Special Bulk Third-Class Eligibility Restrictions

POSTAL SERVICE

39 CFR Part 111

Special Bulk Third-Class Eligibility Restrictions

AGENCY: Postal Service.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: On October 28, 1993, the President signed into law Public Law

103-123, the Treasury, Postal Service, and General Appropriations Act

for 1994. Title VII of the Act, the Revenue Forgone Reform Act, amends

39 U.S.C. 3626 by adding provisions to subsection (j) and new

subsection (m). These sections concern the administration of special

bulk third-class postage rates for certain qualified organizations. The

provisions, which were not to take effect until after December 31,

1993, make certain types of advertisements, promotions, and offers, as

well as some products, ineligible to be mailed at the special bulk

third-class rates. This document contains regulations implementing the

legislative changes.

EFFECTIVE DATE: September 4, 1994.

FOR FURTHER INFORMATION CONTACT: Ernest Collins, (202) 268-5316.

SUPPLEMENTARY INFORMATION: The Postal Service published in the Federal

Register (58 FR 64918-64919) on December 10, 1993, a proposal to amend

the Domestic Mail Manual to implement certain provisions of Public Law

103-123, the Treasury, Postal Service, and General Appropriations Act

for 1994. These provisions made certain types of matter ineligible to

be mailed at the special bulk third-class postage rates, which are

available for use by certain qualified nonprofit organizations and

political committees. The Postal Service requested comments by January

10, 1994. Subsequently, the comment period was extended to February 9,

1994, by notice in the Federal Register (58 FR 65959) on December 17,

1993. At the request of postal customers, the Postal Service held a

public meeting on January 28, 1994, as announced in the Federal

Register (59 FR 1512) on January 11, 1994, to facilitate the receipt of

comments regarding the proposal to implement new statutory restrictions

on the use of special bulk third-class mail.

The new legislation establishes additional content-based

restrictions on matter eligible for special bulk third-class rates. In

order for material that advertises, promotes, offers, or for a fee or

consideration, recommends, describes, or announces the availability of

any product or service to qualify for mailing at these rates, the sale

of the product or the providing of the service must be substantially

related to the exercise or performance by the organization of one or

more of the purposes constituting the basis for the organization's

authorization to mail at such rates. The determination whether a

product or service is substantially related to an organization's

purpose is to be made in accordance with standards established under

the Internal Revenue Code.

The legislation also establishes restrictions for mailing products

at the special rates. The only products mailable at the special bulk

third-class rates are low-cost products as defined under the Internal

Revenue Code, items donated or contributed to the qualified

organization, and periodical publications of qualified organizations.

The Postal Service views the new provisions as supplementary to, rather

than a change to or replacement for, existing restrictions on special

rate mailings. That is, mailings ineligible for the special rates under

existing rules remain ineligible for these rates, regardless of whether

they violate the new restrictions. Further, mailings that violate the

new restrictions would not be eligible for the special rates,

regardless of whether they would be eligible under existing rules.

As a general matter, it should be recognized that the Postal

Service has limited discretion on what may be mailed at the special

rates. These historically subsidized rates are based on statutes that

prescribe standards for who may mail at the special rates and what may

be sent at those rates. The Postal Service views its role as the

administrator of these laws. Accordingly, its goal in this rulemaking

is to promulgate rules implementing Public Law 103-123.

As explained below, the new rules deny the use of special bulk

third-class rates for mailpieces that contain advertisements for

products or services of the qualified organization that are not

``substantially related'' to a purpose on which the organization's

authorization to mail at the special bulk third-class rates is based.

This prohibition applies to catalogs and publications containing such

advertisements, regardless of the inclusion of other advertisements

that do qualify for mailing at those rates. Paid advertisements that do

not violate any of the current restrictions will continue to be allowed

in publications sent at the special bulk third-class rates, as long as

they pass the ``substantially related'' test. These new rules are in

addition to, and are designed to be compatible with, existing

prohibitions on the use of special bulk third-class rates for improper

cooperative mailings, and certain advertising for credit cards,

insurance policies, and travel arrangements. As a separate matter, the

Postal Service will revise mailing statements for special bulk third-

class mailings by citing the appropriate Domestic Mail Manual section

to call mailers' attention to provisions with which they need to be

familiar.

