Legislature(2017 - 2018)HOUSE FINANCE 519
03/28/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
1:37:02 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, addressed two questions from the
previous day.
Co-Chair Foster interjected that Representative Birch
joined the meeting.
Mr. Spanos continued that the first question was posed by
Representative Pruitt regarding S Corporations. He
indicated that there was no change in the treatment of S
Corporations. He noted that S Corporations were taxed under
the previous version, however, the current version of the
bill provided more clarity on how to identify the source of
its income. He identified AS 43.19 and AS 43.20 regarding
the multi state tax compact referenced in HB 115 and
delineated that the sections identified how to source
Alaskan income. He added that the bill put the S
Corporations "on the same playing field as any corporation"
in the state. For most corporations, Alaskan property,
payroll, and sales, were accounted for over property,
payroll, and sales in other places and created an
apportioned formula that determined Alaskan income. He
likened the process to the state taking a slice of a large
pie. He offered that income from S Corporations was passed
through to the individual and the same formula was applied
to determine the Alaskan slice of the income. Otherwise,
"there were many games corporations could play" to exclude
income the state would tax as Alaskan under C Corporation
statutes.
Co-Chair Foster relayed that Mr. Spanos would be reviewing
the fiscal notes on Thursday.
Mr. Spanos concluded that the current version of HB 115 in
relation to S Corporations and Partnerships identified
Alaska sourced income from multi state or multinational
corporations or partnerships. Without the specific
language, litigation could result and the Department of
Revenue (DOR) would have difficulty in administering the
tax.
1:41:55 PM
Representative Pruitt asked whether an S Corporation would
pay tax on all its earning or only the amount distributed
to individuals. Mr. Spanos relayed that ultimately paying
the tax was the individual's responsibility. A provision
allowed the S Corporation to pay on the individuals behalf.
He detailed that the S Corporation provided the K-1 form
that identified the shareholders distributive share.
Representative Pruitt was trying to understand what the S
Corporation would have to file since the income was a
"passthrough." He wondered why the state would mandate the
S Corporation to file a return if the shareholders were
filing. Mr. Spanos did not see a provision in the bill that
required a separate filing for S Corporations.
Representative Pruitt related that he had received
questions from constituents regarding S Corporation filing.
He concluded from Mr. Spanos' answer that S Corporations
would not be required under the bill to do anything
different or additional than currently required. He asked
for reassurance. Mr. Spanos indicated that Representative
Pruitt was correct.
1:45:23 PM
Co-Chair Seaton clarified that if an S Corporation retained
money rather than distributing it to shareholders it would
not be liable to pay a tax or file a form. Mr. Spanos
confirmed Co-Chair Seaton was correct.
Representative Wilson wanted to better understand how the
tax affected an Alaskan trust versus a nonresident trust.
Mr. Spanos informed the committee that trusts were
complicated. He delineated that a trust created by a
resident would not be different than a trust created by a
nonresident. Representative Wilson believed that the bill
taxed residential trusts and nonresidential trusts
differently. She reported that the state had "done a lot of
work in the last few years" trying to attract out-of-state
trusts to boost Alaskan banks. She ascertained that the
lack of an income tax and the state's flexible banking laws
were the major attractants for nonresident trusts. She was
trying to figure out how out-of-state trusts would be
affected by the proposed tax and whether the earning would
be taxed. Mr. Spanos responded that at a "very basic level"
an individual resident could simply place assets in a trust
to avoid paying a tax if resident trusts were not taxed.
The department's consultant recommended taxing all trusts
"to avoid any games" by broadening the base and lowering
the rate. The administration had heard feedback favoring
the state's treatment of trusts that provided protections
from creditors and other protections as well as offering a
tax haven due to the repeal of the income tax. He relayed
that the protections were still in place under the proposed
income tax. He interpreted that the bill would only tax
Alaskan sourced income on nonresident trusts and trusts
managed outside the state would not be a resident trust.
