Legislature(1995 - 1996)
03/07/1996 01:45 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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HOUSE BILL 362
"An Act extending the motor fuel tax exemption for fuel
sold for use in jet propulsion aircraft to fuel used in
those aircraft for flights that continue from a foreign
country."
Representative Therriault noted that HB 362 would extend the
motor fuel tax exemption for fuel used in aircraft for
flights that continue from a foreign country. Currently,
the State of Alaska provides a tax exemption for fuel used
only in flights to foreign countries.
He added that federal law preempts state taxation of
imported aviation fuel transported through a Foreign Trade
Zone (FTZ) for use in aircraft during foreign flights. The
federal definition of "foreign flight" includes flights
originating from and flights continuing to a foreign
country.
Representative Therriault continued that two tankers filled
with tax exempt foreign-produced fuel were brought into
Alaska during 1995. It is anticipated that practice will
increase as airlines move to purchase the tax exempt fuel
for use in foreign flights at a lower cost than taxable
Alaska produced fuel.
He suggested that HB 362 was needed to provide a "level"
playing field to Alaska producers by allowing the tax
exemption for all fuel used in foreign flights.
* Federal law preempts the state from taxing fuel in
an Foreign Trade Zone (FTZ).
* An FTZ allows for foreign refined fuel to be
brought into the United States (U.S.), without a
bond; the fuel may be coming with domestic
product. The Customs Modernization Act (CMA)
allowed that flexibility.
* Bonded fuel is foreign produced fuel imported to
the U.S. for use on foreign flights. Bonded fuel
cannot be commingled with the domestic product; it
must come into a dedicated facility.
* Air carriers will purchase fuel from the cheapest
source.
* The FTZ in Anchorage creates an unfair tax
advantage to foreign produced fuel.
* The State of Alaska and the Alaska based refiners
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did not create the inequity.
* Two tankers filled with tax exempt foreign-
produced fuel were brought into Alaska during
1995. It is anticipated that practice will
increase as airlines move to purchase the tax
exempt fuel for use in foreign flights at a lower
cost than taxable Alaska produced fuel.
* Revenue losses reflecting in the fiscal note would
be lost anyway as carriers purchases additional
tax exempt fuel.
* Unless presented with an alternative solution, HB
362 is needed to provide a "level" playing field
to Alaska producers.
BILL STARK, (TESTIFIED VIA TELECONFERENCE), MANAGING
DIRECTOR OF FUEL, FEDERAL EXPRESS, MEMPHIS, TN., spoke to
the legislation which would "level" the playing field in
open competition for the Alaska refiners who compete to
supply jet fuel in Alaska. He noted that his
responsibilities include researching the lowest cost fuel to
the airlines that he represents. Mr. Stark added, that
responsibility would include bringing foreign refined bonded
jet fuel into Alaska if that would provide a savings.
Mr. Stark added that if the Foreign Trade Zone did not
exist, it would be less convenient for the carriers to bring
foreign refined bonded fuel into the State. That fuel would
not be commingled with the domestic fuel. It would have to
be placed into another tank. Federal Express (Fed Ex) has
built storage in Anchorage which could easily accommodate
that fuel if required. For economic flexibility and
operational reasons, it would be more convenient to be
operated through the free trade zone and then mingle all of
the fuel together.
Co-Chair Hanley responded that bonded trade zone fuel would
not be taxable. Mr. Stark pointed out that Fed Ex has used
bonded fuel in the past two years and that fuel had passed
through the FTZ.
Representative Martin questioned if the State was
relinquishing the tax too quickly in an effort to undermine
the local distributor. Mr. Stark responded that the fuel
was moved from the Middle East via a super tanker and then
it was broken down. That product was then moved to three
locations, Los Angeles, Hawaii and Anchorage. Only the
Alaska portion made money. Chevron added a bonded tanker
thus, that created a successful venture for them.
