What follows is a model lobbying tax compliance guide for employees of a trade or professional association. It is association employees, more than anyone else, who must have a full understanding of exactly what is and is not considered a lobbying activity under the law, in order to accurately track and record their time devoted to lobbying activities. The capitalized term ASSOCIATION is used in this guide in place of an actual association name.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") contained provisions that eliminated the business deductibility of lobbying expenses for federal income tax purposes. The law also contained special rules that render association membership dues nondeductible by members to the extent of associations' expenditures for lobbying (including compensation paid to ASSOCIATION employees).
This guide is designed to assist ASSOCIATION staff in recording their daily time spent on lobbying activities, in accordance with OBRA '93. ASSOCIATION's calculations of annual membership dues nondeductibility are determined in large part by the number of hours (and corresponding salary allocation) spent by ASSOCIATION staff on what the law defines as "lobbying." Consequently, it is critical for staff to have a thorough understanding of what should and what should not be recorded as "lobbying" when completing daily time logs. This guide is designed to serve that function.
The attached time log is to be used by ASSOCIATION employees for recording daily activities under three general categories: (i) lobbying (as defined below); (ii) regulatory non-lobbying (as outlined below); and (iii) other (all activities which do not fall into the first two categories). Time devoted to each activity should be logged on a daily basis in quarter-hour increments (e.g., 0.25). No description of specific lobbying activities is required. The daily "Total" column should reflect the total number of hours worked during that day (not just lobbying hours) and should be completed even if no lobbying activity is engaged in on a given day. For standard nonwork days, such as weekends and holidays, no time need be entered. However, for other nonwork days, such as those attributable to vacation, sickness, personal leave, etc., please briefly indicate the reason for nonwork in that day's entry. At the end of each month, each employee is required to promptly sign the time log and forward it to the Vice President of Finance. ASSOCIATION employees required to complete this time log will be notified of their obligations by ASSOCIATION's General Counsel. Should an employee ever have a question about whether or not a given activity constitutes a lobbying activity, promptly direct such questions to ASSOCIATION's General Counsel.
Pursuant to OBRA '93, a new section has been added to ASSOCIATION's Travel Expense Report for employees to complete immediately following business travel. Upon return from a business trip, employees should record their best estimate of the percentage of the trip's purpose that was lobbying-related and the percentage of the trip's purpose that was nonlobbying-related. (These percentages will then be used to allocate the trip's expenses accordingly.) If the trip was solely for lobbying purposes, of course, no allocation need be made. Where allocations are required, such allocations shall not be based on a comparison of time spent making lobbying communications versus all other time, but rather shall reflect the relative weight assigned to the lobbying versus nonlobbying purposes for the trip.
Categories of Lobbying Activities
OBRA '93 defines five categories of lobbying activities; time spent on any and all of the following activities should be aggregated together and recorded under the "Lobbying" column of the daily time log:
1. Influencing legislation. Any attempt to influence legislation through communication with (i) any member or employee of Congress; (ii) any member or employee of a state legislature; or (iii) any federal or state government official or employee who may participate in the formulation of legislation.
2. Grassroots lobbying. Any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referenda. This includes urging ASSOCIATION members to engage in grassroots lobbying.
3. Communications to covered federal executive branch officials. Any direct communication with a covered federal executive branch official in an attempt to influence the official actions or positions of such official, including regulatory, administrative or any other official actions or positions. Covered federal executive branch officials include: (i) the President; (ii) the Vice President; (iii) any employee of the White House Office of the Executive Office of the President; (iv) the two most senior officers of each of the other agencies in the Executive Office of the President (e.g., Office of Management and Budget, United States Trade Representative, Council of Economic Advisers, National Security Council); (v) any individual (and his or her immediate deputy) serving in a position in level I of the Executive Schedule (e.g., Secretary of Commerce, Secretary of Labor, other cabinet secretaries); and (vi) any other individual (and his or her immediate deputy) designated by the President as having Cabinet-level status (i.e., White House Chief of Staff, Ambassador to the United Nations, Council of Economic Advisers' Chairman, White House Office of National Drug Control Policy Director, and Environmental Protection Agency Administrator). All other federal executive branch officials and employees are not covered under this category (e.g., Food and Drug Administration Commissioner, Federal Trade Commissioners, Assistant Attorney General for Antitrust).