1:50:16 PM
Representative Wilson asked how much money had been
invested in trusts in the state. Mr. Spanos did not know
the answer to her question. He added that trusts received a
deduction for the amount it distributed; if it distributed
all its income it owed zero tax. He concluded that trust
tax was based not on its assets but how much earned income
that remained after distributions each year. Representative
Wilson provided a hypothetical scenario of being a resident
of Alabama with a trust in Alaska. She inquired whether the
trust paid the proposed state income tax on its earnings if
the trust made money in the state. Mr. Spanos responded in
the negative but clarified the trust would pay a tax on
earnings from assets held in the state. He communicated
that the earnings were not subject to a tax if the income
was earned through securities or some other asset that was
not held in Alaska but was managed it the state.
Representative Wilson asked whether she would be taxed on
earnings if she had a trust comprised of only securities in
the state. Mr. Spanos replied in the affirmative and
offered that as a resident any income from a trust,
regardless of where it was located would be taxed.
Representative Wilson deduced that "it would be smarter"
for a resident to maintain a trust in another state to
avoid taxes. Mr. Spanos answered that distributions from
the trust would still be taxed regardless of location.
However, if the trust held the distributions income tax
would not be owed. He furthered that Alaska was a "current
destination" for trusts because of the lack of income tax.
Representative Wilson asked whether the trust was liable
for state income tax if the trust was profitable, but the
income was not distributed. Mr. Spanos responded that the
answer depended on where the assets in the trust were
located. He indicated that if the trust was "non-Alaskan"
without any Alaskan assets the trust would not be taxed
under the proposed income tax and if it was housed in
another state without an income tax.
1:53:35 PM
Representative Wilson discerned that the earnings from the
original income forming the trust would be taxed in Alaska,
but if she subsequently moved the trust to a place without
an income tax and did not take a distribution she would not
owe any tax. Mr. Spanos thought that a trust attorney would
advise her to do so but whether the move was beneficial
depended on other factors. Representative Wilson remarked
that it seemed that Alaskans would be penalized for having
a trust in the state because the bill favored out-of-state
trusts. She thought that Alaskans would move their trusts
to more favorable tax regimes. She had a problem with the
provision. She thought it was not fair to treat
nonresidents more favorably than residents.
Co-Chair Seaton interjected that an Alaskan resident would
pay a tax on income no matter where it was derived from. He
emphasized that an Alaskan resident would pay an
apportionment of taxes to another state with an income tax
on income earned or assets held in the other state. If an
Alaskan earned money in a state without an income tax the
earnings were only taxable in Alaska under the proposed
income tax. He offered that if an Alaskan earned income in
a state with an income tax a credit was earned under the
multi-state compact for the taxes paid to the state where
the income was derived from.
Representative Wilson expressed confusion and wanted
clarification. She provided the example of establishing a
trust with a stock and bond portfolio in the State of
Delaware; a state without an income tax and she did not
take a distribution. She understood that since she did not
take a distribution she was not subject to tax in Alaska.
She furthered that if she maintained the trust in Alaska
she would be taxed even if she did not take a distribution
under HB 115. Mr. Spanos responded that Representative
Wilson would not be taxed but the trust would be taxed. He
agreed that if there were no Alaskan assets in her Delaware
trust, the trust was "a form of a tax haven."
Representative Wilson reiterated her concerns regarding the
legislation maintaining the favorable tax haven for
nonresidents while taxing resident trusts. She believed
that it would now be more advantageous for residents to
take trusts out of state while the state was simultaneously
encouraging nonresident trusts.
1:59:13 PM
Representative Pruitt conveyed questions from his
constituents. He asked whether expenses related to a small
business were a write off. Mr. Spanos answered in the
affirmative and explained that it was similar to filing a
federal return. Representative Pruitt asked about taxable
amounts on IRA distributions and pensions. He wondered how
Mr. Spanos thought the provisions regarding the items would
drive the decisions of senior residents on whether to
reside in the state or to leave. He spoke to taxing
pensions and IRAs and asked "how big of a burden" the taxes
would place on seniors. Mr. Spanos could not answer the
question and added that the department did not obtain an
economic study on the issue. He indicated that some states
had an exemption or credits for seniors or other measures.
Representative Pruitt was interested how taxing retirement
income would affect some of the seniors under the poverty
line. He reported that according to the Council on Aging
the state had the fastest growing rate of senior citizens
in the country and wanted to understand the economic
impacts of a tax. He also asked about medical expenses
being "under the AGI (adjusted gross income) line" on the
proposed state income tax. He understood that significant
medical expenses were not deductible under the state income
tax. Mr. Spanos replied in the affirmative.
