Article by Erik Smith. Published on Thursday, March 11, 2010 EST.

It is When the Legislature Decides to Raise Taxes on Dues and Initiations

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, March 11.—Another of the Legislature’s attempts to take a whack at fat-cats by closing tax loopholes appears to be claiming an unexpected victim – the largest membership organization in the state, the nearly-million-member Washington and North Idaho chapter of the American Automobile Association.

            The auto club is a far cry from the country clubs, athletic clubs and other ritzy and exclusive social organizations lawmakers thought they were targeting. But it’s been drawn into the fray by a definition in the bill that overlooks its particular status. Turns out the Triple-A — hardly an organization for plutocrats — is the hardest hit of any club in the state.

            A wide-ranging tax measure that passed the Senate Sunday, SB 6143, ends 21 tax exemptions granted to business in the state of Washington – among them, a business and occupations tax deduction for dues and initiation fees. The so-called ‘country club exemption’ has been in the crosshairs for nearly two years, following a 2008 report by the Joint Legislative Audit Review Committee that recommended the Legislature might want to tighten the rules.

            During a pair of brief hearings on the matter over the last two legislative sessions, lawmakers made it clear that they were thinking about ending tax breaks for the state’s bastions of privilege. Private clubs have to pay business and occupations taxes on goods and services they provide, but not on membership dues and fees paid for initiation. The bill ends the exemption for all such organizations, except those that qualify for tax-exempt status under the federal tax code.

            By ending the tax break, the state hopes to pick up $1 million a year in new tax revenue.

            But the auto club has run the numbers, and it looks like more than half that amount would be paid by the Triple-A.

            Not Exactly an Exclusive Club

            The problem is that the state auto club is a not-for-profit organization, but it doesn’t qualify for tax-exempt status under the federal tax code. What that means is that any profits from its business operations are plowed back into the organization. So it falls under a different section of the tax code than the largely charitable organizations that the bill exempts.

And the impact would be immense, said Janet Ray, spokesperson for the Bellevue-based organization. She hesitates about naming an exact number. But she said it seems clear that the bulk of the bill would be handed to a single organization. Hers.

            “Based on what the Legislature has been saying the benefit would be to the budget, probably half that amount or more would fall to one business,” she said. “We don’t feel it would be fair for us to have that added tax burden on us.”

            Ray points out that the auto club is a large employer, with 26 offices around the state, and it pays a wide range of taxes on the goods and services it provides. The club also steers customers to a wide range of businesses that earn AAA recommendations.

            Impact is enormous on the auto club simply because its membership is so large. “It’s not like we’re a local sports club that has 200 members,” she said. “We just think that in an economic time like we have now, additional taxes and burdens on nonprofits are not the place to go to solve the state’s budget problems.”

             Ray said lawmakers told her organization early in the session that they didn’t intend to target the auto club. Which explains why the club’s lobbyist has joined the clamor at the House and Senate doors, urging lawmakers to think twice about the exemptions they are contemplating ending. “We just want to make people aware,” Ray said.

            Scant Public Notice

            The move to end the exemption this year didn’t attract much attention until it showed up in the Senate tax bill. Last year the House considered ending it, and seemingly half the business associations in Olympia came out to testify against the measure. But they were mollified when committee staff informed them that organizations exempted from federal taxes would keep their exemption from state business and occupations taxes. That bill died. A similar measure attracted little attention this year. That bill died, too.

            But as House and Senate scrambled to write their enormous wide-ranging bills cracking down on tax exemptions, the idea found its way into the Senate version, Senate Bill 6143.

            During last year’s House hearing, state Rep. Bob Hasegawa, D-Seattle, said the last thing lawmakers wanted to do was to target large populist organizations.

“If there is an organization like Camp Fire Girls or Boy Scouts, I don’t think we’re interested,” he said. “That’s not going to generate a lot of revenue. But if there are other clubs or organizations using what is euphemistically called the ‘country club exemption,’ maybe they can afford to pay more in tax to help the state get through this budget crisis.”

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