Evaluation of Comments Received

Written comments from almost 600 religious, educational, fraternal,

charitable, labor, and agricultural organizations and individuals were

received by the Postal Service. In addition, 14 commenters offered oral

comments at the public meeting.

Four hundred seventeen comments oppose enforcement of the

``substantially related'' test to determine whether an advertisement,

promotion, or offer is mailable at the special bulk third-class rates.

They state that the test would be detrimental to fundraising activities

needed to sustain operating budgets, harm religious publications of all

faiths, and impair organizations' abilities to carry on their

religious, educational, or charitable functions.

As explained above, the Postal Service's responsibility is to

implement and administer a new statutory provision restricting the use

of special bulk third-class rates. This law specifically requires that

the sale of a product or the providing of a service must be

``substantially related (aside from the need, on the part of the

organization promoting such product or service, for income or funds or

the use it makes of the profits derived) to the exercise or performance

by the organization of one or more of the purposes constituting the

basis for the organization's authorization to mail at such rates''

(i.e., special bulk third-class rates). Consequently, the Postal

Service and qualified organizations are required to use the

``substantially related'' test to determine whether an advertisement,

promotion, or offer is mailable at the special bulk third-class rates.

The statute further states that the ``substantially related'' test

for products and services must be consistent with the standards

established by the Internal Revenue Service (IRS) and courts reviewing

IRS decisions. Accordingly, the rules adopted by the Postal Service

follow these standards.

To be ``substantially related'' in accordance with IRS standards,

an advertised product or service must contribute importantly to the

accomplishment of one or more of the purposes of the qualified

organization. This means that the sale of the product or service must

be directly related to accomplishing one or more of the purposes on

which the organization's authorization to mail at the special bulk

third-class rates is based. The sale of the product or offering of the

service must have a causal relationship to the achievement of the

exempt purposes (other than through the production of income) of the

qualified organization. (Whether an activity generates income that will

be used to accomplish one or more of the purposes of the qualified

organization is not to be used as a factor in determining whether an

advertisement passes the ``substantially related'' test.) A synopsis of

IRS rulings regarding the definition of ``substantially related'' is in

Internal Revenue Manual, sec. 7751, part (36) 40 (Exempt Organizations

Handbook). Additionally, the Postal Service expects to publish a

handbook that will provide further guidance to mailers.

One of the major points of contention throughout this rulemaking

has been the classification of third-class newsletters, bulletins, and

other publications containing paid advertising from parties other than

the publisher. The proposed rule published on December 10, 1993, sets

forth the Postal Service's view that these publications are subject to

the new statutory restrictions, and would be excluded from mailing at

the special bulk third-class rates if they contained paid advertising

that did not comply with the ``substantially related'' test. Numerous

commenters have opposed this interpretation, arguing that the statute

contains a general exception for these publications, or that it

reflects the intent of Congress to permit paid advertising, as

distinguished from an organization's own advertising, to be sent at the

special rates. The Postal Service believes that these objections are

not well taken, and that the terms of the statute contain no special

exception from the ``substantially related'' test for the advertising

content of third-class publications.

The ``substantially related'' test is contained in new subparagraph

(D) of 39 U.S.C. 3626(j)(1), which forbids the application of special

bulk third-class rates to ``mail which advertises, promotes, offers,

or, for a fee or consideration recommends, describes, or announces the

availability of'' certain categories of products and services. The

types of advertising already restricted under paragraph (j)(1) include

advertisements for credit cards by subparagraph (A), for insurance

policies by subparagraph (B), and for travel arrangements by

subparagraph (C). Subparagraphs (A), (B), and (C) contain no exception

for paid advertising in third-class publications, and the Postal

Service has not applied any such exception in its enforcement of these

provisions.