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Co-Chair Hanley asked if it would be economically viable for
Fed Ex to use fuel which cost one cent less than fuel in
Alaska. Mr. Stark stressed that it would. Co-Chair Hanley
asked if the three and half cent elimination as proposed was
passed, would it then still be profitable for that company.
Mr. Stark replied that it would be a profitable margin even
at one-tenth of one cent per gallon, currently, the
difference between market fuel and domestic fuel.
Co-Chair Hanley questioned with the elimination of the tax,
could a company still bring in fuel cheaper through the
bonded market. Mr. Stark replied that would not be likely.
However, in the Alaskan market with only three refiners
available, the market can become too isolated. He suggested
that it would be to the carriers benefit to bring in outside
product.
Representative Therriault pointed out that in other
legislative committee hearings, there was discussion
regarding whether other in-state refiners had a large enough
profit margin to be able to absorb the tax and continue to
be competitive. Representative Therriault contended, they
would have too. The market has become out of balance as a
result from FTZ operations.
Co-Chair Hanley asked the cost difference between bonded
fuel going through the Foreign Trade Zone and fuel that does
not go that route. Mr. Stark noted that the cost would be
below one-tenth of one cent different. Co-Chair Hanley
advised that the issue at hand was not with the Foreign
Trade Zone, but rather a problem with bonded fuel which
allows the tax exemption. Mr. Stark pointed out that the
bonded fuel concern result from a federal customs program.
Representative Therriault pointed out that customs personnel
would be required to review and oversee the transport and
use of the bonded fuel. He noted that issue was more
complicated than separate storage. Mr. Stark added that the
accounting rules for losses and gains in fuel are the same
for bonded and free trade zone fuel.
Mr. Stark explained that bonded fuel which is formed by
crude oil, is refined in a foreign refinery, then imported
into the United States for use in international commerce for
international commerce reasons. This fuel is considered to
have not entered the United States because it is under
customs bonds. Free trade zone fuel is foreign produced
crude oil that is refined in a domestic United States
refinery and used on international flights. Both these
fuels are non-taxable because they have entered the states
for commerce. There exists free trade zone storage and
bonded storage. Under the free trade zone rules, bonded,
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free trade zone and domestic fuel can be commingled.
TOM JENSEN, (TESTIFIED VIA TELECONFERENCE), ADMINISTRATOR,
Foreign Trade Zone #160, ANCHORAGE, stated that a Foreign
Trade Zone is a site within the U.S. and in or near a
customs point of entry. He stated that Anchorage, Alaska,
was a point of entry. At those places, foreign and domestic
merchandise is considered to be international commerce. A
Foreign Trade Zone is a site designated by the U.S.
Department of Commerce within the confines of the U.S. and
is treated as a foreign place. Foreign or domestic
merchandise, including petroleum can enter that zone without
a customs entry or payment of excise taxes. The final
product, when it leaves the zone and goes international, is
not taxed. If the product, when it leaves that zone goes
then to the continental United States, it is taxed, but only
taxed on value of when it entered the zone.
Co-Chair Hanley asked if Foreign Trade Zone administrators
had the ability to tax fuel that comes into the Foreign
Trade Zone. Mr. Jensen replied that as the grantee of the
Foreign Trade Zone, the Municipality of Anchorage strictly
administers that zone with federal rules and regulations.
The United States customs determines what is taxable and
non-taxable in that zone. Mr. Jensen stated there was not a
lot of flexibility within the customs laws and regulations.
Mr. Jensen reiterated that the zone is operated under
federal rules and regulations; he explained what was taxable
under federal law and what was not. This is not an
arbitrary decision made by the grantee, but based upon
written law. Representative Therriault asked if there were
allowances and regulations used to base the decision on a
particular product. Mr. Jensen responded that would not
occur. He added, that in the process of activating the site
of the Anchorage International Airport, which is state
property, the State of Alaska negotiated a fifty year lease
of the land as a Foreign Trade Zone, which is a place to
service and store domestic and foreign fuel product.
JOE PERKINS, COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND
PUBLIC FACILITIES (DOTPF), testified that the Administration
supports economic development tools. As the Mayor of
Anchorage, Governor Knowles began development of the FTZ in
Anchorage as a means of attracting value-added business to
the State. Commissioner Perkins concurred that there is a
place for properly managed FTZ's in Alaska.
HB 362 was introduced to "level" the playing field for in-
state refiners to compete against foreign refined fuel being
sold through the FTZ in Anchorage. By utilizing the FTZ,
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foreign fuel is currently being sold to foreign flights
continuing on to U.S. destinations without paying the 3.2
cents per gallon tax.
He noted that the Administration supports Representative
Therriault's intent to "level" the playing field for in-
state refiners. However, the Administration believes that
the problem could be solved administratively by changing the
way the FTZ is operated rather than eliminating the current
fuel tax. The intent of a FTZ would be to bring in new
business, not to put existing businesses at a disadvantage.
Commissioner Perkins stated that the Department supports
utilization of FTZ's for that purpose, however, the way FTZ
is now being used places business at a disadvantage.
Commissioner Perkins emphasized that the legislation would
increase revenue lost to the state by not collecting any
aviation jet fuel on any overseas flights regardless of the
fuel source. The Administration's solution will "level" the
playing field by removing the advantage given to foreign
refiners over in-state refiners by deactivating the FTZ
areas at the airport that currently are being used for the
purpose of avoiding the state tax.
The purpose of an FTZ would be to provide protection from
customs duties or government excise taxes within a
restricted zone for merchandise or commodities before they
enter the commerce stream. Generally, that protection is
granted to allow time for manufacturing components or raw
materials into a final consumer product. No state tax can
be collected on fuel provided under the FTZ process.
Commissioner Perkins continued, utilization of the FTZ
protection involves a 2-Step process:
1). Formation and establishment of the protected zone
and regulation by the FTZ Board in the Department of
Commerce. The Board may approve any zone which it
deems to adequately serve the public interest.
2). The U.S. Customs service must approve activation
of the zone before any merchandise is admitted under
FTZ protection. When "activated", that zone is then
legally considered outside the customs territory of the
U.S.
FTZ status is granted to entities authorized under State law
whom apply to the Board for that protected status. The
"grantee" may either contract with an operator or operate
the zone itself. The original intent for the Anchorage FTZ
was to have the State and the Municipality jointly share the
authority. At that time, State law AS 45.77.010 did not
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authorize a joint application. That was changed in 1988.
In 1987, DOTPF agreed to include airport land in the FTZ
with the conditions that; the State of Alaska be responsible
for the management, the State would have equal
representation on any board formed to oversee FTZ
activities, and would retain veto power over any decision
made by the board which affects airport property. A
corporation was never formed and the transfer of management
authority never occurred.
Commissioner Perkins summarized the current situation.
Foreign refined jet fuel is being sold to carriers that are
arriving from a foreign country and then continuing on to a
U.S. destination without paying the State's 3.2 cents per
gallon fuel tax. In 1995, 2 tankers docked at the Port of
Anchorage with aviation jet "avjet" fuel which was sold
through the Foreign Trade Zone. Each tanker contained 10
million gallons of fuel, resulting in total State lost
revenue of $600,000.
Commissioner Perkins pointed out that HB 362 would expand
the exemption currently enjoyed by flights to foreign
countries to include flights from foreign countries,
refueling in Alaska, and continuing on to U.S. destinations.
The expansion of the exemption would cost the State of
Alaska between $3.5 and $4.6 million dollars a year.
Commissioner Perkins concluded that the situation can be
resolved by administrative means. The Administration
believes that the current utilization of the FTZ to be
contrary to its original intended purpose. They recommend
that it should be corrected.
Co-Chair Hanley reminded Commissioner Perkins that Mr. Stark
had testified that Federal Express intended to take this
action regardless if FTZ existed or not. They currently
have storage facilities. He indicated that the difference
in cost would be less than 1/10 of one-cent per gallon. The
only difference would be the commingling. Co-Chair Hanley
understood that with such a small margin to deal with, the
Foreign Trade Zone should not make a difference. He
requested the Department to provide more in depth research
on bonded fuel, to indicate if the previous testimony was
correct.
