Section 501(c) of the Internal Revenue Code classifies tax exempt organizations into 25 separate categories. Each category is treated differently, and classification in one category rather than another can make a significant difference to an organization's tax liabilities and responsibilities.The American Water Works Association and its sections are exempt under section 501(c)(3) of the code. All AWWA sections get their 501(c)(3) status through a group exemption. This is, in essence, an extension of the Association's 501(c)(3) status to all our sections.
Organizations which are exempt under section 501(c)(3) are usually defined as "charitable" or "educational." These organizations are defined as being organized and operated exclusively for religious, charitable, scientific, testing for the public safety, literary or educational purposes. As a non-profit organization, no part of their net earnings may inure to the benefit of any private individual.
Advantages to classification as a 501(c)(3) organization
- Exempt from tax on dues, interest, dividends, royalties, rents and any other income which is not derived from the conduct of an unrelated trade or business.
- In most states a 501(c)(3) organization is eligible for an exemption from most state taxes, including sales and real estate tax.
- May receive contributions deductible from the taxable income of the donor.
- May sponsor 403(b) retirement plans for their employees.
- Eligible for the third-class postal rate.
- A prohibition against all political activities (other than lobbying) for most exempt organizations.
- Some limitations on the amount of lobbying expenditures and activities of organizations exempt from taxation under 501(c)(3).
- Complex restrictions on certain transactions and complex compliance requirements on organizations deemed to be private foundations.
- Criticism from the for-profit sector for unfair competition.
- A growing Federal, state and local compliance burden including income tax and informational filings and Federal, state and local solicitation laws.
- Increased public scrutiny.
Antitrust laws and their implications for AWWA Sections
Antitrust laws have been enacted primarily for the purpose of maintaining a competitive and fair market place. Although, at first glance, associations may seem to exist on the periphery of the market place, they, in fact, may be more vulnerable to antitrust lawsuits than for-profit companies in some instances.
Four federal laws comprise the main body of law governing antitrust in the United States. They are the Sherman Act, the Robinson-Patman Act, the Clayton Act and the FTC Act. The federal agencies charged with enforcement of these laws are the Justice Department and the Federal Trade Commission. Enforcement can be in the form of governmental proceedings including fines and even imprisonment, lawsuits by private parties or both.
The Sherman Act
Far and away the most important of these to associations is the Sherman Act. The Sherman Act, passed in 1890, has two main provisions. The first is a prohibition against restraint of trade by any "combination" or group or by way of any contract. The second is a prohibition of any monopolistic activities by anyone, whether a group or individual. The intent of the law is to prevent the market place from becoming uncompetitive or monopolized by a group or individual.
Section 1 of the Act, which deals with restraint of trade, is the more relevant of the two sections where associations are concerned. For a violation of the Act to occur, two conditions must be met. They are that a conspiracy exists (that the entity restraining trade be a "combination") and that interstate commerce is restrained. Because an association is already a consortium of individuals and organizations with common interests, almost by definition, all associations meet the first requirement. In other words, associations can, regardless of behavior or purpose, be considered "combinations."
Though there may appear to be some coverage in the requiremen that interstate commerce be affected, this is really not the case. The courts have defined "interstate commerce" to mean any impacted part of the system of continuous commerce among the states. Furthermore, most states have their own laws regulating these activities at the state level.
The Robinson-Patman Act
The Robinson-Patman Act is primarily concerned with discriminatory pricing. Although this Act has much less relevance for associations, care should be given when pricing any service or item. The standard that applies is that any business should be charged the same price given the same circumstances. This is particularly true for those who buy for resale or for use in their products or services. The underlying principle here is that a market advantage could accrue to one buyer of an association's products if that buyer gets a better price than a competitor. This would contribute to the creation of an unfair market place.
