HB 84 - PULL-TABS LIMITED TO 501(C)(3) OR (19) The next order of business to come before the House State Affairs Standing Committee was HB 84, "An Act limiting the authority to conduct pull-tab charitable gaming to qualified organizations that are exempt from taxation under 26 U.S.C. 501(c)(3) or (19); and providing for an effective date." CHAIR JAMES called on Representative Terry Martin, sponsor of HB 84, to present the bill. Number 0405 REPRESENTATIVE TERRY MARTIN, Alaska State Legislature, distributed to the committee members a handout titled, "A Great Time to Brag." People were concerned that the bill would stop their source of money from the pull-tabs. He told them it would depend on what they told the committee and what they had been doing with the money. If the money did not go towards charitable purposes, then there would be a problem. It was also a time for the charitable groups and the citizens to brag about their programs and how they had been helping true charitable purposes. Had they been giving their money to Beans Cafe, or to scholarships, for example? Had they been helping youth athletic programs? Were organizations giving out more scholarships now that they had a permit? It was a great time to see what was happening with the millions and millions of dollars gained from pull-tabs. From the state's perspective, 8 percent of the total of $270 million was not very much when illegal gamblers paid 10 to 15 percent for protection. He believed some of the money went to the Alaska Charitable Gaming Association, Inc. to protect what they were doing. Some used the money to fight regulations in the courts instead of coming to the legislature asking for adjustments. He reiterated it was a great opportunity to scrutinize what was happening in the pull-tab world. Number 0669 REPRESENTATIVE MARTIN further stated that HB 84 was strictly related to pull-tabs. It had nothing to do with the organizations that had a permit for auctions or bingos, for example. Number 0699 REPRESENTATIVE IVAN asked Representative Martin if HB 84 would prohibit municipalities from selling pull-tabs? Number 0730 REPRESENTATIVE MARTIN replied it would be very interesting to find out what the municipalities were doing. CHAIR JAMES asked Representative Martin to answer the question of Representative Ivan. REPRESENTATIVE MARTIN replied he did not know if the bill would prohibit municipalities. If they were not using the money for charitable purposes then they should be questioned. CHAIR JAMES asked Representative Martin if the bill prohibited them? REPRESENTATIVE MARTIN replied, "As I see it now it does, yes." It was up to the committee if municipalities should be put back in as charitable organizations. If they were using the money just for more revenue instead of taxation, then they should be questioned. Number 0774 REPRESENTATIVE IVAN asked Representative Martin if the unincorporated communities would also be impacted by HB 84? Would they be prevented from participating for example? Number 0826 REPRESENTATIVE MARTIN replied, from my point of view, they should be if the money was not going for charitable purposes. If the money was going to the local administration then it was not very charitable. That was what taxes and other avenues of money were for, even in unincorporated communities. Number 0851 CHAIR JAMES asked Representative Martin to explain the identified codes in the bill and which ones would be excluded. REPRESENTATIVE MARTIN deferred the question to Mr. Poshard, Director, Charitable Gaming Division, Department of Revenue. Number 0895 REPRESENTATIVE IVAN asked Representative Martin if he had documentation that accounted for the amount of dollars from pull- tab sales being placed into campaigns? Number 0925 REPRESENTATIVE MARTIN replied he was going to save that information for his other bill - HB 156. At such time, he would bring the backup information that would give a person an idea of how much money was going into the political process - directly and indirectly. "It is absolutely amazing how much money. They make the oil companies look like little pimps." Number 0955 CHAIR JAMES asked Representative Martin if campaign finance reform last year eliminated political contributions from pull-tab activities? Number 0963 REPRESENTATIVE MARTIN replied, "We attempted to." But the words and phrases did not accomplish what we wanted to. The backup information would show the loopholes. The biggest loophole, he declared, was the prevention of corporations and unions from contributing. The legislation did not prevent non-profit organizations, however. Number 1004 CHAIR JAMES replied that campaign finance reform made it specifically clear that only individuals could make political contributions. Number 1017 REPRESENTATIVE MARTIN replied there were big loopholes that needed to be closed. Number 1032 REPRESENTATIVE BERKOWITZ asked Representative Martin if he was seeking to exclude certain non-profits from qualifying? Number 1044 REPRESENTATIVE MARTIN replied the challenge of HB 84 was to find out which groups were not fulfilling the idea of charitable purposes from the sale of pull-tabs. They had not been challenged in 10 years. "Just because they are our friends and neighbors and everything else, doesn't mean the monies they earn from pull-tabs go to charitable purposes." Number 1083 REPRESENTATIVE BERKOWITZ asked Representative Martin if he had a list of the organizations that he was seeking to exclude? CHAIR JAMES stated the Administration was going to come forward to answer that question. Number 1096 REPRESENTATIVE IVAN commented that the legislature was trying to downsize government. Therefore, he believed that this bill would have a detrimental impact on some of the communities that he represented. He asked Representative Martin what was his opinion? Number 1136 REPRESENTATIVE MARTIN replied it could go either way. It depended on what the committee discovered. Part of the reason that pull- tabs came about was to help the charitable needs of a community. In addition, of the $270 million, less than 8 percent went to actual charities. And from that charity alone maybe one-half of the 8 percent went to an actual charitable purpose. Other states mandated that 30 percent off of the top went to charity. Number 1210 CHAIR JAMES asked Representative Martin if HB 84 did that? Number 1226 REPRESENTATIVE MARTIN replied HB 84 scrutinized what the groups were doing. CHAIR JAMES asked Representative Martin if HB 84 had anything to do with the percentages? REPRESENTATIVE MARTIN replied, "No." His second bill addressed the percentages. CHAIR JAMES stated that the committee members should focus on HB 84. REPRESENTATIVE MARTIN replied HB 84 focused on what groups should be allowed and which groups should not be allowed. Number 1250 DENNIS POSHARD, Director, Charitable Gaming Division, Department of Revenue, explained that the division and the department had not taken a position of either for or against the bill. "We feel that the legislature has every right to decide who does and who does not deserve to receive a permit to conduct charitable gaming activities." It had been difficult to come up with an accurate fiscal note because no state agency maintained a list of 501(c)(3)'s, 501(c)(19)'s or any other 501(c) type of organization. The Income, Excise and Audit Division and the Corporation Division maintained a list of 501(c)'s, but with no further designation. As a result, the division contacted the Internal Revenue Service (IRS) that provided a list of all of the designations. The division received it last week, therefore, he did not have the time to redo the fiscal note. The division was currently comparing the list of 501(c)(3)'s and 501(c)(19)'s from the IRS with the division's list of pull-tab permitees. The division intended to create three lists: organizations that currently had pull-tab permits that would no longer be eligible; organizations that currently had pull- tab permits that would remain eligible; and organizations that did not have a pull-tab permit but would be eligible. The lists would - hopefully - be available tomorrow, March 21, 1997. MR. POSHARD further explained that the fiscal notes contained several assumptions: that all 1995 charitable, educational and religious organization that were issued permits were considered 501(c)(3)'s; and that the veteran organizations that were issued permits were 501(c)(19)'s. He discovered there were some that were designated as 501(c)(4). The division also assumed that all other 1995 organizations - IRA Native villages, volunteer fire departments, fraternal organizations, fishing derby associations, dog mushing associations, municipalities, labor organizations, non- profit trade associations, and civic or service organizations - were not designated as 501(c)(3)'s. The division, therefore, calculated that approximately 362 charities that currently had pull-tab permits would no longer be authorized to sell pull-tabs. And the total estimated loss would be about $12 million, slightly reducing the division's budget. It did not mean that the division would have 362 less reports or applications to process because many of those organizations conducted raffles as well, for example. The division, however, would see a slight reduction in its program receipts because it received a 3 percent pull-tab tax of the ideal net of every pull-tab game, and a 1 percent fee of the $12 million in proceeds. Number 1561 CHAIR JAMES stated that the fiscal note also said that the division would lose two full-time positions. MR. POSHARD replied, "Correct." CHAIR JAMES asked Mr. Poshard if the $117,000 marked on the fiscal note was the two positions? MR. POSHARD replied, "Correct." CHAIR JAMES asked