Government Relations – August 2022 Newsletter

While summer might be winding down for most, the Biden Administration’s legislative and regulatory agenda is clearly starting to heat up. Maybe it’s rising pressure from the upcoming 2022 midterm elections or perhaps more permanent staffing and leadership at the helm of federal agencies, but there’s a lot moving, and a lot moving fast.

This month, the 4As August 2022 Government Relations Newsletter will engage your inner policy wonk covering a diverse gamut of policy areas relevant to agencies including labor, tax, data privacy, climate change, and consumer protection.This issue drills down into New Mexico’s attempt at a digital ad tax, the FTC’s initial rulemaking to transform data privacy and security regulation, legal blockage of the private employer provisions within Florida’s Stop “WOKE” Act, proposed changes to the FTC’s endorsement guidance, and more.

---

CFPB Issues Interpretive Rule Warning that Digital Marketing Providers Must Comply with Federal Consumer Finance Protections

In an August 10 announcement, the Consumer Financial Protection Bureau (CFPB) issued a final interpretive rule to address digital marketing providers that commingle the targeting and ad delivery for financial firms to consumers with the Consumer Financial Protection Act’s (CFPA) exemption for advertising “time or space.” The CFPB rule addresses when digital marketing providers are designated “service providers” under the CFPA and thereby not exempt via “time or space exception”.

The CFPB’s Rationale

The new rule asserts that many digital marketers do not qualify under the Consumer Financial Protection Act’s (CFPA) “time or space” exception because they provide “material services” to their financial firm clients to develop content strategy, lead ad targeting, and manage ad placement to help acquire potential customers. In asserting that digital marketing providers are providing a “material service,” the CFPB is relying on a characterization of the type of engagement of digital marketing providers as more similar to the function traditionally performed by a covered person’s own customer acquisition or marketing group than a traditional media source (e.g. lead generation, marketing analysis or strategy). The CFPB rule argues that “material services” go well beyond the activities of traditional media sources, such as print newspapers or radio, that solely passively provided airtime or physical space for advertisements.

More specifically, the CFPB makes clear that a digital marketing provider would not fall within the “time or space’ exception if:

• It targets and delivers advertisements to consumers with certain traits or interests, even if those traits or interests are specified by the covered person.  In these circumstances, it is the digital marketer’s ad targeting and delivery algorithms that chiefly identifies the specific audience that sees the advertisement. 
• A covered person identifies particular users by name and the digital marketer targets and delivers the advertisements to those users at specific times to increase or maximize engagement.  (The CFPB argues that although a traditional media source (i.e. radio, television, etc). might have provided basic information to customers about when to air particular ads, the business purchasing the ad generally made the decision about when and where to place the ad).

Why The New Rule Matters

When digital marketers are designated as service providers under the CFPA, they are definitely liable for consumer protection law violations.The CFPB and other consumer protection enforcers, such as state attorneys general, can sue digital marketers to stop violations of consumer financial protection law. Service providers can also be liable for unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act.

Importantly, an interpretive rule is said only to advise the public of an agency’s view of what a law or regulation means. An interpretive rule, unlike a legislative rule, does not bind the public or have the force of law. Interpretive rules are also exempt from the standard notice-and-comment rulemaking procedures.

For more information on the implications of this new interpretative rule, please refer to this guidance from Ballard Spahr. 

 

New Mexico Proposes Regulations Addressing Gross Receipts Tax Treatment of Digital Advertising Services

On August 9, 2022, the New Mexico Taxation and Revenue Department issued proposed regulations explicating the gross receipts tax (i.e. the state’s version of a sales tax) treatment of digital advertising services. The proposed regulations “clarify” that the state’s gross receipts tax applies to providers of digital advertising services whose digital platform may be accessed or viewed from within New Mexico. State tax regulators explicitly state that the proposed regulations do not reflect a policy change, but instead emphasize that the rules make consistent the tax treatment for all advertising platforms (non-digital and digital).