4. Political activities. Any activity which constitutes participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (at the federal, state, and/or local level). Note that while OBRA '93 does not cover campaign contributions made by ASSOCIATION's political action committee (the "PAC"), it does apply to the administrative costs (so-called "soft" costs) incurred by ASSOCIATION to maintain and solicit contributions to the PAC. Consequently, all ASSOCIATION staff time spent administering and soliciting contributions to the PAC is considered "lobbying" under OBRA '93. In addition, OBRA '93 applies to the costs incurred by ASSOCIATION to make partisan political communications to its members. Consequently, all ASSOCIATION staff time spent preparing and making partisan political communications to ASSOCIATION members is considered "lobbying" under OBRA '93.
5. Supporting activities. Any research, preparation, planning, and coordination (including deciding whether to make a lobbying communication) engaged in for a purpose of making or supporting a lobbying communication or political activity (as defined above) is treated as carried out in connection with such communication or activity. In other words, the time spent on any background activity engaged in for a purpose of supporting a future planned lobbying communication must also be counted as lobbying.
Definitions: "Influencing Legislation" and Related Terms
Treasury regulations provide a definition of the term "influencing legislation," as well as relevant related terms.
1. "Influencing legislation": (i) Any attempt to influence any legislation through a lobbying communication, and (ii) all activities, such as research, preparation, planning, and coordination (including deciding whether to make a lobbying communication), engaged in for a purpose of making or supporting a lobbying communication, even if not yet made.
2. "Attempt to influence legislation": The making of a lobbying communication and all activities such as research and preparation engaged in for a purpose of making or supporting a lobbying communication.
3. "Lobbying communication": Any communication (other than that compelled by subpoena or otherwise compelled by federal or state law) with any member or employee of a legislative body or any other government official or employee who may participate in the formulation of legislation that (i) refers to specific legislation and reflects a view on that legislation; or (ii) clarifies, amplifies, modifies, or provides support for views reflected in a prior lobbying communication.
4. "Legislation": Any action with respect to acts, bills, resolutions, or other similar items by a legislative body. Legislation includes a proposed treaty which requires Senate ratification from the time the President's representative begins to negotiate with the prospective parties to the treaty.
5. "Specific legislation": Among other things, this includes a specific legislative proposal that has not been introduced in a legislative body.
6. "Legislative body": Congress, state legislatures, foreign legislatures, and other similar governing bodies, excluding local councils (and similar governing bodies) and executive, judicial, or administrative bodies.
The following are summaries of select important aspects of the lobbying tax law and regulations, and the application thereof:
- Purpose for engaging in an activity. The regulations provide that an "attempt to influence legislation" means a lobbying communication and all activities such as research and preparation engaged in for a purpose of making or supporting a lobbying communication. The purpose test looks to the original intent for engaging in a given activity to determine whether it will be deemed a lobbying activity, in whole or in part. Because purpose is essentially a state of mind and a subjective judgment, it is often difficult to prove or disprove through documentation. Recognizing the difficulty of quantifying purpose, the regulations provide a list of facts and circumstances to be considered in making the purpose determination. The purpose or purposes for engaging in an activity are to be determined based on all the facts and circumstances, including (but not limited to): (i) whether the activity and the lobbying communication are proximate in time; (ii) whether the activity and the lobbying communication relate to similar subject matter; (iii) whether the activity is performed at the request of, under the direction of, or on behalf of a person making the lobbying communication; (iv) whether the results of the activity are also used for a nonlobbying purpose; and (v) whether, at the time the association engages in the activity, there is specific legislation to which the activity relates.