Mr. Poshard if the reduction in lost revenues was expected to be $1,155,300? MR. POSHARD replied, "Correct." CHAIR JAMES replied then actually the division would only spend $117,000 less. MR. POSHARD replied, "Correct." CHAIR JAMES replied there was a bigger gap in the division's income versus its expenses. Number 1597 REPRESENTATIVE DYSON asked Mr. Poshard if the 362 groups would not be able to operate pull-tabs now because they did not qualify under the federal non-profit regulations? Number 1621 MR. POSHARD replied, "Correct." The number was an estimation based on the assumptions mentioned earlier. The current estimation was that 362 organizations would not qualify because they did not have 501(c)(3) or 501(c)(19) status with the IRS. Number 1652 REPRESENTATIVE DYSON asked Mr. Poshard if many of them would qualify if they applied? MR. POSHARD replied some would be able to qualify just by applying with the IRS, and some would not because they were not incorporated. He explained incorporation was not a requirement, currently. However, some had already received a designation, such as 501(c)(4). They would have difficulty applying with the IRS to receive a different designation because the designations were very specific. Number 1730 REPRESENTATIVE DYSON wondered if that was because their activity fell outside of the framework of the charitable non-profits. Number 1750 MR. POSHARD replied, "Correct." According to the IRS code, a 501(c)(3) was typically a, "religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition, or prevention of cruelty to children or animals organization." A 501(c)(19) was designated as, "post or organization of past or present members of the armed forces." Therefore, if they were not an organization that fell under those categories, they could potentially be designated in a different (c) status. Number 1786 REPRESENTATIVE DYSON asked Mr. Poshard if there would be 70 or a 100 or so of the 362 that would not qualify with their current stated purpose? Number 1798 MR. POSHARD replied it was difficult to estimate, but a majority would probably not be able to qualify. The list was being run now. Number 1819 REPRESENTATIVE MARK HODGINS asked Mr. Poshard if he had a description of the 501 designations? Number 1837 MR. POSHARD replied that he had two lists - the IRS codes and a layman's term list. Number 1850 REPRESENTATIVE HODGINS asked Mr. Poshard for a list of the 501 groupings that currently had pull-tab licenses, if possible. CHAIR JAMES explained that the division was working on the list now. She asked Mr. Poshard how soon would the list be ready? MR. POSHARD replied - hopefully - tomorrow. Number 1877 REPRESENTATIVE BERKOWITZ asked Mr. Poshard if the list included the organizations that would be affected by HB 84? MR. POSHARD replied, "Yes." The division was working on three lists: current 501(c)(3) and (19) designations that did not have pull-tab permits; 501(c)(3) and (19) designations that did have pull-tab permits; and organizations that had pull-tab permits and did not have a 501(c)(3) or (19) designation. Number 1918 REPRESENTATIVE ELTON stated that part of the problem with the bill was the suggestion that the money collected was not going where it ought to go. He asked Mr. Poshard if it was possible to see information from his office on these organizations? Number 1960 MR. POSHARD replied the division had an annual report that summarized that information. In addition, all of its records were considered public information. Each permittee was required to file a schedule E that required a list of every check that it wrote to show how it used its proceeds. Number 2002 REPRESENTATIVE ELTON asked Mr. Poshard if he went to his office and asked to see the file of the Auke Bay Volunteer Fire Department, for example, it would be available? MR. POSHARD replied, "Correct." He could look at the file to see how it spent its money, how it made its money, and/or its expenses. Number 2023 CHAIR JAMES stated that this was convoluted because of the description of the statements made by the sponsor indicating that he had another bill related to this. The question of wanting to know the contents of their file was irrelevant. House Bill HB 84 said that if an organization was not entitled to be tax-exempt from the IRS then it was not entitled to a pull-tab permit. Thus, those who would qualify and who would give money to the right places had nothing to do with the bill. Part of the requirement was that no political activities were allowed in a 501(c)(3) designation. It was also her understanding that it did not have to do with whether or not an organization was putting its money in the right places or handling its money correctly, as-much-as, it was a philosophical opinion. Therefore, anything that the committee would do to the bill would totally change the philosophical bent of the bill. "So, I