Legislature(2005 - 2006)

05/04/2005 04:52 PM FIN


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SENATE BILL NO. 158                                                                                                           
                                                                                                                                
     "An Act  prohibiting the  imposition of municipal  sales                                                                   
     and  use  taxes  on  state  construction  contracts  and                                                                   
     certain  subcontracts; and  providing  for an  effective                                                                   
     date."                                                                                                                     
                                                                                                                                
SENATOR  CHARLIE HUGGINS,  sponsor, spoke  in support  of the                                                                   
legislation and read from the sponsor statement.                                                                                
                                                                                                                                
     During  the course  of business  in the  last couple  of                                                                   
     years, subcontractors in  the construction industry, who                                                                   
     work  in  some  areas of  the  state,  have  experienced                                                                   
     negative  financial  impact  due to  the  imposition  of                                                                   
     local sales taxes on state DOT/PF funded projects.                                                                         
     In  the case of  a construction  contract being  awarded                                                                   
     and a primary contractor  doing business with the state,                                                                   
     the state  is the  purchaser of  those services  and, as                                                                   
     such,  the legal  incidence  for the  tax  falls on  the                                                                   
     state. Based  on the state's sovereign immunity  and the                                                                   
     fact that  the state is immune  from taxation no  tax is                                                                   
     owed.                                                                                                                      
                                                                                                                                
     However,  when a  subcontract is  awarded and a  primary                                                                   
     contractor hires another  contractor to do work for him,                                                                   
     the  subcontractor  is  not  working  directly  for  the                                                                   
     state,  but for  the original  contractor,  and in  some                                                                   
     cases a  sales tax has been  levied on the value  of the                                                                   
     subcontract.                                                                                                               
                                                                                                                                
     In one instance,  on an Airport Project,  a construction                                                                   
     contract  was awarded to  Quality Asphalt Paving  (QAP).                                                                   
     QAP  and  Dimond  Electric entered  into  a  subcontract                                                                   
     directly  in connection  with the  project funded  under                                                                   
     the construction contract.  Dimond Electric was assessed                                                                   
     a  sales tax  of  over $20,000  on  the  value of  their                                                                   
     subcontract. This tax was  unexpected and not considered                                                                   
     in their bid.                                                                                                              
                                                                                                                                
     The state cannot afford to  have an increase in the cost                                                                   
     of  construction projects  due to  the levying  of sales                                                                   
     taxes  on state construction  contracts or  subcontracts                                                                   
     directly awarded  in connection with the  project funded                                                                   
     under    the    construction   contract.    While    all                                                                   
     municipalities do  not assess this sales  tax the policy                                                                   
     needs to be consistent statewide.                                                                                          
                                                                                                                                
     SB 158 will  prohibit the imposition of  municipal sales                                                                   
     and use tax on state construction  contracts and certain                                                                   
     subcontracts and remedy the inequity that exists.                                                                          
                                                                                                                                
Senator Huggins explained  that there would be no  tax on the                                                                   
gross of a state construction  contract. He observed that the                                                                   
Department  of  Transportation   and  Public  Facilities  has                                                                   
previously found that  it was cheaper to pay the  tax than to                                                                   
go  through  a  change  order.  He  asked  the  Committee  to                                                                   
preserve the traditional way of transacting business.                                                                           
                                                                                                                                
5:52:02 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Stoltze  spoke  in support  of  the  legislation.                                                                   
Senator Huggins  stressed that the bill maintains  the status                                                                   
quo.                                                                                                                            
                                                                                                                                
5:53:38 PM                                                                                                                    
                                                                                                                                
STEVE  BOYD,  NATIONAL  ELECTRICAL  CONTRACTORS  ASSOCIATION,                                                                   
ANCHORAGE,  (via  teleconference)  spoke  in support  of  the                                                                   
legislation and maintained that  subcontractor work should be                                                                   
exempt from these taxes.                                                                                                        
                                                                                                                                
5:56:10 PM                                                                                                                    
                                                                                                                                
DAVID    LANZ,    PRESIDENT,     DIAMOND    ELECTRIC,    (via                                                                   
teleconference) offered to answer questions.                                                                                    
                                                                                                                                
5:56: 31 PM                                                                                                                   
                                                                                                                                
DENISE MICHELS,  MAYOR, NOME,  (via teleconference)  referred                                                                   
to her  letter in  the members' packets  (copy on  file.) The                                                                   
City of  Nome is  opposed to  SB 158.  She asserted  that the                                                                   
bill is  punitive and unfairly  restricts local  control. The                                                                   
bill  diminishes the  existing statutory  authority of  local                                                                   
governments  to raise  needed  revenues through  the levy  of                                                                   
taxes. Nome  receives most of  its revenue from  self-tax and                                                                   
property tax.  She observed that  40 percent of  the property                                                                   
tax  is  exempt   by  state  statute.  Contractors   use  the                                                                   
municipality's services. Contractors  are responsible for due                                                                   
diligences  to see  what fees  or taxes are  required in  the                                                                   
community.  The legislation would  reduce the  municipality's                                                                   
revenues.                                                                                                                       
                                                                                                                                