While the newly proposed regulations provide some clarity regarding the taxation of digital advertising services under existing state tax rules, they introduce several inconsistencies and other gaps, particularly related to sourcing. More clarification is needed from state regulators on whether gross receipts from the provision of digital advertising services should be sourced to the purchaser’s address, the server’s location, or the viewer’s location.

 Also included in the draft regulations, regulators would allow a deduction for gross receipts from national or regional advertising; however, the deduction is not allowed if the purchaser is incorporated in or has its principal place of business in New Mexico. While this significantly narrows the base for the tax, it injects complexity by requiring that the seller know the state in which its purchaser is incorporated or has its principal place of business; this is information usually unavailable in the context of internet-based advertising platforms.

New Mexico’s proposed regulations do not specify when these proposed “clarifications” would take effect or the period to which the clarifications would apply. Lack of a such date, along with the Department’s statement that digital advertising services are already subject to the state’s gross receipts tax, could indicate that New Mexico tax regulators will seek to collect digital advertising gross receipts tax for tax periods occurring before the proposed regulations are finalized.

New Mexico’s Taxation and Revenue Department has scheduled a public hearing on the proposed rules for September 8, 2022, at 10:00 am MDT, which also is the final submission deadline for written comments. The proposed regulations would be effective upon publication in the New Mexico Register, which could happen as soon as October 11, 2022.

New Mexico’s announcement comes as Maryland’s digital advertising tax still remains tied up in state and federal court.  Maryland’s tax became effective on January 1, 2022 but still faces significant constitutional challenges and what many legal experts believe are clear violations of the federal Internet Tax Freedom Act (IFTA). ITFA bars discriminatory taxes on electronic commerce, meaning a state can’t tax a digital service if its non-digital counterpart isn’t taxed. Maryland’s digital ad tax is structured differently than New Mexico’s, as a graduated excise tax solely on digital advertising services. By extending existing sales taxes to cover both digital and non-digital advertising services (i.e. broadcast and print), New Mexico is attempting to circumvent obvious violations of  ITFA and increase the likelihood of the tax’s legal staying power.

 

EEOC Says New EEO-1 Data Report Provides Useful Recommendations for Future Data Collections to Combat Pay Discrimintation

On July 28, 2022, the National Academies of Sciences, Engineering, and Medicine issued a Consensus Study Report evaluating the U.S. Equal Employment Opportunity Commission’s (EEOC) historic, first-time collection of pay data from certain private employers and federal contractors, which was completed in February 2020. Many agencies contributed worker demographic data to these reports.

The 277-page report makes several recommendations that would effectively have the EEOC double down on its wage data collection efforts by expanding Component 2 collection and analysis. It finds that “there is value in the expanded EEO-1 data, which are unique among federal surveys by providing employee pay, occupation, and demographic data at the employer level. Nonetheless, both short-term and longer-term improvements are recommended to address significant concerns in employer coverage, conceptual definitions, data measurement, and collection protocols. If implemented, these recommendations could improve the breadth and strength of EEOC data for addressing pay equity, potentially reduce employer burden, and better support employer self-assessment.”

In 2016, the EEOC added a pay data collection to the EEO-1 form for the first time, known as “Component 2.” The EEOC collected 2017 and 2018 pay data from private employers through the EEO-1 Component 2 between July 2019 and February 2020. By the time the pay data collection closed in February 2020, the EEOC had collected pay data from approximately 70,000 employers in each collection year, covering over 100 million workers.

The EEOC voted in 2019, with White House approval, to discontinue the EEO-1 Component 2 pay data collection in the future. EEO-1 Component 1 annual reporting of demographic workforce data, including data by race/ethnicity, sex and job categories, is still mandatory for all private sector employers with 100+ employees, and federal contractors with 50+employees meeting certain criteria.The 2022 EEO-1 Component 1 data collection is tentatively scheduled to open in April 2023. The current EEO-1 form is set to expire on June 30, 2023.