Unlike the earlier provisions, however, new subparagraph (D) does

contain a specific exception related to publications. Subclause

(D)(ii)(II) provides that ``clause (i) [containing the substantially

related test] shall not apply if the product involved is a periodical

publication described in subsection (m)(2) [a periodical publication of

a qualified nonprofit organization] (including a subscription to

receive any such publication).'' By its terms, this provision

recognizes that a periodical publication may also be a product that a

nonprofit organization wishes to advertise, and it exempts the

advertising for the publication (or for subscriptions to the

publication) from the ``substantially related'' test. It in no way

prevents the application of the test to third-party paid advertising

for other products or services that may be contained in an issue of the

publication itself.

A second specific exception concerning publications is contained in

new 39 U.S.C. 3626 (m), which restricts what ``mail consisting of

products'' may be sent at the special bulk third-class rates. Under

paragraph (m)(1), such products must either have been received by the

mailing organization as gifts or contributions, or be ``low-cost

articles'' as defined in the Internal Revenue Code. Paragraph (m)(2)

makes an exception from these requirements for a ``periodical

publication of a qualified nonprofit organization.'' Thus, the statute

recognizes that a periodical publication may also be a product that a

nonprofit organization wishes to mail, whether as a benefit to members

or a premium for potential donors in the course of a fundraising

appeal, and allows such mailings to go at the special rates. By its

terms, however, the ``product rule'' of subsection (m) does not

override the separate and distinct ``advertising rules'' of subsection

(j), and the Postal Service believes that it would be erroneous to

construe subsection (m) as a blanket exception to those rules. Such

interpretation would rob the new ``substantially related'' test of

subparagraph (j)(1)(D) of much of its effectiveness, by allowing

mailers to convert ineligible third-class catalogs into eligible third-

class ``publications,'' and overturn the Postal Service's established

enforcement policies regarding the credit card, insurance, and travel

advertising restrictions in subparagraphs (j)(1)(A), (B), and (C).

The new restrictions do not apply to publications mailed at the

special nonprofit second-class rates. However, if a publisher wishes to

mail copies of a special second-class rate publication at the special

bulk third-class rates as provided for in DMM E215.2.6, those copies

are subject to these new rules. Accordingly, those copies may not be

mailed at the special bulk third-class rates if they contain any

material ineligible for the special rates.

It should be emphasized that the application of the ``substantially

related'' test to third-party paid advertising in publications does not

preclude all paid advertising in publications mailed at the special

bulk third-class rates. If the product or service advertised is

substantially related to one or more of the nonprofit's qualifying

purposes, the publication may still be mailed at the special rates.

Each situation must be considered on a case-by-case basis, including

consideration of the product or service advertised and the nature of

the nonprofit organization. Examples of acceptable types of

advertisements include an advertisement for a blood glucose tester in a

nonprofit diabetes association's publication and an advertisement for

courses at one college in another college's publication.

It should also be noted that the ``substantially related'' test and

other advertising restrictions do not apply if the material in question

is not considered an advertisement under postal rules. The Postal

Service received numerous comments concerning the listing of

contributors in publications, such as the lists of individuals and

firms that appear on the back page of many church bulletins. For

purposes of these rules, acknowledgments of organizations or

individuals who have contributed to the nonprofit mailer are not

generally treated as advertising. 39 U.S.C. 3626(j)(2)(A). To prevent

technical disputes in individual cases concerning the distinction

between an advertisement and an acknowledgment, the rule will consider

material to be acknowledgments, rather than advertising, if they appear

on a page headed ``Sponsors,'' ``Contributors,'' ``Donors'' or a

similar term, and each acknowledgment does not exceed the size of a

business card (approximately 7 square inches). The listings should not

be labeled as advertising in other portions of the publication or

elsewhere (such as rate cards).

Similarly, organizations may still include information and response

cards concerning membership benefits in publications sent at the

special third-class rates. Such matter will still be required to comply

with the restrictions in 39 U.S.C. 3626(j)(2)(B).