Commissioner Perkins responded to Representative Navarre's
question, noting that the International Anchorage Airport
was part of the FTZ. Representative Navarre asked if the
International Airport could withdraw from the FTZ.
Commissioner Perkins replied that the State could initiate
proceedings to withdraw, although it would be easier if the
administrator of the FTZ agreed that it should be changed.
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Procedures for changing do exist. The State has not
investigated other options available to changing the current
situation.
(Tape Change, HFC 96-67, Side 2).
Representative Martin asked what the benefits were to Alaska
to encourage use of the FTZ. Commissioner Perkins replied
that cargo activity at the Anchorage International Airport
involves mainly fuel. In the last five years, there has
been a 25% increase in the use of that airport for
international cargo. That statistic places Alaska in the
first to third category in total tonnage of cargo moving
through the airport. All that activity has been done with
the current fuel tax imposed. The airport has grown with
that tax. In relationship to other states, Alaska tax price
is competitive.
Commissioner Perkins continued, United Parcel Service (UPS)
has announced plans to triple the size of their facility in
Anchorage airport. Federal Express is designating a new
building to train their flight crews. They have also just
received rights for two more flights to China per week.
Northwest Airlines is currently evaluating options for more
international parking and handling facilities. Other firms
are in negotiations to construct a multi-tenant cargo
facility for international foreign cargo. The current tax
structure has been factored into the negotiations with the
above mentioned business.
Representative Therriault agreed that the benefit of the FTZ
for Alaska is the creation of jobs. He pointed out that
fuel flowing through a pipeline has not created that many
jobs. The benefit to the State has been the fees that the
Municipality of Anchorage has been able to generate through
operation.
Mr. Jensen stated that $25 thousand dollars per vessel was
generated through fees last season for use of port
facilities. Two fuel vessels did use that facility.
Representative Therriault referenced the Board's language of
purpose:
"The Board may at any time order the exclusion
from the zone of any goods or process of treatment
that in its judgement is detrimental to the public
interest, health or safety".
Representative Therriault thought that the legislation would
be "enhancing" to public interest.
Co-Chair Hanley asked if the tax were removed, what would be
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the profit margin and how would that amount be used. He
understood the competitive difference to be one-cent.
BOB BARTHOLOMEW, DEPUTY DIRECTOR, DIVISION INCOME & EXCISE
AUDIT DIVISION, DEPARTMENT OF REVENUE, replied that there
was not enough information available to determine a refiners
profit margin. The profit would be determined in general
figures using the market status.
Mr. Bartholomew responded to Representative Brown's concern,
noting that the Department of Revenue (DOR) has provided an
analysis of the Ward Air case. The State has the authority
to charge an excise tax on fuel whether it is used on
domestic or foreign flights. The State does not believe
that they have the ability to do that in a Foreign Trade
Zone or with bonded fuel. Preemptions exist in federal law.
To date, the Department of Law (DOL) has not yet issued an
opinion regarding that concern.
Representative Navarre inquired about the cost sold of the
fuel barged into Alaska. Mr. Bartholomew explained that the
posted price and the contract price differs. That
information as determined by the market, is part of a
confidential agreement, and is not available to the State.
Although, a wholesaler is required to report to the State
the number of gallons received and the price paid.
Co-Chair Hanley asked if Tesoro brought in fuel. Mr.
Bartholomew replied that Tesoro was involved in the process
of bringing in fuel, but he did not know the extent of their
involvement. Tesoro produces and imports domestic jet fuel
for sale to their customers.
Representative Therriault disagreed that passage of the
legislation would shield in-state refineries from
competitive forces. He added that everyone was paying the
tax except the foreign source. He felt that was unfair.
