers to sign up for the list. The statute will also set penalties at a maximum of $2,000 per violation to "be calculated in a liberal manner to deter violators and to protect consumers." The law does offer a defense for companies which can demonstrate that they made a good faith effort to comply.

The Alabama law sets the fee to sign up for the list at $5 every two years, and the fee to purchase the list at $10 per year. Although violators may be fined up to $200 per violation, the application of the list to most telemarketers is limited.

Another such bill was defeated in the California Senate. The bill passed the Senate Appropriations Committee, and was headed for the Senate floor when it was discovered that the committee vote violated Senate rules. State Senate leader John Burton refused to grant the bill a waiver of the rules, and the measure was prevented from reaching the Senate floor. Sen. Burton described the bill as "silly" and unenforceable.

IRS Loses Two More Cases On Mailing List Rental Income
Two Tax Court cases decided on June 22, 1999, held that income from mailing list generally constitutes nontaxable royalties to the extent that it does not constitute payment for services. Common Cause v. Commissioner and Planned Parenthood Federation of America, Inc. v. Commissioner had been consolidated for trial, but were decided separately. These decisions are consistent with the Sierra Club Tax Court decision decided in 1993 and affirmed by the Ninth Circuit in 1996. The IRS had argued in all three cases that mailing list rental income constitutes unrelated business income, subject to taxation, and not royalty income.

California Attorney General To Toughen Charitable Fundraising Oversight
California Attorney General Bill Lockyer informed the California legislature that he will increase state oversight of charitable fundraising. Plans include hiring more fraud investigators and posting records on California's 81,000 nonprofit organizations on the Internet.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible. However, contributions to the Free Speech Defense & Education Fund, Inc., a 501(c)(3) public charity, are tax-deductible.