 

NLRB Partners with DOJ and FTC to Better Protect Labor Markets

On July 26, the National Labor Relations Board (NLRB) announced that they had signed a memorandum of understanding (MOU) with the U.S. Department of Justices (DOJ) Antitrust Division to create a formal partnership between the two agencies to better protect free and fair labor markets and ensure that workers can freely exercise their rights under the National Labor Relations Act. This agreement will manifest itself in greater coordination in information sharing, enforcement activity and training; the agencies will maximize the enforcement of federal laws, including the National Labor Relations Act (NLRA), under the NLRB’s jurisdiction and the antitrust laws enforced by the Justice Department’s Antitrust Division.

NLRB’s and DOJ’s collaboration will focus on “protecting workers who have been harmed or may be at risk of being harmed as a result of conduct designed to evade legal obligation and accountability (such as misclassifying employees or fissuring workplaces); interference with the rights of workers to obtain fair market compensation and collectively bargain (through labor market concentration/labor monopsony or other anti competitive practices); and the imposition of restrictive agreements or workplace rules, such as non-compete, non-solicitation, and nondisclosure provisions”.

Agencies engaging independent contractors should monitor this new alliance as all companies that routinely use independent contractors will be heavily scrutinized.  This MOU comes in addition to a June 3 blog post from the Department of Labor (DOL) that it plans to issue a new federal independent contractor (IC) rule, likely in Q4 2022.

A similar announcement, made two weeks earlier on July 19, heralded a new MOU partnership between the Federal Trade Commission (FTC) and NLRB to bolster the FTC’s efforts to protect workers by promoting competitive U.S. labor markets and putting an end to unfair practices that harm workers. The FTC has prioritized cracking down on anticompetitive contract terms that put workers at a disadvantage by leaving them unable to negotiate freely over the terms and conditions of their employment. The agency is scrutinizing whether some of these contract terms, particularly in take-it-or-leave-it contexts, may violate the law.

The new memorandum of understanding between the two agencies outlines ways in which the Commission and the Board will work together moving forward on key issues such as labor market concentration, one-sided contract terms, and labor developments in the “gig economy.” The MOU identifies areas of mutual interest for the two agencies, including the extent and impact of labor market concentration; the imposition of one-sided and restrictive contract provisions, such as noncompete and nondisclosure provisions; labor market developments relating to the “gig economy” and other alternative work arrangements; claims and disclosures about earnings and costs associated with gig and other work; the impact of algorithmic decision-making on workers; the ability of workers to act collectively; and the classification and treatment of workers.

These MOU agreements all stem back to a February 2022 memorandum from General Counsel Abruzzo to all field offices, committing to working closely with other federal agencies to ensure the government is co-functioning and co-enforcing all related laws in the most effective and efficient way to ensure workers are fully protected, while minimizing employers’ compliance burdens.

 

FTC Issues Broad Privacy ANPRM to Address “Commercial Surveillance and Data Security”

As was expected, the Federal Trade Commission (FTC) published an advance notice of proposed rulemaking (ANPRM) on “Commercial Surveillance and Data Security” on August 22, 2022. The FTC first indicated in December 2021 that it intended to initiate this rulemaking “curb[] lax security practices, limit[] intrusive surveillance, and ensur[e] that algorithmic decision-making does not result in unlawful discrimination”, after a formal request for rulemaking petition was filed by thinktank Accountable Tech.

To initiate its ANPRM, the FTC cited its rulemaking authority under Section 18 of the FTC Act, 15 U.S.C. § 57a, AKA Magnuson-Moss. Magnuson-Moss rulemaking procedures require the FTC to take several steps before promulgating new rules, including issuing reports and recommendations for public comment, holding informal hearings, and providing interested parties with limited rights of cross-examination of witnesses at those hearings.

The ANPRM, which the FTC approved on a 3-2 party-line vote, is the initial step in a process that could result in the adoption of  the first major federal regulation addressing privacy, data security, and algorithmic discrimination across broad sectors of the U.S. economy. 