Co-Chair Hanley pointed out that if the 3.2% tax was
removed, both the refineries in-state and out-of-state would
share the same competitive advantage. He thought the
playing field would continue to grow.
DAN SAVAGE, (TESTIFIED VIA TELECONFERENCE), FAIRBANKS, spoke
in opposition to the legislation noting the loss of State
revenue. Representative Therriault interjected that the
revenue for the State would be lost regardless.
TIM ROGERS, (TESTIFIED VIA TELECONFERENCE), LEGISLATIVE
PROGRAM DIRECTOR, MUNICIPALITY OF ANCHORAGE, ANCHORAGE,
confirmed that the municipality would be meeting next week
with State officials in order to come up with another
solution to the problem. He reminded Committee members how
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important Anchorage International Airport is and how highly
competitive the environment is in which it operates. He
requested that the Committee provide oversight to enable
continued operations of the fifteen carriers while at the
same time, attracting new carriers. He emphasized the
importance of not stifling free trade competition within the
airport.
Representative Therriault listed other factors which bring
business to the Anchorage Airport. He pointed out the time
constraints on operations of the airports within the Pacific
Rim. He emphasized that Anchorage is strategically located
so that international airlines can fly to the Pacific Rim
sites before those airports are closed.
RICHARD CURTIN, GENERAL COUNSEL, PETRO STAR, ANCHORAGE,
spoke in support of the legislation. Passage of the bill
would not result in lost revenue for the State. The
carriers have the capability to bring in bonded fuel, and
Petro Star believes that they will do so.
Mr. Curtin stressed that the Administration's attempt to
"level" the playing field will be a gamble. He recommended
that the State do everything that they can to make Alaska
attractive to foreign traffic. Mr. Curtin encouraged the
Committee to opt to exempt "made in Alaska" fuel from the
tax as long as foreign fuel was exempt. Co-Chair Hanley
questioned the tax margin advantage.
TRENT CARBAUGH, DIRECTOR OF JET FUELS, PETRO STAR,
ANCHORAGE, stated that prices change every week. They are
determined by the Los Angeles market each day. Contract
agreements exist with each airlines. Those prices are fixed
at the beginning and hold for the duration of the contract.
Changes are based by many variables; it is impossible to
estimate the tax margin percentage.
Co-Chair Hanley asked if foreign fuel had to be imported as
bonded fuel. Mr. Curtin stated that it did not. Co-Chair
Hanley understood that the reason that airlines continue to
do it, is that the bonded fuel would provide exemption from
the tax. He thought that there would be costs associated
with the bonding. He added, should the tax be eliminated,
there be a need to bond. Mr. Curtin pointed out that Mr.
Stark indicated the average costs of bonding fuel was less
than 1/10 of one-cent per gallon. Co-Chair Hanley
understood that the cost was the difference of commingling
within the FTZ and the bonding. He reiterated that FTZ is
not the issue; the concern appears to be the bonded fuel.
Co-Chair Hanley requested Commissioner Perkins to provide
further information regarding the bonding costs paid by the
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oil companies; he asked if those costs would be changed with
removal of that tax. Mr. Curtin advised that the major
portion of the bonding cost resulted from the segregated
storage.
Representative Navarre questioned if the bond requirement
was increased or if the tax was reduced, would the in-state
refineries then have a 3.2 cent cushion. Mr. Curtin said
they wouldn't. That cost could not be beaten and would most
likely eliminate the in-state refinery out of the market.
Every gallon brought into Alaska would become a gallon of
fuel cheaper than refined in Alaska. Representative Navarre
reminded Mr. Curtin that currently suffer from periodic fuel
shortages.
Mr. Carbaugh informed members that more fuel will be
imported into the market. That imported fuel has an
advantage over the in-state refineries. Prior to FTZ
operation, the only fuel that was imported, was the
additional volume that the in-state refineries could not
make. From this point forward, as long as a situation
exists, the air carriers will be checking the volumes which
they utilize for the inbound portions of the originating
foreign flights. That fuel would have to be FTZ bonded
fuel.