think all of this other information is superfluous to the issue before us." It was not clear in HB 84 that the intent was to scrutinize how the money was being spent. Number 2140 REPRESENTATIVE ELTON replied he agreed with the interpretation of Chair James. However, before he could make a decision on the bill he wanted to know the impact on the organizations that would be excluded and on the charities that they supported. Number 2150 CHAIR JAMES replied the list that the committee members were going to get from the Charitable Gaming Division would allow him to do that. Number 2160 MR. POSHARD stated that the division could add the amount of net proceeds that each of the charitable organizations received from their pull-tab activity. It would take a little bit more time to prepare the list, however. CHAIR JAMES replied that was a good idea. She reiterated that those issues were irrelevant to the intent of the bill; however, to narrow those organizations that qualified for pull-tabs as a money making entity. Number 2208 REPRESENTATIVE HODGINS asked Mr. Poshard if it would be possible to provide how many of the pull-tab organizations used operators? Number 2223 MR. POSHARD replied it was another designation that could be added to the report. It would not be a significant amount; however, not as much as one-half. Number 2246 GERALD J. DORSHER, Legislative Officer, Veterans of Foreign Wars, was the first person to testify in Juneau. Some good points were raised today in regards to where the committee was going with the bill. The veterans of foreign wars had for some reason been designated as a 501(c)(4) when it should be a 501(c)(19). The department was pursuing the issue at this time through its mother organization. The department hoped that Representative Martin would include a 501(c)(4) during the interim of its designation as a 501(c)(19). Number 2318 CHAIR JAMES asked Mr. Dorsher if there were any other advantages for the veterans to be a 501(c)(19) as opposed to a (4), besides a pull-tab permit? Number 2331 MR. DORSHER replied, "No." The IRS designated past and present military organizations as a 501(c)(19). Number 2340 REPRESENTATIVE AL VEZEY announced that he had the definitions of the 501(c) designations. A 501(c)(19) was a special classification for veteran organizations entitling them to a tax-exempt status. The 501(c)(3) category was not just a public-welfare organization, but a tax-deductible organization. Many public welfare organizations did not try to get a tax deductible status - 501(c)(4) and 501(c)(8) - for example. Therefore, we should consider more than just the 501(c)(3) and 501(c)(19) designations. There were valid reasons to be a (c)(4) rather than a (c)(19); it expanded what could be done without jeopardizing the tax-exempt status. Number 2408 CHAIR JAMES stated that she did not want to do anything to distress the veterans. They were the most valued citizens. Number 2420 GEORGE WRIGHT, Representative, Alaska Native Brotherhood (ANB) Camp Number 2, was the next person to testify in Juneau. The ANB Camp Number 2 opposed the bill because it eliminated a lot of the gambling for villages that use it for a fund raiser. "It would completely knock the Brotherhood out." It had applied for a 501(c)(3) and (c)(8) status which had not been attained yet. The Alaska Native Brotherhood Grand Camp was a (c)(8) which covered all of the ANB camps. The bill, however, did not include (c)(8). "It's a bad bill." It simply chopped off everything else that was irrelevant, such as: how it spent its money and how it earned its money. He was part of a task force to rewrite the gaming rules and regulations and for some reason neither body had reviewed the recommendations; for example, to finance the department with extra man power so that it could go after the people.... TAPE 97-29, SIDE B Number 0001 MR. WRIGHT further said that the ANB followed the guidelines of a fraternal organization on the one hand and the guidelines of a 501(c)(3) on the other. The board members were having a hard time trying to get its certificate with the IRS. Under a 501(c)(3) designation the organization could not donate money to its members. "Well everybody in the village is somehow related and that kind of chopped them off at the knees." How do you break it up if you're all related and you started this organization and you want to give money to your son. This is a very bad bill." The ANB did like the tax-exempt portion of the bill, however. Mr. Elton established the city sales tax in Juneau to raise revenues from pull-tabs. Currently, the city taxed the gross dollar amount of sales. If a ticket sold for $1, the city would put a 4 cents sales tax on every ticket in the box. The city did not give any consideration to the price pay-outs or the play-backs. The city taxed the whole amount which was 39 percent of the ANB's