On October 2, 2019, a federal judge blocked the State of New Jersey from implementing and enforcing new campaign finance reporting and donor disclosure rules for 501(c)(4) and 527 organizations, which were enacted earlier this year as part of a sweeping and controversial campaign finance bill, S. 150. In its ruling, the Court found that the plaintiffs likely would succeed on their claim that these provisions of S. 150 violate the First Amendment. The case will now proceed to trial for a final decision. The decision follows that of another federal judge who earlier this week struck down on First Amendment grounds two provisions of New York’s lobbying law that would have required nonprofits to disclose their donors.

The controversial legislation expanded New Jersey’s campaign finance law to require 501(c)(4) and 527 organizations that engage in issue advocacy to register and report as “independent expenditure committees.” The law would have required groups that raise or spend $3,000 or more either (1) to “influence or attempt to influence” any New Jersey election, public question, legislation, or regulation, or (2) that provide “political information” on any New Jersey candidate, public question, legislation, or regulation to publicly disclose on campaign finance reports all expenditures of more than $3,000 for such purposes. It would also require such groups to disclose all donors who contribute more than $10,000 for any purpose. The new law was set to go in effect on October 15, 2019.

Several groups directly affected by the new law have challenged its constitutionality in federal court. In this case, the Court agreed that the plain language of the statute would likely not pass constitutional muster, emphasizing that the provisions would improperly subject organizations engaged in issue advocacy to the same disclosure obligations for organizations attempting to influence an election. A separate, simultaneous challenge to the definition of “independent expenditure committee” is still pending before the Court.

The case will now continue to trial. Although the implementation of the donor disclosure and other reporting provisions are currently on hold pending trial, the Court noted that the New Jersey Legislature and the Election Law Enforcement Commission may take legislative action in the meantime to amend or clarify the law’s constitutional deficiencies.

The opinion and order were issued in Americans for Prosperity v. Grewal, No. 3:19-cv-14228-BRM-LHG (D.N.J. Oct. 2, 2019).

A federal judge this week struck down on First Amendment grounds two provisions of New York’s lobbying law that would have required nonprofits to disclose their donors.

In 2016, New York state legislators passed legislation changing the state’s lobbying and campaign finance laws. Two important provisions dramatically expanded donor disclosure requirements for 501(c)(3) and 501(c)(4) organizations engaged in issue advocacy and lobbying in New York:

501(c)(4) Rules: The law required 501(c)(4) organizations to disclose all of their donors in public filings with the state when they spend over $10,000 in a calendar year on communications to at least 500 members of the public concerning the position of any elected official on potential or pending legislation.

501(c)(3) Rules: The law also required 501(c)(3) charitable organizations to disclose donors of $2,500 or more if the charitable organization made an in-kind donation of more than $2,500 to a Section 501(c)(4) organization engaged in lobbying in New York.

Continue Reading New York Nonprofit Donor Disclosure Rules Struck Down

Companies that do business with state and local governments are subject to a wide array of laws restricting their political contributions, as well as the personal political contributions of their owners, officers, and some employees. These laws are known as pay-to-play laws because they are aimed at severing the relationship — or the appearance of a relationship — between a contribution (the “pay”) and the award of a government contract (the “play”).

Violations of pay-to-play laws — even a single, inadvertent political contribution — can result in costly bid disqualifications, voided contracts, and damaging publicity.

In approaching compliance, government contractors should do a risk assessment that takes into account where the company does business with government agencies, whether its contracts are covered by relevant laws, and where its employees live. For many companies, pre-clearing contributions and political fundraising (which some laws also cover) and training affected personnel are essential elements of an effective compliance plan. Also, companies should adopt protocols for registration and reporting to state election boards, as there are some pay-to-play laws that impose such requirements instead of, or on top of, contribution restrictions.

Pay-to-play laws vary across jurisdictions; we have outlined the broad requirements and highlighted certain relevant updates but encourage consultation with our political law attorneys to customize a compliance plan for your particular needs.

Continue Reading Pay-to-Play Laws Remain in the Spotlight: Government Contract Eligibility Hinges on Awareness and Compliance

A federal judge on July 30, 2019 overturned an IRS ruling, issued almost exactly a year ago, that allowed many nonprofits to stop disclosing their donors on their annual tax returns.

In Revenue Procedure 2018-38 (July 16, 2018), the IRS allowed social welfare organizations under section 501(c)(4), professional and trade associations under section 501(c)(6), and many other types of organizations required to file a Form 990 series return, to cease disclosing their large donors ($5,000 or more) on Schedule B of the Form 990. The major exceptions were section 501(c)(3) organizations and section 527 political organizations, both of which are subject to statutory requirements for donor disclosure that the IRS could not waive. Those IRS rules are described in more detail here.