The Clayton Act
The Clayton Act addresses a variety of activities centered on growth and distribution activities. Among these are exclusive dealing and requirement contracts and price discrimination. Additionally, mergers, acquisitions and joint ventures are addressed. Although mergers and other forms of organizational relationships are not prohibited, they may be found to be in violation of the Clayton Act if they have the effect of reducing competition or creating a monopoly. Although these provisions of the Act are unlikely to affect our sections directly, one added feature of the Act may. The Clayton Act also provides for private lawsuits as an enforcement method for antitrust violations. These lawsuits allow the recovery of damages. Moreover, the plaintiff can recover treble damages in such cases. In cases brought by private parties, they must prove that they have sustained actual measurable damages as opposed to potential or prospective damages and must prove that the damage is the result of a violation of one of the existing antitrust laws.
The FTC Act
The FTC Act, among other things, created the Federal Trade Commission, which is responsible (along with the Justice Department in the case of Sherman Act violations) for the enforcement of antitrade laws. The FTC Act also included language which makes activities that constitute unfair competition by individuals illegal (remember that the Sherman Act only addressed such activities by groups). The FTC Act has additional provisions that relate to consumer protection.
As was already mentioned, the Sherman Act requires an effect on interstate commerce, though this requirement has been very broadly interpreted by the courts, and thus, has lowered the burden of proof required to substantiate an effect on interstate commerce. More important, though, is the trend of the states to institute their own set of statutes that in most cases have a strong relationship to the federal legislation.
What is important to know here is that there may be governmental enforcement and private remedies for antitrust violations at the state level additionally. Moreover, although these laws generally grew out of trends in the regulation of commerce at the federal level, important differences likely exist. By using the laws described above and the proscribed activities as a guide, you can determine when you need to investigate both state and federal antitrust laws in greater detail.
What to watch out for
Some programs are of more concern to the international association because it is more involved in the specific activity. For example, AWWA's standards program could generate antitrust allegations if it were to produce a standard that clearly excluded a particular manufacturer without reasonable technical or scientific justification. Both sections and the international association should be concerned about other activities. These include:
Certification or professional credentialing programs
Because certification or other credentialing processes can affect the marketability of an individual or business, care must be given in the design of the program. The key considerations are:
- Are the criteria used to determine who will be certified equally applied to all?
- Is the program designed in a way that it could limit competition?
- Are the tests used designed so that they accurately test the relevant skills rather than reading ability or other unrelated abilities and has the test been validated? Test development is a science, requiring attention to many design elements that are not related strictly to content, you may want to consider the use of tests developed and validated by a testing service or other organization which has experience in test development.
- Does the program have a fair appeals process?
Endorsements should always be based on clear criteria for the selection of entities to be endorsed. Additionally, a study should be conducted of the service, product or organization being endorsed to confirm that it meets the criteria. You should also be prepared to offer an endorsement for all service, products or organizations which meet these criteria and otherwise meet the requirements of the endorsement program, e.g., application process, payment for related services, etc. Arbitrarily excluding a group that does meet these criteria can lead to allegations of restraint of trade.
Data Collection and Reporting
In some cases, the collection and dissemination of data or statistics that are not collected, analyzed or reported correctly might raise antitrust issues, depending on how the information is used (whether or not its use affects competition in the market). Excluding non-members or requiring member participation in the data collection process might also be of concern.
Availability of Services to Non-Members
For the purposes of antitrust analysis, associations are seen as serving an industry or profession rather than members. For this reason, you must be careful not to exclude non-members from services, which, it could be argued, are important or necessary to conduct business. However, you can charge them a different rate for these services.
Canadian Antitrust Law
The Competition Act is the Canadian law, which covers all aspects of antitrust. Generally, this law is less prescriptive and involved than US antitrust law. The law covers a wide range of prohibited or regulated activities. They are divided into two classes of violations; criminal and non-criminal.
Criminal violations include: conspiracy, misleading advertising and discriminatory pricing. Criminal violations are prosecuted by the Attorney General of Canada after referral by the Bureau of Competition Policy, which has statutory responsibility for the Act.
Non-criminal violations, also called "reviewable practices," include mergers, refusal to deal, abuse of dominant position, and exclusive dealing. These violations are referred to the Competition Tribunal for corrective action. Private remedies are also available, but are much more restricted than they are in the United States. Private remedies can only be sought in cases of criminal violation or when a Tribunal or court order has not been complied with. Damages are also limited to actual losses rather than the treble damages that are available in the United States.
