BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1341| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 1341 Author: Wolk (D), et al. Amended: 6/13/12 Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 8-0, 4/11/12 AYES: Wolk, Dutton, Fuller, Hancock, Hernandez, Kehoe, La Malfa, Liu NO VOTE RECORDED: DeSaulnier SENATE APPROPRIATIONS COMMITTEE : 7-0, 4/30/12 AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price, Steinberg SENATE FLOOR : 38-0, 5/7/12 AYES: Alquist, Anderson, Berryhill, Blakeslee, Calderon, Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, Emmerson, Evans, Fuller, Gaines, Hancock, Harman, Hernandez, Huff, Kehoe, La Malfa, Leno, Lieu, Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio, Simitian, Steinberg, Vargas, Walters, Wolk, Wright, Wyland, Yee NO VOTE RECORDED: Runner, Strickland ASSEMBLY FLOOR : 79-0, 8/16/12 (Consent) - See last page for vote SUBJECT : Corporation Tax Law: charitable corporations SOURCE : Franchise Tax Board CONTINUED SB 1341 Page 2 DIGEST : This bill provides specified charities with a 120-day grace period to come into compliance with registration and reporting requirements before revocation of tax-exempt status. This bill also deletes a requirement that charities pay the minimum franchise tax for any period in which their tax-exempt status was invalid. Assembly Amendments make a technical change and add a coauthor. ANALYSIS : Charitable corporations are required to register with the Secretary of State's Office and the Attorney General's (AG) Office upon formation and may apply for tax exemption from the Internal Revenue Service (IRS) and the Franchise Tax Board (FTB). The AG's Office requires charitable corporations to renew their registrations annually. If a charitable corporation fails to renew its paperwork, the AG's Office assumes the charitable corporation received the IRS's maximum tax filing extension (six months) and gives the charitable corporation this same extension. A charitable corporation that does not file 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). The AG's Office may send additional warning letters. If a charitable corporation does not meet its filing requirement, the AG's Office sends a request to the FTB to revoke the charitable corporation's tax exempt status. The FTB assesses the minimum franchise tax ($800 per year) for each year the charitable corporation did not file its paperwork. Many charitable corporations are assessed the franchise tax for several years of non-filing. The FTB must tax the charitable corporation once the AG's Office refers it, and the charitable corporation cannot clear its tax debt until it pays all amounts due. If the charitable corporation does not pay the tax, it faces the same consequences that for-profit corporations do, such as it cannot transact business legally, bring an action or SB 1341 Page 3 defend itself in court, receive an automatic extension to file taxes, file a claim for a refund, file or maintain an appeal before the Board of Equalization, or begin or continue a protest. The AG's registry lists over 50,000 charitable corporations as "delinquent" because they failed to renew their registrations. For 2009-10, the FTB imposed taxes on 140 charitable corporations for a total of 664 years of non-filing and $531,200 in outstanding tax. For 2010-11, the FTB imposed taxes on 54 charitable corporations for a total of 388 years and $310,400 in outstanding tax. However, 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. This bill requires the FTB to revoke a charitable corporation's tax exempt status if the charitable corporation fails to file registration forms and reports required by state law with the AG. Under this bill, revocation occurs only after the AG has notified the FTB that a charitable corporation failed to file any registration or periodic report, and the FTB mailed a notice to the charitable corporation stating it intends to revoke the exemption if the charitable corporation does not file all past due and currently due documents with the AG. After the AG has received all required documents from the charitable corporation, the AG is required to notify the FTB and the charitable corporation that all past due and currently due documents were appropriately filed. If the AG does not notify the FTB that the charitable corporation has complied with the filing requirements by the last day of the applicable period, the FTB must revoke the charitable corporation's tax exemption on the first day after the applicable period. This bill defines the applicable period as: 1. 120 days after the date on which this bill takes effect for notifications of noncompliance from the AG that the FTB received before this bill's effective date. 2. 120 days after the FTB mails notification of the intent SB 1341 Page 4 to revoke the exemption granted to the charitable corporation for notifications of noncompliance from the AG that the FTB received on or after this bill's effective date. An organization that lost its tax exempt status due to non-filing may be reestablished as an exempt organization upon the filing or payment of both of the following: 1. A new application for exemption and payment of the filing fee; 2. Any returns, statements, or payment of any amounts due which were not previously submitted or paid and which resulted in the revocation. When revocation occurs because the charitable corporation failed to confine its activities to those permitted by the section, it may be reestablished as an exempt organization if it can provide satisfactory proof that all of the following have occurred: 1. The organization corrected its nonexempt activities. 2. The organization will operate in an "exempt manner" pursuant to California law. 3. The payment of any tax for periods the organization was not qualified for exemption. Comments The purpose of this bill is to increase compliance with the AG's filing requirements by providing charitable corporations--entities that would otherwise not be taxed--with a 120-day grace period to fulfill their reporting requirement before the tax is imposed. According to the AG's Office, charitable corporations that complied after receiving a bill from the FTB were seldom delinquent with their registrations again. Because many of these charitable corporations are small and volunteer-managed, some are unaware of the filing requirement. (Some of the groups listed on the AG's Web site of delinquent charitable corporations include: choral societies, painting groups, SB 1341 Page 5 volunteer firefighter associations, and park restoration groups.) When they receive a bill from the FTB, many are unable to pay the tax and abandon their charitable corporation altogether. Without this bill, the FTB will continue to revoke tax exemptions to charitable corporations that the AG's Office refers, which could lead to thousands more charitable corporations disbanding. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Annual General Fund revenue losses of approximately $20,000 by providing relief from payment of the minimum franchise tax for charitable corporations that reinstate tax exempt status by complying with AG filing requirements. AG staffing costs of up to $54,000 in 2013-13 and up to $76,000 ongoing to update regulations and perform new administrative duties (Registry of Charitable Trusts Fund). SUPPORT : (Verified 8/16/12) Franchise Tax Board (source) California Association of Museums California Association of Nonprofits California State PTA Girl Scouts Heart of Central California Goodwill Historical Society of Morro Bay ASSEMBLY FLOOR : 79-0, 8/16/12 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Gorell, Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, SB 1341 Page 6 Knight, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Lara AGB:k 8/17/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****