- Multiple purposes. If ASSOCIATION engages in an activity for both lobbying and nonlobbying purposes, it must treat the activity as engaged in partially for a lobbying purpose and partially for a nonlobbying one. The division of the activity must result in a reasonable allocation of costs (g., staff time) to lobbying. An allocation will not be reasonable if it allocates to lobbying (i) only the incremental costs (e.g., staff time) that would not have been incurred but for the lobbying purpose; or (ii) an amount based solely on the number of purposes for engaging in that activity without regard to the relative importance of those purposes. The regulations state that as long as the relative importance of the various purposes is reflected, the allocation need not be precise. Unless instructed otherwise by your supervisor, ASSOCIATION staff engaging in an activity that has both lobbying and nonlobbying purposes should make such a reasonable allocation when daily time is recorded.
- The regulations provide that the following activities may be treated as having no lobbying purpose: (i) determining the existence or procedural status of specific legislation, or the time, place and subject of a legislative hearing on specific legislation;* (ii) preparing routine, brief summaries of specific legislation;* (iii) performing an activity required by law; (iv) reading any publications available to the general public or viewing or listening to other mass media communications; and (v) merely attending a widely attended speech. *Note that the first two activities above apply only if they occur before ASSOCIATION evidences a lobbying purpose with regard to the specific legislation at issue.
- Communications with members. Regarding ASSOCIATION communications with its members about legislation, if a communication urges members, either explicitly or implicitly, to contact their legislators concerning a specific piece of legislation (g., a legislative "action alert"), the cost of the communication must be treated as lobbying. Regarding communications that merely inform members about the details or status of legislation, if the communication can be considered a "routine, brief summary" of legislation or its status and if ASSOCIATION has not yet evidenced a purpose to influence that legislation (either through ASSOCIATION staff or members acting on ASSOCIATION's behalf), then the communication does not have to be treated as lobbying. However, once such a lobbying purpose is evidenced by ASSOCIATION, all subsequent (but not prior) communications to members on that issue, even those that merely provide routine, brief summaries of the legislation or its status, must be treated as lobbying. Of course, as with any activity, if the communication (e.g., newsletter) has nonlobbying purposes as well (as many do), then a reasonable allocation of costs must be made between the lobbying and nonlobbying purposes.
- Lobbying or education? The regulations explicitly reject the creation of a distinction between influencing legislation and educating legislators; the same basic rules and definitions outlined above apply in determining whether or not educating a legislator constitutes influencing legislation in a given circumstance.
- Balanced analysis of legislation? The regulations explicitly reject an exception from lobbying for presenting a balanced analysis of the merits and defects of legislation, and they clarify that a view on legislation can be reflected implicitly; support or opposition to legislation does not have to be explicitly
- De minimis rules for labor hours. The regulations provide two de minimis rules for disregarding certain minimal amounts of ASSOCIATION staff time spent on lobbying activities, both of which are relevant to ASSOCIATION:
1. ASSOCIATION may treat time spent by staff on lobbying activities as zero (0) if less than five (5) percent of the employee's total overall time is spent on lobbying activities. Reasonable methods may be used to determine if lobbying time constitutes less than five (5) percent of an employee's total time. However, any time spent by any ASSOCIATION employee on direct contact lobbying (including the allocable travel time related to the direct contact lobbying) may not be excluded under the de minimis rule. Notwithstanding direct contact lobbying, the de minimis rule may still exclude other time spent by that employee on nondirect contact lobbying if it is less than five (5) percent of his or her total time. Direct contact lobbying is defined as a meeting, telephone conversation, letter, or other similar means of communication with a federal or state legislator or covered federal executive branch official that otherwise qualifies as a lobbying activity (e.g., reflects a view on specific legislation). The regulations specify that a person who engages in research, preparation or other background activities related to direct contact lobbying is not engaged in direct contact lobbying.