Consistent with Postal Service practice and policy, public service

announcements for which no consideration has been paid will not be

considered advertising, and may be included in publications sent at the

special bulk third-class rates.

Finally, announcements of activities substantially all the work of

which is contributed by the members or supporters of a qualified

organization without compensation and advertisements for products and

services, including products and services offered as prizes or

premiums, substantially all of which have been received by a qualified

organization as gifts or contributions, are considered to be

``substantially related'' to the organization's purposes.

One hundred twenty-seven comments asserted that the Postal

Service's proposed rule did not follow the intent of Congress to base

mailing restrictions on whether the qualified organization pays

unrelated business income tax on the particular activity advertised.

The law, however, does not adopt the test urged by the comments.

Instead it clearly states that the products or services advertised must

be ``substantially related'' to the purpose(s) on which the qualified

organization's authorization to mail at special bulk third-class rates

is based. This ``relatedness'' test is only one of the factors

considered by the IRS in determining whether unrelated business income

tax must be paid, but this part of the test is singled out by the

statute as the standard that the Postal Service must follow.

Accordingly, the Postal Service is directed to rely on the

``substantially related'' portion of the unrelated business income tax

analysis but not the other parts.

Twenty-five comments oppose or protest increases in rates for

nonprofit mailers over the next 6 years, the end of subsidized funding

for nonprofit postage rates, and other aspects of the Revenue Forgone

Reform Act that will have an adverse effect on the mailing activities

of churches and church organizations. In general, these types of

comments are beyond the scope of this rulemaking. These comments also

questioned whether including new member information, financial

information, attendance information, and announcements of upcoming

church events would disqualify church bulletins from being sent at the

special bulk third-class rates. This kind of information concerning the

qualified organization's activities would generally be considered to be

substantially related to the nonprofit religious purposes of a church.

Three comments requested that scholarly journals be allowed to

continue to accept exchange advertisements and paid advertisements to

attract new subscriptions and promote books and journals. The final

rule allows paid advertisements to be in materials that are mailed at

the special bulk third-class rates as long as the advertisements are

for products or services related to the purposes on which the qualified

organization's authorization to mail at special bulk third-class rates

is based. Although each advertisement must be considered on a case-by-

case basis, the inclusion of exchange advertisements and third-party

paid advertisements under the circumstances described would not appear

to violate the ``substantially related'' test.

Ten comments stated that the proposed definition of ``low-cost

items'' was inconsistent with the Internal Revenue Service definition.

These comments are correct.

Accordingly, the definition for ``low-cost items'' in the final

rule is the same definition that the Internal Revenue Service uses and

includes a provision for annually increasing the cost of such items

based on the cost of living.

Ten comments stated that requiring a separate certification at the

time of mailing would be an administrative and logistical burden for

mailers and the Postal Service, urged that mailers needed more

information about the process and the consequences of improper

certification, and questioned why such a statement could not be

included on the mailing statement for each mailing. It was also

suggested that the application for special bulk third-class mailing

privileges be modified to state that the organization will submit only

mailings it thinks qualify for the special bulk third-class rates. In

response to these comments, it should be noted that the intended

purpose of the certification statement was more instructive than

regulatory. That is, the Postal Service was concerned that nonprofits

should be aware of the restrictions on nonprofit rates. Because mailing

statements are often signed by agents, there was concern that the

nonprofits themselves may not be aware of the new rules. Further,

although the publication of these rules and a one-time notice to the

nonprofit organization would provide sufficient legal notice, the

Postal Service took notice that the officers of nonprofit

organizations, particularly smaller ones, regularly change, and was

concerned that new officers might not be aware of the rules.

Nevertheless, in view of the hardships noted by comments, a separate

certification will not be required. Instead, the mailing statement that

must be completed for each mailing will be modified to refer to the DMM

section in which the standards for advertisements are located, as a

reminder and a reference. The Postal Service will also explore other

ideas to promote awareness of the rules, such as providing information

pertaining to this final rule to qualified organizations before the

effective date of the rule change.

