Well I tried again with no luck today. I took an envelope in that was in the 3/4 inch guidlines that some of you have stated and it was denied. I had a nice little chat with the post master.
I asked what about the if it fits it ships slogan? He said that the problem is that it didn't fit. Just because the envelope shut doesn't mean that it fit. It is an envelope for documents only and cannot be used for anything else! Period. They are loosing so much money that they had to tighten down on the rules. Documents only.
We then talked about other options. I told him that if I stop using the flat rate envelopes I will no longer be able to sell online as the shipping will be more than the products that I am selling. He said that I can order the new padded envelopes online and use them. They are not used for documents. You can use them for anything and there are no restrictions on them as far as width.
Overall it was a very nice chat. He understood my complains and helped me to find a new solution. He also isn't sure why they can't get the bubble mailers in the store but he said he would look into it further for me. So I guess that is a reasonable solution
Thank you everyone for your thoughts and comments! I appreciate all the help and advice!