2. ASSOCIATION may treat as zero (0) the lobbying labor hours of staff engaged in secretarial, clerical, support, or other administrative activities that do not involve significant judgment with respect to lobbying. Note, however, that this de minimis rule is only available when used in connection with two of the specified cost allocation methods set forth in the regulations, the "Ratio" method and the "225% Gross-Up" method.
The following hypothetical examples are designed to illustrate the application of the rules and concepts discussed above. These examples are illustrative only; specific questions about the proper classification of ASSOCIATION government affairs activities should be directed to ASSOCIATION General Counsel.
- Definitions of Influencing Legislation, Attempt to Influence Legislation, Lobbying Communication, Legislation, and Specific Legislation; Lobbying versus Regulatory Non-Lobbying.
1. An ASSOCIATION employee is assigned to approach members of Congress to gain their support for a pending bill of potential benefit to ASSOCIATION members. The employee drafts a position letter on the bill, which is then sent to select members of Congress. Additionally, the employee personally contacts select congressional staff members to seek support for ASSOCIATION's position on the bill. The letter and the personal contacts are lobbying communications. Therefore, ASSOCIATION is influencing legislation.
2. ASSOCIATION's CEO is invited to provide testimony at a congressional oversight hearing concerning Food and Drug Administration ("FDA") implementation of legislation designed to streamline the new drug approval process. In his testimony, ASSOCIATION's CEO criticizes FDA-proposed regulations and urges significant revisions before the rules are finalized. Because ASSOCIATION's CEO does not refer to any specific legislation or reflect a view on any such legislation (it merely addressed proposed regulations), ASSOCIATION has not made a lobbying communication. Therefore, ASSOCIATION is not influencing legislation.
3. ASSOCIATION employees prepare a paper that asserts that lack of new capital is hurting the national economy. The paper suggests that lowering the capital gains tax rate would increase the availability of capital and increase federal tax receipts. ASSOCIATION forwards the paper to members of the House Ways and Means and Senate Finance Committees with a cover letter that says in part: "ASSOCIATION urges you to support a reduction in the capital gains tax rate." ASSOCIATION's communication is a lobbying communication because it refers to and reflects a view on a specific legislative proposal (i.e., lowering the capital gains tax rate). Therefore, ASSOCIATION is influencing legislation, and the time spent by ASSOCIATION employees preparing and sending the paper should be recorded as lobbying.
4. (a) ASSOCIATION's CEO meets with the Chairman of the House Commerce Health and Environment Subcommittee, which has jurisdiction over regulation of the mail-order drug industry, to discuss the possibility of legislation to address current problems with the mail-order drug industry. ASSOCIATION's CEO recommends that legislation be introduced by the Chairman to help eliminate perceived unfair tax advantages currently enjoyed by the mail-order drug industry. The CEO's discussion with the Subcommittee Chairman is a lobbying communication because the CEO refers to and reflects a view on a specific legislative proposal. Therefore, ASSOCIATION is influencing legislation.
(b) The Subcommittee Chairman is not convinced that additional federal legislation is needed regarding the mail-order drug industry and requests that ASSOCIATION provide more information on the current state of the prescription drug market. After the meeting, the CEO has an ASSOCIATION employee prepare a brief background paper on the current state of the prescription drug market. The paper makes no explicit or implicit recommendations for new legislation. The CEO sends the paper to the Subcommittee Chairman with a cover letter that merely refers to the enclosed paper. Although the CEO's follow-up letter to the Subcommittee Chairman does not refer to specific legislation or reflect a view on such legislation, the letter and accompanying background paper support the views reflected in the earlier face-to-face lobbying communication. Therefore, the letter and accompanying paper are lobbying communications and ASSOCIATION is influencing legislation. All ASSOCIATION staff time spent drafting the background paper and cover letter is considered lobbying, except time spent by clerical staff where no significant judgment with respect to lobbying is involved, and except time spent by employees who spend less than 5% of their total time on lobbying activities. (Note: If no initial lobbying communication from ASSOCIATION had ever taken place on this matter, and if the background paper had not been prepared with any future lobbying purpose in mind, the time spent preparing and sending the paper would not be considered lobbying. In such a circumstance, it would be generally advisable to document the nonlobbying purpose(s) of preparing the paper by creating a brief file memorandum.)