(Tape Change, HFC 96-68, Side 1).
Mr. Curtin said that governments everywhere try to design
their tax policies to favor industries. Representative
Navarre reminded Mr. Curtin that the playing field is not
"level" yet. He suggested that transportation costs will
impact the market concern. He thought that the legislation
could provide an additional profit advantage. Mr. Carbaugh
countered that the market has been set previous to the tax
issue. There are many times during the year that the
imported price will beat the Los Angeles price product. He
pointed out that is what creates the market and also creates
the commodity.
Mr. Curtin reiterated that Petro Star favors the legislation
and that they would like to see the FTZ left in tact. He
thought that the only other politically feasible solution
would be to address the FTZ. Petro Star would support that
action in as much as it "levels" the playing field.
Representative Martin asked if capacity exists within the
State to supply our fuel needs. Currently, Mr. Carbaugh
said that the three oil companies are able to supply the
bulk of the needs to Anchorage. However, there are other
refiners on the West Coast who import product. They would
also be affected by the tax. The benefit of using the FTZ
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is to commingle the product. That then allows the airlines
to avoid customs provisions in segregating and bonding fuel.
That solution would cause additional management and capital
costs. He concluded that removing the FTZ would only create
animosity with the airlines.
Representative Therriault spoke to the loss of the $4.2
million dollars. He noted that the Department of Revenue's
fiscal note indicates a current loss of $700 thousand
dollars. The airlines are moving aggressively to shift
their fuel source. He thought that the $4.2 million dollars
would be lost regardless.
Co-Chair Hanley requested Commissioner Perkins to provide
information regarding the problem of the bonded fuel.
Representative Brown inquired where Petro Oil purchased
their crude oil from. Mr. Curtin replied that they purchase
it from a producer on the North Slope, and that cost was
based on a sale price determined outside the State.
Representative Brown questioned if the margin received by
the Alaskan refineries was a reasonable percentage compared
to what they charge the public. Mr. Curtin advised that was
confidential information.
TOM JOHNSON, SELF, JUNEAU, questioned at what point does the
State stop trying to meet the potential price decreases and
at what point does the state protect the in-state refining
capability. He asserted that repealing the tax will not
help matters. The playing field is not level. He added
that on the international scene, the Organization of
Petroleum Exporting Countries (OPEC) cartel has been famous
for cheating on their quotas. Mr. Johnson concluded that
when it comes to profit, anything goes.
JEFF COOK, VICE PRESIDENT, EXTERNAL AFFAIRS AND
ADMINISTRATION, MAPCO PETROLEUM, ANCHORAGE, voiced
appreciation with the Administration in trying to "level"
the playing field by working with the Municipality of
Anchorage to find a solution to the inequity. He voiced his
concern regarding the bonded fuel issue. Mr. Cook stated
that HB 362 would solve both the bonding and the FTZ issue.
Alaska refiners do not provide enough jet fuel, and
supplemental fuel is imported from the West Coast. He added
that it does not appear that there will be enough fuel
produced in the future, thus, forcing a competitive price.
Representative Martin asked if MAPCO finds the FTZ
beneficial. Mr. Cook stated perhaps in the future. He
added, HB 362 does not tamper with the FTZ. Representative
Martin voiced his support of free enterprise.
Co-Chair Hanley commented that assumptions appear to drive
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many of the decisions on the part of the oil refineries.
Revenue will be lost with fuel being used on flights not
being taxed. Co-Chair Hanley suggested that the other
issues of profit margin differ. Representative Brown
inquired if the product line-up could be switched.
MIKE SMITH, ALASKA MANAGER, WHOLESALE MARKETING,
DISTRIBUTION & SUPPLY, MAPCO PETROLEUM, ANCHORAGE, replied
no. MAPCO's refinery at North Pole, Alaska, is a simple
distillation refinery. Mr. Cook added that MAPCO refines
approximately 43 thousand barrels a day and that 48% of that
is jet fuel.
HB 362 was HELD in Committee for further consideration.
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