2:03:08 PM
Vice-Chair Gara referred to the comments regarding low
income seniors. He reminded the committee that the bill
exempted income below $14.3 thousand per individual. Mr.
Spanos agreed with the statement. Vice-Chair Gara indicated
that for each $1 thousand dollars of income the tax was 2.5
percent. He asked whether the statement was correct. Mr.
Spanos indicated Vice-Chair Gara was correct. Vice-Chair
Gara asked whether and Alaskan who wanted to remain in the
state but avoid a tax on their trust would "locate their
trust in one of the nine states without an income tax." Mr.
Spanos replied in the affirmative and qualified that the
trust could also be in one of the states that did not tax
trusts and in both instances the trust could only be
comprised of "non-sourcable assets" such as securities and
bonds. Vice-Chair Gara voiced that "he had no idea what the
trust industry was in the state" and never received a clear
explanation. He supposed that whoever "made money" on the
trust industry in the state would pay taxes on their
income. Mr. Spanos responded in the affirmative. Vice-Chair
Gara inquired whether the bill would tax the income from a
New York resident who had their trust managed in Alaska.
Mr. Spanos indicated that was the intent of the bill.
2:05:50 PM
Vice-Chair Gara noted that historically in the state S
Corporations, Limited Liability Companies (LLC), and
Partnerships were taxed through distributions to
individuals. He queried whether when the state abolished
its income tax, these types of businesses were currently
not taxed except for C Corporations. Mr. Spanos responded
affirmatively.
Co-Chair Seaton clarified that a married couple filing
jointly would not pay a tax if their income was under $30
thousand. Mr. Spanos responded affirmatively. Co-Chair
Seaton asked how administering the state income tax would
burden the department in relation "to the earlier version."
Mr. Spanos relayed that "the burden was significant either
way." The newest version was more specific and directive
than the previous version that was based on a progressive
tax. He delineated that the current version of the bill
identified Alaska sourced income for non-residents which
provided clarity and specified how to apportion and
allocate the income. The previous version was vague and
would have forced the department to develop regulations
which were out of the scope of DOR's authority or to
rebuild the individual's federal return to determine the
tax. The current version was "significantly simpler" to
administer. He specified that the information necessary to
determine the tax on Alaska sourced income used the federal
AGI and the Alaska sourced income and applied the defined
factor to a tax bracket that was the same as a resident's
tax bracket. The formula, called the "Cal Method of Taxing"
was developed in California. The method withstood
substantial litigation and was deemed valid. He favored the
new version that "made many issues black and white."
2:10:19 PM
Co-Chair Seaton wondered about audits. He suggested that
since the tax was based on the AGI the state could rely on
federal Internal Revenue Service (IRS) audits. He asked
whether he was correct. Mr. Spanos replied that using the
AGI enabled DOR to rely on the IRS return, even if the
return was not audited. He noted that the state or IRS
could perform an audit. He shared that the chance of an
audit incentivized correct self-reporting and for those who
were audited, DOR was highly confident that the returns
would be accurate. He indicated that a provision in the
bill required an individual to file a new return if the IRS
altered their tax return. The state currently shared
information with the IRS regarding C Corporations, which
could easily include individual tax payers. Co-Chair Seaton
noted the difficulty for the state to hire auditors. He
wondered whether more auditors would be available to do
individual income tax audits versus oil and gas tax audits.
Mr. Spanos answered that the topic was under discussion by
the department. He reported that there were many more
people that had experience in the individual income tax
realm. However, if the income tax was instituted, income
tax preparers would make more money in the private sector
with the increased business in the state. He guessed that
the scenario might make it challenging for the department
to find qualified individuals. He conjectured that out-of-
state individual income tax preparers, accountants, or
auditors would be easier to recruit than oil and gas or
corporate auditors.
2:14:11 PM
Co-Chair Seaton was attempting to determine the difficulty
of filing the forms. He wondered about the burden for the
individuals or businesses to file a return compared to the
federal returns. Mr. Spanos hoped that everyone would file
online. He communicated that currently the department's web
portal for corporations made filing easy and guided the
user through the process by choosing the simplest form and
offered the least options. He suggested that the online
system for individuals would require W-2 information and
only ask several more questions pertaining to the state.