- Covered Federal Executive Branch Officials.
1. An ASSOCIATION employee drafts a letter advocating changes to Medicare regulations and sends it to the Administrator of the Health Care Financing Administration ("HCFA"). The letter does not constitute a lobbying communication because the letter does not refer to any specific legislation, but merely to regulatory matters. Furthermore, because the HCFA Administrator is not a covered federal executive branch official, the letter does not constitute a lobbying communication by way of this additional category.
2. An ASSOCIATION employee drafts a letter advocating proposed Medicare reform legislation and sends it to the Administrator of the Health Care Financing Administration urging HCFA support. The letter constitutes a lobbying communication because it refers to and reflects a view on specific legislation, and is directed at a government official who may participate in the formulation of such legislation.
3. An ASSOCIATION employee drafts a letter advocating changes to Medicare regulations and sends it to the Secretary of the Department of Health and Human Services. The letter constitutes a lobbying communication because it is directed to a covered federal executive branch official (i.e., a Cabinet Secretary) in an attempt to influence an official action or position of such official. Note that communications to such covered officials are considered lobbying even if such communications relate solely to regulatory actions.
4. An ASSOCIATION employee drafts a letter advocating changes to Medicare regulations and sends it to the Assistant Secretary for Planning and Evaluation at the Department of Health and Human Services. The letter does not constitute a lobbying communication because it does not refer to any specific legislation (it refers only to regulatory matters), and because it is not addressed to the HHS Secretary, the Deputy HHS Secretary, or any other covered federal executive branch official (rather, it is addressed to the Assistant HHS Secretary, who is not a covered federal executive branch official).
- The Purpose Test; Multiple Purposes; Exception for Routine, Brief Summaries of Legislation; Communications with ASSOCIATION Members.
1. Facts. In 2000, the Department of Health and Human Services ("HHS") issues proposed regulations relating to Medicare coverage for prescription drugs. There is no pending or proposed legislation during 2000 that is similar to the regulatory proposal. ASSOCIATION undertakes a study of the impact of the proposed regulations on its members. ASSOCIATION incorporates the results of that study in comments sent to HHS in 2000. In 2001, Medicare reform legislation is introduced in Congress that includes provisions similar to the aforementioned regulatory proposal. Also in 2001, ASSOCIATION's CEO writes a letter to the Chairmen of the Senate Finance and House Ways and Means Committees stating that ASSOCIATION opposes these provisions of the proposed legislation. ASSOCIATION's CEO encloses with the letter a copy of the comments previously sent to HHS.
Analysis. ASSOCIATION's letter to the respective Senate and House Committee Chairmen refers to and reflects a view on specific legislation and therefore is a lobbying communication. Although ASSOCIATION's study of the impact of the proposed regulations is proximate in time and similar in subject matter to the lobbying communication, ASSOCIATION performed the study and incorporated the results in comments sent to HHS when no legislation with a similar subject matter was pending or proposed (a nonlobbying use). On these facts, ASSOCIATION engaged in the study solely for a nonlobbying purpose.
2. Facts. The Governor of California proposes a budget that includes a proposed sales tax on electricity. After gathering records of electricity consumption from all of its members' stores in California, ASSOCIATION estimates the additional costs that the budget proposal would impose upon its members. In that same year, ASSOCIATION writes to members of the California state legislature and explains that it opposes the proposed sales tax. In its letter, ASSOCIATION includes its estimate of the costs that the sales tax would impose on its members. ASSOCIATION does not demonstrate any other use of its estimates.
