OLYMPIA, Wash. - The Washington Legislature may soon take up atax issue that affects federal charters that convert to statecharters. At issue is whether converting federal charters shouldpay back taxes on property. In the past, the state has said itneeds the revenue from the special "use tax." However, this yearthe state might go along with a bill being introduced by theWashington Credit Union League to exempt the use tax from CUs thatconvert on grounds that new state charters paying sales tax wouldenrich coffers. According to the Department of FinancialInstitutions, Washington is the only state in the U.S. that chargesa use tax on property in pre-conversion cases. The desire to switchcharters among the 61 Washington federals has been on the rise inrecent years following favorable field of membership and businesslending rules advanced by the state's chief CU regulator, LindaJekel, as well as her predecessor. "Yes, we do have a progressive,valuable and modern credit union charter in this state,"acknowledged Jekel, who is CU director in the Department ofFinancial Institutions and the current chairman of the NationalAssociation of State Credit Union Supervisors. Despite the interestin switching to a federal charter, the use tax has been a barrier,say CU executives. But in one stunning turn of developments inSeptember, the members of one large Seattle area CU turned down afederal-to-state conversion proposal backed by managementapparently because of the CU paying new taxes. Still, opinions varyas to what caused the membership rejection at the $600 millionKitsap Community FCU in Bremerton. One theory has it as falloutfrom the very public Columbia CU scrap in Vancouver, which createdconsiderable public confusion and conversion fears. Another theoryis that the rejection simply reflected an anti-tax mood inWashington State resulting from the bitter and very tight 2004 racefor governor, which focused on taxes, won by Democrat ChristineGregoire. And still another is that Kitsap has a number of federalemployees and members of the military who carried their own bias.Elliott Gregg, the president/CEO of Kitsap, admitted the negativevote on the conversion - 3,491 to 3,042 - was indeed a surpriseadding that the balloting during a special meeting "stirred somepassions reflecting antipathy to taxes" among his members. Greggnoted also that only 6,500 of the CU's 72,000 members actually tookpart in the voting. Through a state charter, Kitsap had sought toexpand its FOM in counties comprising the Puget Sound area. Up tonow, Kitsap has been serving members in Kitsap, Mason and Piercecounties "and for the time being we'll do just fine but for thelong term we felt the need to expand our field of membership."Kitsap, said Gregg, may eventually proceed with an application toNCUA for expanded FOM "but I think we'll wait to see what happenson those Utah and Pennsylvania cases." That was a reference to twoseparate and pending American Bankers Association court challengesto FOM expansion brought against NCUA in federal courts in SaltLake City involving America First FCU of Ogden and in Pennsylvaniaagainst three CUs in that state. In the meantime, Gregg discountsthe Columbia fallout theory as causing the membership rejection."We're in the Seattle area and Vancouver is far away from us," saidGregg, noting the conversion publicity was carried in Vancouver andPortland, Ore. newspapers. Nonetheless, Stacy S. Augustine, seniorvice president and general counsel for the League, said she wasshocked to hear at a recent legislator dinner the comments of onewell-known senator-and a member of Kitsap-tell a group that theKitsap conversion involved a switch from a CU to a mutual bank."Now that was an eye opener and if that lawmaker is totallyconfused, there has to be others," observed Augustine, who ishelping spearhead the use tax bill before the legislature when itconvenes Jan. 10. In a statement explaining its use tax position,the League noted that since the passage of the 1997 WashingtonState Credit Union Act Modernization bill, several federal chartershave converted to state charters adding, "despite the fact thatstate chartered are obligated to pay additional taxes, creditunions have shown a willingness to shoulder the additional taxburden in return for Washington State's progressive credit unioncharter." But, the statement went on, "recently the Department ofRevenue has asserted that credit unions that convert from a federalto a state charter owe the state use tax on the value of allproperty at the time of conversion." This, said the league,represents "poor public policy because state chartered creditunions bring in additional tax income to the State of Washington,increase local control over regulated financial institutions andsupport a healthy regulatory environment through assessments usedto fund the Department of Financial Institutions." According to theleague, a $150 million CU pays about $100,000 in sales tax eachyear and if this formula were applied to the assets that haveconverted since 1995, the state would have increased its annualsales tax revenue by $1.2 million each year. That figure, said theleague, is likely a low estimate, because a CU often doubles ortriples its sales taxes owed in any year it builds a new branch.Kitsap estimated its tax obligation to the state had it convertedwould have been $358,000. The $310 million Global CU of Spokanesaid it paid out $70,000 to the state when it converted years agofrom federal to state and it remains satisfied with the switch."There are regulatory advantages to being a state charter and Icredit Linda Jekel for running a progressive department," said JackFallis, president/CEO of Global. He said the eased FOM rulesallowing well-run CUs to establish FOM parameters through boardaction as well as allowing CUs broad expansion in business lendingare all plus factors. The most recent switch to a state chartercame without fanfare little more than a month ago by the $31million Social and Health Services FCU of Olympia. The CU had beenwrangling with NCUA for nearly two years on a TIP charter to serveall government workers but kept running into regulatory roadblocks,explained Edward Danz, president/CEO. Social and Health receivedits state charter Oct. 26 and in accordance with Washington law itsboard sent out letters Nov. 15 to all CUs in the state informingthem of SHS' new FOM reach. Danz said there is confusion as toexactly how the use tax is applied and determined for his CU "butour best estimate is $6,000" in liability. Robert Harvey, thechairman of the league and president of the $410 million SeattleMetropolitan Credit Union, said Washington like other states hasseen the pendulum swing between state and federals over the yearsbut his CU like other state CUs continue to enjoy growth advantagesbecause of the regulatory climate. Because of the tax income streamand a chance to gain greater control, "it would seem the statewould want to welcome with open arms these federals that want toconvert," concluded Harvey, whose CU has a statewide [email protected]