Four comments expressed confusion between advertising, public

``thank yous,'' and free advertisements, and asked for clarification.

The definition for advertising that will be used to administer the new

eligibility requirements for special bulk third-class matter is in DMM

E211.11.1. As discussed above, public service announcements for which

no consideration is paid are not considered advertising as stated in

DMM E211.11.2. Two examples of a public service announcements are

``Support the Red Cross Blood Drive'' and ``Buy U.S. Savings Bonds.''

Eighty-one comments raised a variety of conflicting views from the

perspective of commercial mailers and small or local religious and

charitable organizations. The commercial mailers stated that it is

unfair to business owners who are not members of a qualified

organization to allow qualified organizations to include advertisements

of their members in the materials they mail at the special bulk third-

class rates, and higher postage should be paid when third-party

advertisements are mailed with materials of a qualified organization.

The small nonprofit organizations argued against imposing additional

restrictions on the advertising in their publications and other

materials they mail at the special bulk third-class rates. In general,

those comments concern suggestions that the Postal Service has no

authority to implement. The Postal Service is required to administer

the statutory provisions that prohibit only certain types of

advertising in nonprofit mail matter.

Three comments (two colleges and a religious organization) stated

that advertisements for similar types of organizations and affiliated

organizations should be permitted in materials mailed at the special

bulk third-class rates. The statutes and implementing rules look to the

nature of the product or service promoted, rather than to the identity

of the advertiser. As noted above, paid advertisements for

``substantially related'' products or services may be mailed at the

special bulk third-class rates, regardless of the identity of the

advertiser.

One comment stated that the proposed regulations do not include

provisions for informing mailers of enforcement decisions or of

measures that may serve to assist mailers plan future mailings. Notice

of changes in these standards will be published by the Postal Service

in accordance with its usual procedures for rulemaking.

Two comments suggested that the proposed definition of ``periodical

publication'' goes beyond the requirements of the new statute. Nothing

in the new statute suggests an intent to modify the established postal

definition of periodical publication derived from statutory standards,

which the Postal Service believes to be consistent with the common

usage and understanding of that term among mailers. The use of the

existing definition for a periodical publication would seem consistent

with the statute and would in addition help avoid ambiguity and

confusion.

Seventy-six comments stated that the proposed rule change is vague

and complex, does not clearly define ``substantially related'' and

``contribute importantly,'' and does not indicate whether ``front-end''

and ``back-end'' premiums as well as emblematic products will qualify

for mailing at the reduced rates. The Postal Service does not believe

the rule is unclear. Moreover, the final rule clearly states that the

phrases ``substantially related'' and ``contribute importantly'' will

be administered in accordance with Internal Revenue Service rulings and

precedents. In addition, as discussed, the Postal Service will produce

a publication to provide further guidance and examples concerning the

rules. The question whether front-end and back-end premium products, as

well as emblematic products, are eligible for the special rates will be

determined on a case-by-case basis by the statutory restrictions

concerning the mailing of ``products.'' That is, these products must

meet the definition for low-cost items, be donated or contributed to

the mailing organization, or be periodical publications.

Thirty-seven comments stated that they oppose retroactive

applicability of eligibility restrictions if the qualified organization

made an innocent mistake or lacked knowledge of the restriction at the

time of mailing, and requested that the Postal Service excuse ``minor

infractions'' regarding advertisements that do not meet the

``substantially related'' test. The statute does not provide any such

exceptions, and the Postal Service is required to ``maintain procedures

for the prompt collection of postage deficiencies arising from'' these

rules. 39 U.S.C. 3626(k)(3). See also 39 U.S.C. 2601(a)(1), which

requires the Postal Service to ``collect debts due to the Postal

Service.'' Indeed, the granting of an exception to some noncomplying

mailers would appear to discriminate against mailers who pay postage at

the appropriate rate. 39 U.S.C. 403(c). Here, the final rule is being

published in advance of its effective date to give mailers time to

adjust their methods of operation, and the regulations contain

sufficient detailed information to help mailers ensure that they comply

with the new eligibility restrictions. In addition, mailers may obtain

private legal or financial advice and counsel to assist in making their

decisions. Nevertheless, the Postal Service will continue to consider

requests for compromise or settlement of revenue deficiencies on a

case-by-case basis, consistent with existing postal policies.