Even though the names of donors disclosed on Schedule B of the Form 990 were not made available to the public, only to the IRS, many commentators viewed the new rules as facilitating “dark money” in politics. The state of Montana, joined by the state of New Jersey, brought a lawsuit alleging that the IRS could not simply waive the donor disclosure requirements, which were established by IRS regulation, without providing an opportunity for public comment in accordance with the Administrative Procedure Act.

Continue Reading Donor Disclosure Rules for Nonprofit Tax Returns Overturned by Federal Court

The District of Columbia has adopted a “pay-to-play” law that bans political contributions from city contractors, as well as personal political contributions from their senior officers. Violators may forfeit contracts, face disqualification on bidding for up to four years, and pay civil penalties. The law takes effect on November 4, 2020.

Other major municipalities, such as Chicago, New York City, and Philadelphia have similar laws that either restrict political contributions from contractors and their principals, require the contractor to file reports with the relevant election board, or both. A number of states also have pay-to-play laws, including Maryland, New Jersey, and Illinois.

Continue Reading New DC “Pay-to-Play” Law Bans Contributions by Government Contractors and their Officers

Every two years, after an election, the FEC indexes certain contribution limits to inflation. After returning from the shutdown, the FEC issued the revised limits for this year, a few days later than usual. As has been the case the past few cycles, the individual limit has gone up by $100. For candidates up for election in 2020, individuals may now give $2,800 per election or $5,600 per candidate per election cycle (with the primary and general considered separate elections). This means that individual contributors who had previously maxed out to candidates for 2020 primary and general elections at $2,700 per election can now give those candidates another $100 per election.

The FEC also raised the limits on individual contributions to party committees and non-multicandidate PACs:

Continue Reading Federal Election Commission Announces New Contribution Limits for 2019-2020 Cycle

The U.S. Supreme Court this week left in place a lower court ruling that expands donor disclosure for advocacy groups that fund independent expenditures. While the full effect of the ruling may not be known for some time, groups in the throes of an election season suddenly have to reconsider their electoral spending plans and fundraising practices, and donors to politically active 501(c)(4) social welfare organizations or 501(c)(6) business leagues have to account for an increased risk that their donations will be publicly disclosed.

What Does the Ruling Do?

Groups that are not registered with the Federal Election Commission (FEC) as campaign committees, party committees, or PACs are nonetheless required to file reports if they make an expenditure of more than $250 that expressly supports or opposes a federal candidate. These “independent expenditure” reports must itemize disbursements to each vendor involved in the creation and distribution of an ad (or other public communication), and identify the election involved and whether the organization supports or opposes the featured candidate.

In addition, a long-standing FEC rule requires that these reports identify donors who gave more than $200 to the organization in the calendar year for the purpose of funding the particular ad that is being reported. As a practical matter, donors seldom know that their funds will be used to pay for a specific ad, and thus donors have rarely been disclosed.

The district court struck down the FEC donor-disclosure rule, concluding that it applied the statutory disclosure requirement too narrowly. The court concluded that independent expenditure reports filed by groups that are not registered political committees must identify all donors who (1) give to the organization for the purpose of influencing a federal election, or (2) give for the purpose of funding the group’s independent expenditures, whether tied to a specific ad or not. The court stressed, however, that contributors to an organization’s “general programs” need not be identified.

The court deferred the effective date of the ruling for 45 days, giving the FEC time to adopt a new donor disclosure rule. That period came and went with no new rule or interpretive guidance. Crossroads GPS, which intervened in the case, has appealed the ruling to the D.C. Circuit.

Continue Reading U.S. Supreme Court Allows Expanded Donor Disclosure Rules to Take Effect

The Federal Election Commission recently held a public hearing to discuss its March 2018 proposed rule aimed at providing voters with more information about who pays for or sponsors online political advertisements. The private sector has adopted a solution to the issue.

On May 22, 2018, the Digital Advertising Alliance (DAA) took the first step to alter the status quo by unveiling a new, industry-wide PoliticalAds transparency initiative designed to bring greater transparency and accountability to the realm of political advertising.

Similar to the DAA’s YourAdChoice program, which provides consumers with easily accessible information via the familiar blue triangle that accompanies interest-based ads, the PoliticalAds initiative will require certain political advertisements to supply information and a comparable purple icon.

Continue Reading Transparency Coming to a Campaign Ad Near You!