Analysis. The letter is a lobbying communication because it refers to and reflects a view on specific legislation - the Governor's proposed budget. ASSOCIATION's estimate of additional member costs under the proposal supports the lobbying communication, is proximate in time and similar in subject matter to a specific legislative proposal then in existence, and is not used for a nonlobbying purpose. Based on these facts, ASSOCIATION estimated the additional member costs under the budget proposal solely to support the lobbying communication. Therefore, all ASSOCIATION staff time spent gathering and estimating the additional member costs must be counted as lobbying.
3. Facts. ASSOCIATION's CEO travels to a two-day National Retail Federation conference in Sacramento, California on emerging trends in the retail industry. The CEO plans to spend a third day in Sacramento meeting with state legislators to explain why ASSOCIATION opposes the Governor's proposed sales tax on electricity (a bill unrelated to the subject of the conference). At the meetings with the legislators, the CEO makes lobbying communications by referring to and reflecting a view on the pending bill.
Analysis. The CEO's trip is partially for the purpose of making lobbying communications and partially for a nonlobbying purpose (attending the National Retail Federation conference). As a result, the CEO must reasonably allocate his travel expenses (e.g., transportation, meals, lodging), as well as his travel time (for salary allocation purposes), between these two purposes. (Of course, the CEO's time spent in the meetings with state legislators must also be recorded as lobbying.) Allocating to lobbying only the CEO's incremental travel time and transportation expenses (i.e., the taxi travel time and taxi fare to meet with the state legislators) does not result in a reasonable allocation of travel time and expenses to lobbying; some reasonable portion of the CEO's total travel time and expenses (e.g., air travel time, airfare, hotel, meals) must also be allocated to lobbying.
4. Facts. On February 1, 2000, a bill regarding Medicare coverage for prescription drugs is introduced in Congress. Employees in ASSOCIATION's Federal Government Affairs Division, as is customary, prepare a brief summary of the bill and periodically confirm the procedural status of the bill through conversations with House Ways and Means and Senate Finance Committee staffers. This brief bill summary is included in certain ASSOCIATION newsletters sent to ASSOCIATION members. On May 1, 2000, ASSOCIATION's Vice President for Government Affairs sends a memo to ASSOCIATION's Vice President for Pharmacy Affairs requesting his department's help in analyzing the bill and drafting a position letter in opposition to the bill. Employees in ASSOCIATION's Federal Government Affairs Division continue to confirm periodically the procedural status of the bill, and ASSOCIATION members are kept apprised of the bill's status through member newsletters. On October 1, 2000, ASSOCIATION's position letter in opposition to the bill is delivered to all members of Congress.
Analysis. ASSOCIATION's position letter is a lobbying communication because it refers to and reflects a view on specific legislation. The May 1 memo from ASSOCIATION's VP for Government Affairs to the VP for Pharmacy Affairs requesting assistance in analyzing the bill and assistance in drafting a position letter in opposition to the bill evidences a purpose to influence legislation. Neither the activity of periodically confirming the procedural status of the bill nor the activity of preparing the routine, brief summary of the bill (as well as reporting on both to ASSOCIATION members) before May 1 constitutes influencing legislation; the statutory exceptions for these activities apply. In contrast, periodically confirming the procedural status of the bill (and reporting on such to ASSOCIATION members) on or after May 1 relates to the same subject as, and is close in time to, the October 1 lobbying communication and is used for no nonlobbying purpose. Furthermore, because the activity occurs after ASSOCIATION evidences a lobbying purpose with regard to the pending bill, the statutory exception does not apply. Consequently, after May 1, ASSOCIATION is deemed to have determined the procedural status of the bill (and apprised ASSOCIATION members of such) for the sole purpose of supporting the October 1 lobbying communication. The time spent by ASSOCIATION employees on such activities must be recorded as lobbying.
For more information, contact the author at jtenenbaum@TenenbaumLegal.com.