Five comments stated that the Postal Service needs to establish a

procedure for mailers to obtain advance binding rulings regarding

whether materials and products will be mailable at the special bulk

third-class rates. In general, as discussed above, the Postal Service

does not believe such a procedure is necessary because mailers have

access to the many IRS determinations and precedents that govern how

the eligibility restrictions are administered. The Postal Service also

believes that nonprofit mailers that engage in any considerable amount

of commercial advertising or business activity may have already

obtained private legal or financial counsel to help them deal with such

matters. The Postal Service further notes that it does not have the

staffing to provide a large volume of such rulings in a timely and

consistent fashion, has not had a formal procedure for providing such

opinions in mail classification matters, and does not believe that it

is feasible to provide such a procedure.

One comment was concerned that the Postal Service may disqualify a

mailing announcing a meeting, seminar, or conference sponsored by the

qualified organization if it contains a brochure for the hotel where

the meeting will be held. This decision must necessarily be determined

upon the specific circumstances of the mailing. Nevertheless, the

Postal Service does not believe that the inclusion of such a brochure

would necessarily prevent the mailpiece from being mailed at the

special rates. For instance, it would be significant whether the

brochure is donated to the qualified organization as information for

individuals that will or may attend a meeting, seminar, or conference

sponsored by the qualified organization at that hotel, as opposed to

being provided by the hotel to the nonprofit with payment for inclusion

in the mailpiece.

Seven comments stated that a ``grace period'' should be authorized

to allow qualified organizations to mail materials that are in the

process of being prepared for mailing to avoid having to discard them

or pay a higher postage rate than was planned for the mailing. One

comment suggested that the grace period be allowed and that the Postal

Service publish a graduated phase-in schedule, beginning January 1,

1996, to allow for the acceptance of materials in the process of being

prepared for mailing. One comment suggested a 90-day grace period

consistent with this comment. The final rule will be effective

September 4, 1994, more than 4 months after it is published. Although

the Postal Service is sympathetic with the concerns expressed by

comments seeking a more extended period, these interests must be

balanced against the additional revenue loss caused by any delay in the

effective date of the rules. This loss will ultimately be borne by

postal customers. Additionally, it is noted that the rules will not

become effective until a full 8 months after the January 1, 1994, date

authorized in the legislation.

One comment from a nonprofit society stated that the regulations

should provide specific ``procedural rules'' for reliance on Internal

Revenue Service regulations and court decisions regarding the

``substantially related'' test. It is not clear what type of

``procedural rules'' the comment envisions. Nevertheless, the final

rule makes it clear, as specified by Public Law 103-123, that the

Postal Service will use standards established by the Internal Revenue

Service and the courts with respect to determining whether a product or

service is substantially related to the purpose(s) on which the

qualified organization's authorization to mail at special bulk third-

class rates is based.

Three comments stated that the Postal Service should determine that

the ``substantially related'' test does not apply to an offer for a

``back-end premium'' (a product or service provided to a donor who

first contributes a certain sum of money). To be mailable at the

special bulk third-class rates, the ``back-end premium'' itself, if it

is a product, must be a ``low-cost'' item or otherwise comply with 39

U.S.C. 3626(m). The solicitation seeking donations and offering the

``back end premium'' is, moreover, an advertisement, covered by the new

``substantially related `` test. Accordingly, the solicitation is

mailable at the special rates only if the premium is substantially

related to the nonprofit's qualifying purposes.

One comment stated that organizations that market training and

education through the mail should not be allowed to mail at the special

bulk third-class rates if they are not accredited educational

institutions. The statutory provisions do not restrict the use of

special rates in this manner, and this suggestion is beyond the

authority of the Postal Service to adopt.