The ANPRM includes a list of 95 questions (some with subparts) on topics including:

• Privacy protections for children and teens.
  • Protections for children under 13 that go beyond COPPA’s scope and whether COPPA’s mechanisms are adequate.
  • How services that are not directed to children or teens should address child and teen privacy, including what protections they should be required to provide for these groups, and whether they should be required to take steps to determine the age of their users
  • Potential limits on the use of targeted advertising to teens and children
• Restrictions on targeted behavioral advertising.
  • Whether opt-outs from personalized advertising should be available to all consumers
  • Determining whether companies in certain sectors such as finance, healthcare, search, or social media should be limited from owning or operating a business that engages in targeted advertising.
  • Assessing whether contextual advertising is as effective as personalized advertising and should be used in its place
• Significant restrictions on data processing.
  • Evaluating the notice and choice paradigm and whether certain types of data collection and processing should be disallowed
  • Assessing the efficacy of consent-based data processing and asking about blanket restrictions to certain practices, irrespective of consumer consent
  • Determining what should be included in required privacy disclosures, and what standards for consumer comprehension should apply
• Data Security
  • Understanding the implications of mandating specific measures such as encryption, breach notification, data minimization, and retention
  • Codifying a prohibition on deceptive statements about security so that penalties can be obtained for first-time violations
  • Applying the data security requirements of COPPA and/or the Gramm-Leach-Bliley Act (GLBA) Safeguards Rule to much wider sectors of industry
  • Requiring certification by businesses that their practices meet certain standards.
• Biometric Information.
  • A question that hints the agency is considering developing a rule that imposes substantive limits on the use of facial recognition, fingerprinting, and other biometric technologies.
• Algorithms and algorithmic discrimination.
  • Determining whether regulations should focus on harms to protected classes or consider harms to other underserved groups (e.g., unhoused people or rural communities) or should analyze proxies for protected classes
  • Pondering whether it should consider rules regarding algorithmic discrimination only in established areas like housing, employment, and consumer finance or go beyond them. 
  • Discerning the prevalence of algorithmic discrimination and how the agency should evaluate, measure, and regulate such discrimination.
  • Assessing if other federal laws (the First Amendment, Section 230 of the Communications Act, 47 U.S.C. § 230, and other civil rights laws) should affect the scope of any FTC rule in these areas.

For more information about the ANPRM, please read this fact sheet released by the FTC. 

Written comments must be submitted on or before Friday, October 21, 2022 via regulations.gov. The FTC will also accept comments on the ANPRM during a public forum scheduled for September 8, 2022.

 

FTC Seeks Comments on Updated Endorsement Guides

In a notice published in the Federal Register on July 26, the Federal Trade Commission (FTC)  is seeking public comment on the proposed updates to its Endorsement Guides (Document ID: FTC-2022-0047-0001), which reflect the new ways that advertisers now reach consumers to promote products and services, including through social media.

The Endorsement Guides, first enacted in 1980 and amended in 2009, provide guidance to businesses and others to ensure that advertising using endorsements or testimonials is truthful.

In February 2020, the FTC sought comment on whether changes should be made to the guides. The proposed changes reflect the extent to which advertisers have turned increasingly to the use of social media and product reviews to market their products. Due to the ongoing business impacts of the COVID-19 pandemic, lack of staff resources at the FTC, long-looming pending FTC commissioner nominations, and other circumstances, it took the FTC more than two years to issue the draft updated FTC endorsement guides.

In a notice, along with the proposed revisions to the guides, the FTC has:

• Warned social media platforms that some of their tools for endorsers are inadequate and may open them up to liability;
• Clarified that fake reviews are covered under the guides and added a new principle that in procuring, suppressing, boosting, organizing, or editing consumer reviews, advertisers should not distort or misrepresent what consumers think of their products. This would cover review suppression like in the FTC’s recent Fashion Nova case;
• Clarified that tags in social media posts are covered under the guides and modified the definition of “endorsers” to bring virtual influencers under the guides; and
• Added an example addressing the microtargeting of a discrete group of consumers.
• Included a new definition of a “clear and conspicuous” disclosure, giving specific instructions for visual and audible disclosures, stressing the importance of “unavoidability” when the communication involves social media or the internet, and saying  that the disclosure should not be contradicted or mitigated by, or inconsistent with, anything in the communication.