The purpose of the Act is principally the same as that in U.S. law -- to insure a competitive market place. For that reason, Canadian sections should take care to examine the programs they operate, and to become familiar with the general provisions of the law. However, because Canadian law is generally more liberal and because civil law suits are much more limited, Canadian sections probably have less exposure in this area than their U.S. counterparts. For more information on Canadian antitrust law, contact the Bureau of Competition Policy, Compliance and Enforcement Branch at 613/953-7942.
In general, you should be cognizant of the principals of antitrust laws. In the process of reviewing a section program, consider whether it is likely to affect the market in such a way that it affects free, unhindered competition. If you have any concerns at all, follow up with legal counsel or contact your Section Services Relationship Manager. Remember, even if you win an antitrust lawsuit, the legal fees themselves can cost hundreds of thousands of dollars. It is cheaper to make sure that the program is on firm ground before beginning operation.
Guidelines for standardization of section assessments
1. A section will develop its section assessment in accordance with AWWA Governing Documents, Article XI, Section 11.4.4.
2. A section will contact its Section Services Representative prior to implementing the process for the establishment of a section assessment. The Section Services Representative will ensure the necessary steps are followed.
3. The institution of a section assessment is subject to approval by the section's membership, the Executive Committee of AWWA, and the AWWA Board of Directors.
4. A section may apply for permission to levy an assessment upon its members In order to increase funds available for section uses consistent with the Association objectives and policies. Sections will select from predetermined tier levels, which are 5%, 10%, 15%, 20%,30%, 40%, and 50% of dues for each respective membership category, but not more than 100% of Individual Active member dues.
Categories which will not be assessed are Student, Retiree, Honorary and Life. The actual amount of the section assessment resulting from a percentage of AWWA dues will be rounded to the nearest dollar amount to simplify membership recruitment efforts. Section assessment income will increase as AWWA dues increase, in proportion to the selected tier level. The application must be authorized by a vote of the governing board of the section.
5. Sections shall send a letter of intent to the AWWA CEO at least one year prior to collection of the proposed section assessment. The letter shall state the section’s intent to seek an assessment and which tier level has been selected. The letter will state that if the assessment is approved, future changes in the assessment may be authorized by a vote of the Governing Board of the section. Sections must announce the intention to seek an assessment to its members, and send a letter ballot to every member who is eligible to vote.
Approval of a section assessment requires that twenty-five percent of the section’s membership must vote and two thirds of those voting must approve the assessment. This voting process must be completed within six months of the mailing of the letter of intent to the AWWA CEO. The letter of intent may be amended by a section’s governing board up to the point of polling section members. Notification of such amendment shall be sent to AWWA and the section’s membership.
Sections must acknowledge acceptance or rejection of the section assessment by the vote of the section members to the AWWA CEO no later than May 15 of the year preceding the start of collection of the assessment.
6. The results of the section letter ballot shall be transmitted and attested by the section secretary to the AWWA CEO who shall transmit the letter of intent and ballot results to the Executive Committee. If the application is approved by the Executive Committee, the application shall be submitted to the Board of Directors for approval.
7. When the above requirements have been fulfilled, the CEO shall, until directed to cease doing so, include the assessment in the dues renewal notices sent to members of the section. When payment is received, the assessment portion shall be remitted monthly to the section secretary and entered in the section’s accounts. If payment is not received, then the Association and section may take reasonable collection actions as noted in these guidelines.
8. A section may increase or decrease the assessment fees by selecting a different percentage from the tiers described in 11.4.4(1), or discontinue an assessment by taking appropriate action at a regular meeting of its governing board or other means in accordance with section bylaws. The section secretary shall notify the CEO of such increase, decrease, or discontinuance no later than May 15 of the year preceding the increase, decrease, or discontinuance.
9. A multi-section member will be required to pay a section’s assessment levied upon its members, in addition to multi-section fees.
10. Sections with approved assessments should notify potential members of the assessment fee and assist new members in properly filling out applications to assure that they pay the full dues amount.
