Washington State Fed-to-State Conversion Bill To Remove Use Tax on the Way to Gov. Gregoire

OLYMPIA, Wash. – In what is being called a resounding vote of credit union support, the Washington legislature is removing penalties and clearing the way for federal credit unions to switch to state charters. Under a bill which passed the Senate 47-0 on Feb. 24 and which awaits the signature of Gov. Christine Gregoire, FCUs can apply for state charters without fear of paying a special “use” or sales tax on assets at the time they convert or merge into a state charter. Though a number of federal CUs over the years had looked at switching to the more favorable state charter, they were deterred by the tax penalty, said officials of the Washington Credit Union League, which had lobbied for the bill. The measure had the backing of the state’s Department of Financial Institutions but for a time was challenged by the Department of Revenue which insisted the revenue was needed to shore up budget coffers. However, the league, joined by regulators, convinced the Gregoire administration the state could gain more in future sales tax revenue once the FCUs converted to a state charter. In a statement, the league forecasted that “over a five-year period, the estimated new sales tax revenues per year would be $1.45 million assuming that two federally chartered credit unions convert to a state charter every year.” Without identifying them, the league said that there are only two FCUs which “currently have an interest in converting to a state charter.” One of those CUs is known to be Kitsap Community FCU in Bremerton whose members in September rejected a charter conversion plan, attributed in part to an anti-tax mood in Washington State “as members did not want their credit union to have to pay use taxes on conversion,” noted the league. There are currently 79 state chartered credit unions in Washington with aggregate assets of more than $16.9 billion, and 61 federally chartered credit unions with total assets of approximately $3 billion, said the league. “The nine largest federal charters make up $2 billion in assets, and would be most interested in converting to a state charter,” said the league statement. In reviewing the history leading up to the bill’s passage, the league noted that the number of conversions to state charters “increased dramatically following the modernization of the Washington State Credit Union Act in 1997 and since 2001 the Washington Department of Revenue has attempted to assess use tax on the value of a federally chartered credit union’s assets at the time it converts to a state chartered credit union.” The DOR, said the league, argues that because an FCU was exempt from taxation and did not pay sales taxes when goods were purchased, it is obligated to pay use taxes on the value of assets at the time of conversion to a state charter. Since 1990, the league said 16 federally chartered credit unions have converted to state charters with total assets over $3.97 billion. If the average $150 million CU pays an estimated $100,000 in sales tax a year, the sales tax revenue would reach $1.2 million a year, the league concluded, adding “this figure is likely an extremely low estimate because a credit union typically doubles or triples its sales taxes owed in any year it builds a branch.” “The use tax assessment was essentially a penalty for conversion to a state charter, and this bill removes that penalty,” said Stacy Augustine, senior vice president and general counsel for the league who helped spearhead the bill’s passage. Echoing her comments was John Annaloro, president/CEO of the league, who called the use tax “unique” and an anomaly which needed to be fixed. Final action on the House-passed bill by the state Senate “clearly supports dual chartering and credit union choice,” he said. -