[Federal Register Volume 59, Number 86 (Thursday, May 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10852]


[[Page Unknown]]

[Federal Register: May 5, 1994]


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POSTAL SERVICE

39 CFR Part 111

 

Special Bulk Third-Class Eligibility Restrictions

AGENCY: Postal Service.

ACTION: Final rule.

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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