11. Sections will assist in providing follow-up on delinquent assessment payments.
12. Members will be billed automatically for the applicable section assessment as part of the annual AWWA dues renewal process.
13. If a member does not pay a section assessment, AWWA will send a balance due invoice to the member and notify the section of its actions. If the balance due invoice is not paid within two months of issuance, AWWA will take the following action:
- New or reinstated members will be updated to full membership and the sections will be contacted concerning follow-up with the member about the need for the section assessment.
- Multi-section members will not be granted the multi-section option and their multisection fee will be returned. Renewing members will be dropped and any partial dues payments returned.
14. AWWA will respond to members, whether new or existing, if clarification regarding the assessment is needed.
15. No portion of the assessment shall be reimbursed to a member upon canceling AWWA membership nor shall the assessment be pro-rated.
16. All members will retain their active membership status of both AWWA and the section when the assessment and the AWWA dues are paid.
17. Sections will receive the assessment check monthly, along with a listing that identifies those members who have paid the assessment.
18. Sections will receive periodic notification of all delinquent members.
Approved by the Board of Directors February 12, 2006
When your section provides entertainment at meetings -- from tapes, records, compact disks, audio/visual presentations, live entertainment or even the radio (over a sound system) -- you must first obtain permission to use that music as required by the United States Copyright Law.
The American Society of Composers, Authors and Publishers and Broadcast Music Inc. are the two companies in the United States that act as licensing agents for songwriters and publishers. By completing applications and paying a fee to either ASCAP, BMI or both organizations (based on the music you are using), your section will be in compliance with the law.
ASCAP and BMI provide a listing of the repertory of copyrighted music for which each claims to hold assigned performance rights. By identifying which organization holds a copyright to the material, sections can pay a licensing fee to that organization rather than to each organization as was necessary in the past when these listings were not available. With this information, sections can also use music that does not have a copyright and therefore eliminate the need to pay licensing fees.
These listings are available on the Internet: Visit the BMI site
for information on the music controlled by BMI, and visit the ASCAP site
for that controlled by ASCAP.
Canadian sections also need to be aware of the Society of Composers, Authors, and Music Publishers of Canada
. The role of SOCAN is to:
- license music users for the performance of music in Canada;
- collect license fees; and
- distribute performance royalties in accordance with the rules of the society to those composers, lyricists, and music publishers whose works have been broadcast or performed in public.
SOCAN routinely charges hotels for using music and the hotel will incorporate those charges into a section contract. Canadian sections should check the hotel contract to determine whether or not this charge has been included. SOCAN can be reached by telephone at 416. 445.8700.
The music copyrighting agency for Mexico is SACM and can be reached at San Phillipe 143, Col. Xoco, Deleg. B., Juarez 03330, Mexico, D.F. You can contact SACM at 011-52-5-604-7733.
AWWA acknowledges concerns regarding the activities of BMI and ASCAP. AWWA, along with other associations, have expressed to BMI and ASCAP the following concerns:
- Unwillingness to license others. Section meetings are planned and conducted primarily for educational and scientific purposes. Any music that is played is incidental and quite unimportant. AWWA and other associations want the hotels, convention centers, exhibitor audiovisual contractors and performers to assume the responsibility as well as take care of the licensing fees.
- Misuse of dominant market power. ASCAP and BMI are the largest performance rights for copyrighted music. Legal, economic and moral principles require that neither company misuses their dominant market power. AWWA and other associations feel these companies are misusing their dominant market power.
- Failure to grant an umbrella agreement music. AWWA would like to have an umbrella agreement to pay only one licensing fee for AWWA and its sections. Currently, BMI and ASCAP state that sections are separate legal entities and AWWA national cannot enter into a licensing agreement for sections.
AWWA will report any further developments to sections. Even though AWWA has concerns with the implementation of BMI and ASCAP policies, AWWA recommends that sections pay the royalty fees assessed by BMI and ASCAP. If there are further questions, BMI can be reached at 212.586.2000. ASCAP can be reached at 212.595.3050.