One comment stated that the Postal Service should allow third-class

periodical publications that contain advertisements, have no

subscribers, and meet the definition of a periodical to be mailable at

the special bulk third-class rates until the Postal Service obtains

approval from the Postal Rate Commission to accept such periodicals as

second-class matter. Again, the statutory provisions do not authorize

an exception of this type, and it is beyond the authority of the Postal

Service to adopt. Organizations that wish to mail publications at the

special second-class rates will be required to obtain authorization,

under the existing eligibility requirements, to mail at those rates,

which would generally require that the publication be primarily

circulated to paid subscribers. Subscriptions may be paid for with dues

or contributions, if the dues or contributions and the subscription

price are separated to show the amount paid for the subscription. A

membership organization applying for second-class mailing privileges

under the narrowly defined ``Publications of Institutions and

Societies'' category (see DMM E222) may pass a resolution specifying

the amount that is to be used for a subscription to receive its

periodical publication if each member knows how much is being paid for

the subscription. Mailers should contact their postmasters for advice

on the exact procedures they must follow to qualify their publications

for special second-class mailing privileges.

List of Subjects in 39 CFR Part 111

Postal Service.

For the reasons discussed above, the Postal Service hereby adopts

the following amendments to the Domestic Mail Manual, which is

incorporated by reference in the Code of Federal Regulations (see 39

CFR part 111).

PART 111--[AMENDED]

1. The authority citation for 39 CFR part 111 is revised to read as

follows:

Authority: 5 U.S.C. 552(a); 39 U.S.C. 101, 401, 403, 404, 3001-

3011, 3201-3219, 3403-3406, 3621, 3626, 5001.

2. Domestic Mail Manual section E370 is amended by renumbering old

5.6 and 5.7 as 5.7 and 5.8, respectively; renumbering old 5.9 as 5.10;

and adding new 5.4(d), 5.6, 5.7c, and 5.9. The text is as follows:

E-Eligibility

* * * * *

E370 Special (Nonprofit) Bulk Rates

* * * * *

5.0 Eligible and Ineligible Matter

* * * * *

5.4 Prohibitions

Except under 5.7, special bulk third-class rates may not be used

for the entry of material that advertises, promotes, offers, or, for a

fee or consideration, recommends, describes, or announces the

availability of:

* * * * *

[Add new 5.4d as follows:]

d. Any product or service (other than those described in 5.4a ,

5.4b, or 5.4c), if the sale of the product or the providing of such

service is not substantially related to the exercise or performance by

the organization of one or more of the purposes used by the

organization to qualify for mailing at the special bulk third-class

rates. The criteria in 5.6 are used as the bases for determining

whether an advertisement, promotion, or offer for a product or service

is mailable at the special bulk third-class rates.

[Change title of 5.5 as follows:]

5.5 Definitions, Insurance

[Add new 5.6 and renumber existing 5.6 and 5.7 as 5.7 and 5.8,

respectively:]

5.6 Definitions, Substantially Related Advertising, Products

For the standards in 5.4d:

a. To be ``substantially related,'' the sale of the product or the

providing of the service must contribute importantly to the

accomplishment of one or more of the qualifying purposes of the

organization. This means that the sale of the product or the providing

of the service must be directly related to accomplishing one or more of

the purposes on which the organization's authorization to mail at the

special bulk third-class rates is based. The sale of the product or the

providing of the service must have a causal relationship to the

achievement of the exempt purposes (other than through the production

of income) of the qualified organization. (Whether selling the product

or providing the service generates income that is used to accomplish

the purposes of the qualified organization is not used as a factor in

determining whether such activity is substantially related to the

qualifying purpose or purposes of the organization.)

b. Standards established by the Internal Revenue Service (IRS) and

the courts with respect to 26 U.S.C. 513 (a) and (c) of the Internal

Revenue Code are used to determine whether an advertised product or

service, whether sold or offered by the organization or by another

party, is ``substantially related'' to the qualifying purposes of an

organization.

(1) If the advertising material is for a product or service that is

not substantially related, the material is not mailable at the special

bulk third-class rates.

