OLYMPIA, Wash. - The Washington Legislature may soon take up a tax issue that affects federal charters that convert to state charters. At issue is whether converting federal charters should pay back taxes on property. In the past, the state has said it needs the revenue from the special "use tax." However, this year the state might go along with a bill being introduced by the Washington Credit Union League to exempt the use tax from CUs that convert on grounds that new state charters paying sales tax would enrich coffers. According to the Department of Financial Institutions, Washington is the only state in the U.S. that charges a use tax on property in pre-conversion cases. The desire to switch charters among the 61 Washington federals has been on the rise in recent years following favorable field of membership and business lending rules advanced by the state's chief CU regulator, Linda Jekel, 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 of Financial Institutions and the current chairman of the National Association of State Credit Union Supervisors. Despite the interest in switching to a federal charter, the use tax has been a barrier, say CU executives. But in one stunning turn of developments in September, the members of one large Seattle area CU turned down a federal-to-state conversion proposal backed by management apparently because of the CU paying new taxes. Still, opinions vary as to what caused the membership rejection at the $600 million Kitsap Community FCU in Bremerton. One theory has it as fallout from the very public Columbia CU scrap in Vancouver, which created considerable public confusion and conversion fears. Another theory is that the rejection simply reflected an anti-tax mood in Washington State resulting from the bitter and very tight 2004 race for governor, which focused on taxes, won by Democrat Christine Gregoire. And still another is that Kitsap has a number of federal employees and members of the military who carried their own bias. Elliott Gregg, the president/CEO of Kitsap, admitted the negative vote on the conversion - 3,491 to 3,042 - was indeed a surprise adding that the balloting during a special meeting "stirred some passions reflecting antipathy to taxes" among his members. Gregg noted also that only 6,500 of the CU's 72,000 members actually took part in the voting. Through a state charter, Kitsap had sought to expand its FOM in counties comprising the Puget Sound area. Up to now, Kitsap has been serving members in Kitsap, Mason and Pierce counties "and for the time being we'll do just fine but for the long term we felt the need to expand our field of membership." Kitsap, said Gregg, may eventually proceed with an application to NCUA for expanded FOM "but I think we'll wait to see what happens on those Utah and Pennsylvania cases." That was a reference to two separate and pending American Bankers Association court challenges to FOM expansion brought against NCUA in federal courts in Salt Lake City involving America First FCU of Ogden and in Pennsylvania against three CUs in that state. In the meantime, Gregg discounts the Columbia fallout theory as causing the membership rejection. "We're in the Seattle area and Vancouver is far away from us," said Gregg, noting the conversion publicity was carried in Vancouver and Portland, Ore. newspapers. Nonetheless, Stacy S. Augustine, senior vice president and general counsel for the League, said she was shocked to hear at a recent legislator dinner the comments of one well-known senator-and a member of Kitsap-tell a group that the Kitsap conversion involved a switch from a CU to a mutual bank. "Now that was an eye opener and if that lawmaker is totally confused, there has to be others," observed Augustine, who is helping spearhead the use tax bill before the legislature when it convenes Jan. 10. In a statement explaining its use tax position, the League noted that since the passage of the 1997 Washington State Credit Union Act Modernization bill, several federal charters have converted to state charters adding, "despite the fact that state chartered are obligated to pay additional taxes, credit unions have shown a willingness to shoulder the additional tax burden in return for Washington State's progressive credit union charter." But, the statement went on, "recently the Department of Revenue has asserted that credit unions that convert from a federal to a state charter owe the state use tax on the value of all property at the time of conversion." This, said the league, represents "poor public policy because state chartered credit unions bring in additional tax income to the State of Washington, increase local control over regulated financial institutions and support a healthy regulatory environment through assessments used to fund the Department of Financial Institutions." According to the league, a $150 million CU pays about $100,000 in sales tax each year and if this formula were applied to the assets that have converted since 1995, the state would have increased its annual sales tax revenue by $1.2 million each year. That figure, said the league, is likely a low estimate, because a CU often doubles or triples its sales taxes owed in any year it builds a new branch. Kitsap estimated its tax obligation to the state had it converted would have been $358,000. The $310 million Global CU of Spokane said it paid out $70,000 to the state when it converted years ago from federal to state and it remains satisfied with the switch. "There are regulatory advantages to being a state charter and I credit Linda Jekel for running a progressive department," said Jack Fallis, president/CEO of Global. He said the eased FOM rules allowing well-run CUs to establish FOM parameters through board action as well as allowing CUs broad expansion in business lending are all plus factors. The most recent switch to a state charter came without fanfare little more than a month ago by the $31 million Social and Health Services FCU of Olympia. The CU had been wrangling with NCUA for nearly two years on a TIP charter to serve all government workers but kept running into regulatory roadblocks, explained Edward Danz, president/CEO. Social and Health received its state charter Oct. 26 and in accordance with Washington law its board sent out letters Nov. 15 to all CUs in the state informing them of SHS' new FOM reach. Danz said there is confusion as to exactly how the use tax is applied and determined for his CU "but our best estimate is $6,000" in liability. Robert Harvey, the chairman of the league and president of the $410 million Seattle Metropolitan Credit Union, said Washington like other states has seen the pendulum swing between state and federals over the years but his CU like other state CUs continue to enjoy growth advantages because of the regulatory climate. Because of the tax income stream and a chance to gain greater control, "it would seem the state would want to welcome with open arms these federals that want to convert," concluded Harvey, whose CU has a statewide FOM. [email protected]