profits. The ANB paid 51 percent to the city of Juneau because of its tax structure after covering the cost of business. "They refuse to recognize that the charity only controls the money that they take to the bank. They don't control the money that they pay out in prizes. That money is held in trust until somebody wins it, but they tax it." He suggested if a bill was going to be written to examine the tax structure, it would force a lot of people out of business in Juneau then Mr. Martin would not have to worry about HB 84. Number 0099 REPRESENTATIVE VEZEY asked Mr. Wright if the ANB was organized under 501(c)? MR. Wright replied the grand camp was organized under 501(c)(8). The ANB Camp Number 2 was a subordinate just like the Moose Lodges. REPRESENTATIVE VEZEY asked Mr. Wright if he would object to the bill if it incorporated 501(c)(8)? MR. WRIGHT replied he would object because some of the villages could not be that way. For example, the spring carnival in some villages were the biggest event of the year, of which, pull-tabs were used to raise money for prizes to draw the people back to the villages for the carnival. If they wanted to grandfather the bill then there would not be a problem. If they wanted to eliminate those that were not operating to the color of the law then let's take the matter to the Charitable Gaming Division and give it more investigators. "Two investigators to do 1,600 permits in the state of Alaska is quite skimpy." He suggested that the committee members look at the task force rewrites and the recommendations. Number 0169 REPRESENTATIVE HODGINS asked Mr. Wright to give him information about the Native groups and how many used operators and where were they located. Number 0184 REPRESENTATIVE ELTON commented that Mr. Wright and he had a history. The city of Juneau did apply a sales tax to pull-tabs in the same way that it applied a sales tax to a loaf of bread. The sales tax was not applied to the profit; it was applied to the sale price. Number 0200 CHAIR JAMES asked Representative Elton if she paid $1 for a pull- tab, did she have to pay $1.04? REPRESENTATIVE ELTON replied in Juneau she would have to pay $1.05. CHAIR JAMES replied she did not think that was the way it worked. REPRESENTATIVE ELTON explained the assembly recognized that $1.05 could inhibit the sale of a pull-tab rather than $1. Therefore, the assembly gave the operators an option to charge $1.05, lower the pay-out of the game by 5 cents, or absorb the cost. He could not think of anybody in town charging $1.05 now. Number 0247 MR. WRIGHT replied, "No." Playing pull-tabs was a sporadic thing. The ANB did not have a problem paying the tax on the $1 spent. It had a problem with paying the tax on the ticket that was won because generally the individual exchanged the winning amount of the ticket for more tickets. Thus, no money was exchanged; but, the city took 5 cents for each one of the tickets. REPRESENTATIVE ELTON replied the city appreciated it. MR. WRIGHT explained the Ketchikan court ruled that pull-tabs were intangible objects. It was not a retail product, nor like anything else that was sold in a store. It was an object sold with a liability - the price pay-out. Number 0304 CHAIR JAMES stated this was an interesting conversation. She did not buy pull-tabs but her husband did. It was called "fun raising" not "fund raising" at the Elks on Friday nights. She knew that he was paying only $1 for a ticket which meant that the 5 cents was coming out of the sale. It was not a tax on the person, therefore. In this case the seller paid the tax because $1.05 would be very inconvenient for the buyer. Number 0376 CHAIR JAMES announced, for the record, that Mr. Minor W. Thomas III from the Loyal Order of Moose in Juneau, was opposed to HB 84. He urged it to be defeated and asked that his letter be part of the record. "I am sorry that I cannot be there in person to testify on this bill, however please accept my gratitude for allowing me t submit written testimony. "We here at the Juneau Moose and the other lodges around the state are vehemently opposed to H.B. 84. First, why is Representative Martin excluding Sec. 501 C-8 organizations from this bill? That would include all of the Moose lodges in the state and I don't know how many other organization. "Moose lodges are organized under 501(C8) as non-profit fraternal organizations with no political ties and none allowed. We are organized under a strict members only policy and any monies made by Moose lodges must come from its members and not the general public. This includes any pull tab monies we make. It must be remembered that we support many charities with our pull tab monies as evidenced with the information packs given to Representative Elton and Hudson. Along with the information for Juneau, you could look at the Craig lodge who sent thousands of dollars back into