Agencies can submit written comments on the proposed updates to the FTC endorsement guides via regulations.gov on or before September 26, 2022. The 4As will be submitting comments on behalf of our members.

 

President Biden Signs Democrats’ Domestic Policy Agenda Bill With Significant Clean Energy, Climate Change, Tax, and Healthcare Provisions

On August 16, President Biden signed into law the Inflation Reduction Act of 2022, an approximately $730 billion health care, tax and climate bill that represents a sizable portion of the Democrats’ domestic policy agenda.

The bill uses incentives for private companies to produce more renewable energy and for households to transform their energy use and consumption. The bill also gives Medicare the ability to negotiate the price of prescription drugs for the first time in its’ history and extends  the Affordable Care Act’s health insurance subsidies for millions of Americans.

Tax Provisions

Important particularly for larger agencies, a key provision of the bill is the revival of an alternative U.S. corporate minimum tax, which generally is intended to subject certain targeted U.S. corporations, to a minimum tax of 15 percent on “adjusted financial statement income” (as opposed to adjusted taxable income) for tax years beginning after Dec. 31, 2022.  Foreign-parent companies would also be subject to the $1 billion threshold so long as their U.S.-connected income exceeds $100 million. 

Corporations would generally be eligible to claim net operating losses and tax credits against the AMT. When applicable, a corporation’s U.S. tax liability for a particular year would be the greater of the amounts computed under the regular U.S. corporate tax or the Corporate AMT. The tax does not apply to nonprofit organizations, even those with $1 billion of income, unless they have $1 billion of unrelated business taxable income.

A summary of the other tax provisions within the bill can be found here. 

Climate Change and Clean Energy Provisions

In addition to spurring energy independence, Democratic lawmakers say the bill would reduce carbon emissions by roughly 40 percent by 2030, close to President Biden’s goal of cutting U.S. emissions by at least 50 to 52 percent below 2005 levels by 2030. As currently drafted, the bill would put ~$370 billion into combating climate change and bolstering U.S. energy production through changes that would encourage nearly the whole economy to cut carbon emissions.

A more detailed breakdown of the climate related provisions within the bill can be found here.

 

Federal Judge Rules Florida’s Stop “WOKE” Act is Unconstitutional, Blocking Private Business Provision

On August 19, a federal judge issued a preliminary injunction against a controversial provision in Florida’s Stop “WOKE” Act‒a provision that prohibits Florida employers with 15+ employees from forcing workers to attend diversity, equity, and inclusion (DEI) trainings that would make them feel uncomfortable or guilty about their race because of historical events. The Act, and its ongoing legal proceedings, could have potentially significant implications for agencies wishing to cover topics like structural racism, white/male privilege, and unconscious bias in workplace anti-discrimination and diversity and inclusion trainings.

Tallahassee U.S. District Judge Mark Walker said in a 44-page ruling that the “Stop WOKE” act violates the First Amendment and is impermissibly vague. Judge Walker also refused to issue a stay that would keep the law in effect during any appeal by the state. The legislation, he wrote, “does not target trainings because they are mandatory,” but rather “because of the speech delivered in them.”

Judge Walker’s ruling is preliminary. It was filed by private entities, Clearwater-based Honeyfund.com and others, claiming their free speech rights are curtailed because the law infringes on company training programs stressing diversity, inclusion, elimination of bias and prevention of workplace harassment.

In order to help agencies better understand the specifics of the law and how it might apply to their DEI training policies and goals, the 4As Government Relations team in consultation with the 4As Professional and Organizational Development team has put together a helpful guidance document.

---

If you have any questions about the policy updates in this newsletter, please contact Alison Pepper, Executive Vice President of Government Relations and Sustainability.