Nonprofit organizations may obtain recognition of federal tax exemption under Section 501(c)(3) of the Internal Revenue Code. In California, the corresponding provision for state tax exemption is Section 23701d of the Revenue and Taxation Code. Section 23701d is very similar to Section 501(c)(3) and states the following:

"Corporations, community chests or trusts, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involved the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation, (except as otherwise provided in Section 23704.5), and which does not participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

Last week, the California State Senate passed SB 323, or the Youth Equality Act, a bill that will amend Section 23701d in order to deny or revoke state tax exemption for youth organizations that discriminate. The bill, aimed at the Boy Scouts of America, was designed to bring nonprofit youth groups in line with California's existing non-discrimination laws by levying state sales, use, and corporate taxes on those organizations with discriminatory practices. Specifically, SB 323 proposes the addition of the following language to the code:

"Notwithstanding any other law, an organization organized and operated exclusively as a public charity youth organization that discriminates on the basis of gender identity, race, sexual orientation, nationality, religion, or religious affiliation shall not be exempt from taxes imposed by this part."

Critics of the measure are concerned about its constitutionality, citing free speech issues and U.S. Supreme Court cases that recognize a private organization's right to make membership decisions. Although the Boy Scouts recently approved new guidelines allowing homosexual-identifying youths to become members, its policy still prohibits openly homosexual adults from serving as leaders.

Another criticism of the bill is that the language leaves open the meaning of gender identity. An expansive definition of gender identity could have unintended (or possibly intended) consequences on nonprofit schools and institutions that have traditionally been all-boys or all-girls.

To become law, SB 323 requires a two-thirds vote from the California State Assembly and then Governor Jerry Brown's signature. If passed, the result will create a disconnect between state and federal exemption requirements, prohibiting, for example, the Boy Scouts from being recognized as exempt under state law because of its discriminatory policies, but having no change to its status as exempt under federal law. The bill is currently in the Assembly awaiting review.