5:59:04 PM                                                                                                                    
                                                                                                                                
KEVIN RITCHIE,  EXECUTIVE DIRECTOR, ALASKA  MUNICIPAL LEAGUE,                                                                   
spoke  in opposition  to the  legislation and  referred to  a                                                                   
letter from AML to the Committee  (copy on file.) He stressed                                                                   
that  municipalities  must  tax  to  survive.  The  tax  base                                                                   
diminishes  in small  communities.  Municipalities have  lost                                                                   
state funds  over the past 10  years. He maintained  that the                                                                   
issue is not  between the contractor and city.  He maintained                                                                   
that the  cost should come out  of the overall cost  of state                                                                   
or federal grants.  He argued that the impacts  are local and                                                                   
the tax benefits local citizens.                                                                                                
                                                                                                                                
6:01:59 PM                                                                                                                    
                                                                                                                                
Representative  Holm ascertained that  Mr. Ritchie  had never                                                                   
bid a contract. Representative  Holm explained how a contract                                                                   
is marked up, and that the percentage  has to be included. He                                                                   
inquired  why  the Alaska  Municipal  League  would think  it                                                                   
appropriate for tax dollars to be taxed.                                                                                        
                                                                                                                                
6:04:03 PM                                                                                                                    
                                                                                                                                
Mr. Ritchie responded that in  many cases federal money would                                                                   
come into  play. He referred  to Mayor Michels'  statement of                                                                   
small communities  struggling to  provide basic  services. He                                                                   
noted  that tax  dollars run  a municipality.  Representative                                                                   
Holm pointed out that this also applies to Anchorage.                                                                           
                                                                                                                                
6:07:23 PM                                                                                                                    
                                                                                                                                
Representative Kelly referred  to the letter of April 26 from                                                                   
Kathie Wasserman.  He asked Mr.  Ritchie to explain  the last                                                                   
paragraph:                                                                                                                      
                                                                                                                                
     The bill summary states that  the bill's intention is to                                                                   
     "prohibit the imposition  of municipal sales and use tax                                                                   
     on a  construction contract  awarded by  the state  or ~                                                                 
     state agency, or on a subcontract  awarded in connection                                                                 
     with   the  project   funded   under  the   construction                                                                   
     contract." This is misleading,  as no communities impose                                                                   
     a sales  or use tax  on a construction contract  awarded                                                                   
     by  the state.  This  issue  is ONLY  about  subcontract                                                                   
     workers that have been hired by the contractor.                                                                            
                                                                                                                                
Mr.  Ritchie  explained  that  no community  taxes  the  full                                                                   
contract.  The  letter  refers  to  subcontracts  awarded  in                                                                   
connection with the project.                                                                                                    
                                                                                                                                
6:08:57 PM                                                                                                                    
                                                                                                                                
Representative Kelly stated the  bill's intent is to prohibit                                                                   
the  imposition  of  municipal  sales  tax  and  use  tax  on                                                                   
construction contracts  awarded by the state of  Alaska or on                                                                   
the subcontractor awarded in connection  with the project. He                                                                   
summarized that AML charges that this is misleading.                                                                            
                                                                                                                                
Mr. Ritchie clarified  that communities can't  impose a sales                                                                   
tax on the general contractor,  but can on subcontractors not                                                                   
awarded  by  the state.  Representative  Kelly  continued  to                                                                   
express concern.                                                                                                                
                                                                                                                                
6:11:35 PM                                                                                                                    
                                                                                                                                
THYES  SHAUB, LOBBYIST,  NATIONAL  FEDERATION OF  INDEPENDENT                                                                   
BUSINESSES,   AGC,  in  support   of  the  legislation.   She                                                                   
emphasized  that business likes  to know  what the  rules are                                                                   
and have them applied consistently.                                                                                             
                                                                                                                                
6:12:51 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   MOVED  to  report  SB   158  out  of                                                                   
Committee   with    individual   recommendations    and   the                                                                   
accompanying fiscal note.                                                                                                       
                                                                                                                                
Representative  Joule OBJECTED  for  discussion purposes.  He                                                                   
stressed that  the legislature must deal  with municipalities                                                                   
and their  financial issues. The  bigger issue is how  we are                                                                   
not sharing the wealth with those communities.                                                                                  
                                                                                                                                
Representative Joule  WITHDREW his objection. There  being NO                                                                   
further OBJECTION, it was so ordered.                                                                                           
                                                                                                                                
SB  158  was REPORTED  out  of  Committee  with a  "do  pass"                                                                   
recommendation  and with  a zero  fiscal impact  note by  the                                                                   
Department of Commerce, Community and Economic Development.                                                                     
                                                                                                                                
6:14:29 PM                                                                                                                    
                                                                                                                                
Representative Joule spoke about  future problems due to lack                                                                   
of revenue sharing.                                                                                                             
                                                                                                                                
6:16:03 PM                                                                                                                    
                                                                                                                                

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