The Federal Election Commission (FEC) this week issued a Notice of Proposed Rulemaking, asking for public comment on proposals for requiring “disclaimers” on online ads and fundraising. Under each of two similar proposals, paid Internet ads that expressly advocate for candidates or that solicit political donations must state who paid for the ad and whether it was authorized by a candidate. The rules would impact websites, blast emails, and ads paid for by a political committee, regardless of their content.

The FEC rulemaking responds to mounting concerns about the influence of Russian-linked social media activity during the 2016 presidential election, as well as years of ambiguity about when and how the agency’s rules apply to emerging platforms and technology.

Which Ads Require Political Disclaimers Under Current Law?

Under current law, the FEC requires disclaimers on three types of advertisements:

  • Communications by Political Committees: Disclaimers are required on all “public communications” paid for by a registered political committee, as well as the committee’s own website and blast emails sent to more than 500 recipients.
  • Express Advocacy by Any Person: Regardless of the ad’s sponsor, “public communications” must include a disclaimer if they expressly advocate for or against a candidate.
  • Solicitations by Any Person: Regardless of the ad’s sponsor, “public communications” that solicit a contribution to a registered political committee must include a disclaimer.

A “public communication” includes Internet communications only when one person pays a fee to place the communication on another person’s website. The law does not require disclaimers on communications that do not involve a fee, such as unpromoted or unsponsored tweets, blogs, or Facebook posts.

The FEC has also concluded that certain communications are exempt from disclaimer requirements for practical reasons, such as for SMS text messages and Google’s text ads.

Which New Types of Ads May Be Covered?

The regulations proposed this week do not significantly alter the types of advertisements that would require political disclaimers; however, they would limit the circumstances under which an Internet ad could omit a disclaimer due to size constraints, which would have the effect of expanding the universe of Internet ads that would carry disclaimers.

What Must a Disclaimer Say?

Current law requires disclaimers to include the name of the person who paid for the ad, the person’s telephone number, address, or URL, and a statement indicating whether the communication was authorized by any candidate or a candidate’s committee, where applicable. This would remain unchanged, and Internet ads would include the same information when space permits.

However, the proposed rules would add specificity to how Internet disclaimers may be displayed. One proposal would apply the current requirements for the size, duration, and appearance of television, radio, and print disclaimers to their Internet-based analogs. For example, an ad on a video streaming platform would require a disclaimer to appear in the same way as disclaimers on television ads.

In the event an ad is character-limited, or too short or small to include the full disclaimer, both proposals allow for an “adapted disclaimer”. The proposals do not specify what format this abbreviated disclaimer must take but would permit the use of a hover-over, link, icon, or other feature that would lead the viewer to the full disclaimer.

Next Steps

The FEC has asked for written comments on its proposals and has scheduled a hearing for late June. After the hearing, the Commission will work to find consensus on a final rule, a process which would require unanimity among the four sitting Commissioners, unless the two vacant seats on the Commission are filled in the coming months. Given the timing of the hearing and the challenges of working out an agreement on final language, it is unlikely that final rules will take effect in time for the mid-term elections. But if adopted, they will certainly have an effect on the 2020 elections.

Venable’s Political Law Group is closely monitoring this rulemaking and can assist clients in navigating the rules governing Internet advertising and fundraising.

A little-noticed provision tucked away in the recently enacted Tax Cuts and Jobs Act (TJCA) will have an effect on businesses that lobby at the local level. Under the TJCA, expenses incurred in connection with attempting to influence legislation at the local or municipal level (including Indian tribal governments) will no longer be deductible.

In general, since 1993, the tax code has prohibited businesses from deducting expenses incurred in connection with influencing legislation at the federal and state levels. However, the tax code contained a specific exception for expenses incurred in connection with influencing local legislation. The TJCA eliminates this exception immediately, effective for any such expenditures incurred on or after December 22, 2017.

Businesses will see the impact of this tax in three ways:

  1. Businesses that lobby at the local level will now have to capture staff time, expenses, and outside consultant fees in their nondeductible lobbying spend.
  2. Associations that lobby at the local level will have to include their staff time, expenses, and outside consultant fees in the percentage of their dues that they report to members as being nondeductible. That means that businesses will be able to deduct less of their dues.
  3. Associations that lobby exclusively at the local level (such as local chambers of commerce) will now have to treat a portion of their dues as nondeductible. In the past, business were able to deduct all of their dues to such associations, since all of their lobbying was deductible.

As a reminder, the rules on deductibility of lobbying are completely unrelated to lobbying disclosure rules. Many states require registration and reporting at the state level for local lobbying (such as New York). In addition, many localities have their own lobbying registration systems (such as New York City, to name just one of many).