BILL ANALYSIS Ó
SB 1341
Page 1
Date of Hearing: June 18, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 1341 (Wolk) - As Amended: June 13, 2012
Majority vote. Fiscal committee.
SENATE VOT : 38-0
SUBJECT : Corporation Tax Law: charitable corporations:
revocation of tax exemption.
SUMMARY : Provides a 120-day grace period for certain charitable
corporations to comply with specified registration and reporting
requirements in order to maintain their tax-exempt status for
state tax purposes. Specifically, this bill :
1)Requires the Franchise Tax Board (FTB) to revoke the
tax-exempt status of a charitable organization that has failed
to file any required registration or periodic report with the
Attorney General's Office (AG), but only if all of the
following have occurred:
a) The AG has notified the FTB of the corporation's failure
to comply with the registration and reporting requirements;
b) The FTB has promptly notified the delinquent corporation
of the FTB's intent to revoke the corporation's tax-exempt
status, as specified; and,
c) The FTB has not received notification from the AG
stating that the corporation has complied with all of the
filing requirements by the last day of the "applicable
period," as defined.
2)Defines the "applicable period" as either of the following:
a) For AG's notifications of noncompliance received by the
FTB prior to the effective date of this bill, the
"applicable period" means 120 days after January 1, 2013.
b) For AG's notifications of noncompliance that are
received by the FTB on or after January 1, 2013, the
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"applicable period" means 120 days after the FTB mails
notification of the intent to revoke the tax exemption
granted to the charitable corporation.
3)Allows the FTB to reestablish a charitable corporation's
tax-exempt status, after receipt of notification from the AG
regarding the corporation's failure to comply with the
registration and reporting requirements, if both of the
following conditions are met:
a) The corporation files a new application for exemption
and pays the filing fee; and,
b) The corporation files all delinquent returns and
statements and submits payments due that were not
previously submitted or paid and which resulted in the
revocation.
4)Specifies that, if the revocation occurs because the
charitable corporation failed to confine its activities to
those that are permitted, the FTB may reestablish the
corporation's tax exempt status if the corporation provides
satisfactory proof that all of the following have occurred:
a) The corporation has corrected its non-exempt activities;
b) The organization will operate in an "exempt manner" as
specified; and,
c) The payment tax for periods the organization was not
qualified for exemption has been made.
5)Contains legislative findings and declarations that the
minimum franchise tax abatement for charitable corporations,
as well as related penalties and interest, serves a public
purpose of encouraging a charitable corporation to come into
compliance with filing requirements so that all Californians
can continue to support and donate to much needed charitable
organizations.
EXISTING LAW :
1)Exempts charitable corporations from tax, including the
corporation minimum franchise tax, if they have been granted
tax-exempt status by the FTB and meet certain other
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requirements.
2)Requires a charitable corporation be in compliance with the
registration and reporting requirements of the AG's office.
3)Requires the AG to provide the FTB with written notification
of a charitable corporation's period of noncompliance if that
corporation fails to meet certain registration and reporting
requirements.
4)Requires the FTB to revoke the corporation's tax exemption for
the period of noncompliance, and the charitable corporation
becomes subject to tax, including the annual $800 minimum
franchise tax, on all tax years within that period.
5)Allows the FTB to reinstate a charitable corporation's
previously revoked tax-exempt status if the corporation
subsequently comes into compliance with the AG registration
and reporting requirements. Prohibits the FTB from abating
the minimum franchise tax imposed on the corporation during
any previous periods of noncompliance with the AG.
FISCAL EFFECT : According to the FTB, this bill will result in
an annual General Fund revenue loss of 20,000.
COMMENTS :
1)Author's Statement. The author states that, "The AG's current
compliance mechanism taxes entities that otherwise would not
be taxed, even forcing some to disband. Senate Bill 1341
allows the FTB to give a charity a 120-day grace period to
file its paperwork before revoking its tax-exempt status. This
will help the AG monitor charities by increasing charities'
compliance with the AG's regulations. With an estimated
revenue loss of only $20,000 per year, this bill allows
charities that comply with the AG's filing requirement to use
their funds for charitable purposes instead of paying the
franchise tax."
2)Arguments in Support. The proponents of this bill state that
"smaller nonprofits need adequate time to complete and file
required tax exemption paperwork with the Attorney General."
In addition, "many of these nonprofits?are run by volunteers
and part-time staff." It is argued that these volunteers and
part-time staff are "unaware that, under existing law, they
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must meet annual filing requirements with the Attorney
General" and consequently, "dozens of charities like these
lose their tax-exempt status and find themselves unable to pay
the minimum franchise tax." The proponents state that "SB
1341 makes it possible for charities that Ýultimately] comply
with the AG's filing requirement to continue Ýto] meet
community needs without having to pay the state's franchise
tax."
3)Background. Charitable corporations are required to register
with the Secretary of State's Office and the AG's Office upon
creation and may apply for tax exemption with the Internal
Revenues Service (IRS) and the FTB. The AG's Office requires
all charitable corporations to renew their registration
annually as a way to monitor their activities. If a
charitable corporation fails to files its paperwork, the AG's
Office assumes the charity has received the IRS's maximum tax
filing extensions (six months) and gives the charitable
corporation this same extension. A charity that has not filed
its paperwork after this six-month extension receives a letter
from the AG's Office warning of possible fines and taxes if it
does not renew its registration within the given timeframe
(usually 30 days from the date the letter was sent). If the
charitable corporation does not meet the filing requirements,
the AG refers the charitable corporation to the FTB, which is
then required to levy the minimum franchise tax on that
charitable corporation ($800 for each year of non-filing). At
this time, a charitable corporation cannot clear its debt
until it pays all amounts due. According to the FTB, in the
fiscal year 2010-11, it imposed taxes on 54 charitable
corporations for a total of 388 years and $310,400 in
outstanding tax. The state collects only about $20,000 each
year from delinquent charitable corporations because many of
them disband when they cannot afford to pay the bill.
4)What does this bill do? Many charities are small, volunteer
organizations unaware of the AG's filing requirements. It is
argued that, when these charities receive an outstanding fine,
they are unable to pay the minimum franchise tax and disband.
There are currently over 50,000 delinquent charities in
California. SB 1341 would allow charities a new 120-day grace
period to file paperwork before revoking its tax exempt
status, in addition to the existing six-month extension (per
the guidelines of the IRS). Thus, if a charitable
organization files paperwork within the new 120-day grace
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period, its delinquent status will be removed, it will retain
its tax-exempt status, and it will not be subject to tax. If
the organization fails to file the required paperwork within
this grace period, it will lose its tax-exempt status and will
be assessed the minimum franchise tax for each year in which
the organization was noncompliant.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (Sponsor)
Girl Scouts Heart of Central California
CA Association of the Nonprofits
Historical Society of Morro Bay
Council of California Goodwill
Opposition
None on file
Analysis Prepared by : Meghan Ginley / Oksana Jaffe / REV. &
TAX. / (916) 319-2098