the community. In fact, they are the major contributor to the Ambulance Corp. The Petersburg lodge donated over $100,000 back to the community last year. In Anchorage along last year $123,000 was given to charity. "With figures like these it is hard to fathom how anyone could deny 501(C8) organizations the right or privilege to sell pull tabs to its members. "If we cannot sell pull tabs who is going to fund and support the many charities. "Again, we urge that H.B. 84 be defeated. "Thank you for your time and consideration." Number 0401 REPRESENTATIVE MARTIN distributed to the committee members the report on what was happening to charitable dollars and how the money got into the political process - directly and indirectly. Number 0440 CHAIR JAMES asked Representative Martin if he would do this again after the 1998 campaign to see what the changes would be because of campaign finance reform? Number 0449 REPRESENTATIVE MARTIN replied it depended on if he was reelected. The report showed each individual candidate and how much money came in from groups that had a pull-tab permit. It also showed how much went to the political parties and then to the candidates illustrating the loopholes in the system. He cited the Home Builders Association raised a lot of money. He did not see how it was a charitable organization, however. Number 0519 CHAIR JAMES replied it was a public policy decision to determine if the organizations met the ordinary understanding of charitable issues. House Bill 84 would change it so that only recognized charitable activities would be able to be funded from pull-tabs. Number 0566 REPRESENTATIVE MARTIN replied this was just the beginning. It was not to be exclusive of anything. There was confusion with the IRS in regards to what organization was a charity. CHAIR JAMES replied she disagreed with the fact that the IRS was confused. "They tell us who is and who isn't. They aren't confused about that at all." REPRESENTATIVE MARTIN replied the IRS was confused in regards to what Alaska called a charity. CHAIR JAMES replied the IRS did not care if the state was confused because they were not confused. REPRESENTATIVE MARTIN reiterated it was confusing to the IRS in regards to what the state called charity. CHAIR JAMES replied that was none of its business. The IRS was a taxing authority and it could tax the way it wanted to and it was none of its business what the state did. REPRESENTATIVE MARTIN replied this was charity and not tax. "If you're saying in the name of charity that we're letting these people have all of these millions of dollars then we can stick our heads in the sand. We don't care if we're going to touch motherhood and apple pie." Number 0634 REPRESENTATIVE ELTON stated he understood what Representative Martin was trying to accomplish. He wondered, however, if it could be accomplished by drafting legislation that said the proceeds could only be used in a manner that would be contemplated under 501(c)(3) or 501(c)(19). Therefore, it would not limit those who could do it, but it would limit how the proceeds could be used. Number 0662 REPRESENTATIVE MARTIN replied he could have done a thousand different things. "I do take the challenge of bringing it open and they're talking about motherhood and apple pie." No one expected 1,600 people to get a pull-tab permit when almost any three or four individuals could call themselves a non-profit organization and they did not qualify for the intent of the legislation. Number 0683 REPRESENTATIVE ELTON replied this was like hunting sparrows with a shotgun. If there were legitimate purposes by the VFW, for example, that was a (c)(4) designation, the bill would get rid of it no matter how it used the proceeds. The better way to approach this would be to say what the proceeds could be used for rather than saying who could sell pull-tabs. Number 0712 REPRESENTATIVE MARTIN replied the challenge for the committee was to look and to say that Representative Martin was a complete idiot. The legislature should see what was happening with the money. "If you don't want to then vote VFW and motherhood." The Chiropractor Association was not a charitable organization, he declared. Number 0736 REPRESENTATIVE ELTON asked Representative Martin if the money went to charities then what was the difference? REPRESENTATIVE MARTIN replied the Chiropractor Association put a lot of money into the political process and it put a lot of money into its own organization; and, yes, it did contribute $250 to a little league. But, when it gained $50,000 and only gave out $250, that was not charity. CHAIR JAMES announced that the bill would be held in the committee. Number 0766 REPRESENTATIVE ELTON introduced his shadow for the day, Joel Cladouhos from Juneau Douglas High School. His unfortunate duty was to follow him around today so he was trying to make it pleasant for him.