(2) If an organization pays unrelated business income tax on the

sale of a product or the providing of a service, that activity is by

IRS definition not substantially related to the organization's

qualifying purposes. The fact that an organization does not pay such

tax, however, does not establish that the activity is substantially

related, because other criteria may exempt the organization from

payment. Thus, the inclusion of an advertisement for a product or

service in a mailpiece may disqualify the piece from using special bulk

third-class rates, even if the mailer does not pay unrelated business

income tax on its sale.

(3) Advertisements in the qualified organization's newsletter or

other publication for one or more products or services that are not

substantially related to the qualified organization's purposes,

notwithstanding the presence of advertisements that are so related, are

not mailable at the special bulk third-class rates. Third-party paid

advertisements may be included in a publication mailed at the special

bulk third-class rates if the products or services advertised are

substantially related to one or more of the purposes for which the

qualified organization is authorized to mail at the special bulk third-

class rates. If the publication contains one or more advertisements

ineligible for the special rates, the publication is not eligible for

the special rates.

(4) Advertising for one or more products or services that are not

substantially related to the qualified organization's purpose included

in a catalog that also offers items that are so related is not mailable

at the special bulk third-class rates. If the catalog contains one or

more advertisements ineligible for the special rates, the catalog is

not eligible for the special rates.

c. Public service announcements, e.g., ``Support the Red Cross

Blood Drive,'' for which no consideration has been paid are mailable at

the special bulk third-class rates.

d. Announcements of activities, e.g., bake sale, car wash, charity

auction, oratorical contest, substantially all the work of which is

conducted by the members or supporters of a qualified organization

without compensation are mailable at the special bulk third-class

rates. Such activities are considered to be ``substantially related''

to the organization's purposes.

e. Advertisements for products and services, including products and

services offered as prizes or premiums, substantially all of which have

been received by a qualified organization as gifts or contributions.

Such products and services are considered ``substantially related'' to

the organization's purposes.

f. An advertisement, promotion, or offer for a periodical

publication, including subscription order forms, meeting the

eligibility criteria in E211 and published by one of the types of

qualified nonprofit organizations listed in E370.2.0 is mailable at the

special bulk third-class rates.

5.7 Other Matter

* * * * *

[Add new 5.7c as follows:]

c. A listing in a qualified organization's newsletter or other

publication of the names of individuals or organizations who sponsor

the publication or other activities of the qualified organization. The

Postal Service presumes that an item is an acknowledgment of a sponsor

and not an advertisement ineligible for special rates if it occupies

not more than 7 square inches (the approximate size of a business card)

and if it appears in a portion of the publication titled ``Sponsors,''

``Contributors,'' ``Donors,'' or a similar designation.

[Renumber old 5.9 as 5.10 and add new section 5.9 as follows:]

5.9 Products Mailable at Special Bulk Third-Class Rates

The following products are mailable at special bulk third-class

rates:

a. Low-cost items within the meaning of 26 U.S.C. 513(h)(2),

Internal Revenue Code. Under this standard, low-cost items are

currently those having a cost of not more than $6.39 as of January 1,

1994. At the beginning of each calendar year, the value of low-cost

items is adjusted for cost of living. The cost is the cost to the

qualified nonprofit organization that mails the item or on whose behalf

the item is mailed.

b. Items donated or contributed to the qualified organization. Such

items need not meet the definition of low cost as described in 5.9a.

c. Periodical publication of a qualified nonprofit organization

that does not contain any advertisements or other material ineligible

to be mailed at the special bulk third-class rates under 5.4 a, b, c,

or d. Periodical publication and qualified nonprofit organization are

defined in 5.6f.

A transmittal letter making these changes in the pages of the

Domestic Mail Manual will be published and will be transmitted to

subscribers automatically. Notice of issuance will be published in the

Federal Register as provided by 39 CFR 111.3.

Stanley F. Mires,

Chief Counsel, Legislative.

[FR Doc. 94-10852 Filed 5-2-94; 2:29 pm]

BILLING CODE 7710-12-U