Commercial software was adapted to include the state's
income tax forms added on as an option with federal tax
forms. He indicated that if an individual was using a paper
form a separate income schedule would be included. He
anticipated a two-page form for paper filers.
2:16:47 PM
Representative Wilson wondered whether native corporation
dividends would be taxed or exempted. Mr. Spanos responded
that the dividends were taxed at the federal level and
would be taxed at the state level. Representative Wilson
cited statistics that oil and gas job wages were 11 percent
of the total state wages amounting to $2 billion, more than
2.5 times the overall average as of June 2016 and that the
industry lost 3,000 jobs. She asked whether the statistics
were incorporated into the calculations of how much revenue
the state would gain from an income tax. Mr. Spanos
responded that the department had used the 2015 available
data from the IRS. Representative Wilson asked whether more
current data was available that included the job loss
figures. Mr. Spanos was not certain current data was
available and would consult with DOR economists. He would
provide the information to the committee. Representative
Wilson thought "true numbers" were necessary going forward.
2:19:02 PM
Co-Chair Foster related that many native corporation
shareholders in "northwest" Alaska did not pay federal
taxes on their taxes due to loss carry forwards or other
exemptions. He asked Mr. Spanos to expand on the subject.
Mr. Spanos wanted to address native corporation's taxes
first. He indicated that Alaska Native Corporations were
for-profit businesses and were "definitely" taxed. A native
corporation with net operating losses would not pay tax due
to loss carry forwards. The dividends to shareholders would
be taxed in the same way as they were taxed at the federal
level. Co-Chair Foster informed the committee that many of
the native corporations were formed in 1971 or 1972. He
relayed that native corporations recently informed its
shareholders that they were required to pay taxes on their
dividends because the corporations were becoming more
profitable.
2:21:24 PM
Representative Pruitt asked if the fiscal notes were based
on the 2015 data. Mr. Spanos replied that if the department
determined that "significant" information was available
that would improve the fiscal note, the information would
be included. He added that DOR had previously determined
that the 2015 IRS data was the best information available.
Representative Pruitt assumed better data meant more
accurate. Mr. Spanos responded that the fiscal note data
was a best estimate of future tax revenue. Representative
Pruitt wanted to ensure the fiscal notes were "not going to
make a statement." He could not find information in the
bill about penalties and interest for non-payment. Mr.
Spanos conveyed that the division had identified many
administrative sections that were not included in the
legislation but was aware that the desired level of detail
took a substantial amount of work to develop. The specifics
of the tax itself was most important. The state had
existing tax statutes relating to penalties in AS.42.05
dealing with late payments for filing, negligence, and
fraud. The division wanted to include penalties related to
substantial understatement for individual taxpayers. There
were several other administrative sections that other
states utilized the division would like to "mimic."
Representative Pruitt asked whether the penalties were the
same or different than the penalties for other taxes the
state currently administered. Mr. Spanos answered that the
division incorporated the same penalties as the IRS in the
state's corporate income tax statutes and noted the income
tax would also incorporate the IRS penalties. He suggested
that the penalty section in AS.42.05 could be applied to
all tax types.
2:26:22 PM
Representative Pruitt asked about the departments'
timeframe for offering amendments to the administrative
sections. Mr. Spanos answered that the timeframe was the
same as the members' amendment deadline. He thought that
the timeframe was short and noted the division would
include a few administrative provisions they deemed
necessary. He mentioned the difficulty of proving fraud in
income tax cases related to the inclusion of penalties for
substantial understatement.
Co-Chair Foster interjected that amendments were due by
4:00 pm on Friday of the current week.
Representative Pruitt wondered whether the committee
"should be moving a piece of legislation that did not have
all of the pieces in it." Mr. Spanos thought that the bill
was sufficient in its current form but expressed his desire
for more administrative sections that made administering
the tax simpler. Representative Pruitt believed that the
committee process was responsible for including all
necessary provisions in legislation.
HB 115 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the agenda for the following day.
Public testimony would be heard the following day.
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