Legislature(2011 - 2012)HOUSE FINANCE 519

02/29/2012 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Meeting Delayed to 2:00 p.m. Today --
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 252                                                                                                            
     "An Act exempting certain small businesses from the                                                                        
     corporate income tax; and providing for an effective                                                                       
2:09:14 PM                                                                                                                    
REPRESENTATIVE MIA  COSTELLO, SPONSOR, introduced  HB 252 and                                                                   
explained  that the  intent of  the legislation  was to  take                                                                   
advantage of federal  law and incentivize investment  in fast                                                                   
growing  companies.   Currently,   federal  law  allowed   an                                                                   
investor to  be exempt from capital  gains tax on  money that                                                                   
was  invested in  this  type of  company  if  the funds  were                                                                   
invested for five  years. She related that the  intent behind                                                                   
the  federal  law  was to  encourage  investment  in  certain                                                                   
types  of fast  growing,  qualifying companies.  She  pointed                                                                   
out that  qualifying companies  could be  based anywhere  and                                                                   
were not  targeted to a  particular geographic region  of the                                                                   
world;  the  intent  of  the bill  was  to  bring  investment                                                                   
dollars to Alaska  by creating a tax incentive  for companies                                                                   
under  a  certain  size.  She  stated  that  Alaska  did  not                                                                   
currently  have many  fast  growing, smaller  companies,  but                                                                   
that bringing them to the state  would grow and diversify its                                                                   
2:12:00 PM                                                                                                                    
AT EASE                                                                                                                         
2:13:01 PM                                                                                                                    
2:13:03 PM                                                                                                                    
Vice-Chair Fairclough  MOVED to ADOPT the  proposed committee                                                                   
substitute  for  HB  252,  Work  Draft  27-LS1085\D  (Nauman,                                                                   
2/29/12) as a working document.                                                                                                 
2:13:14 PM                                                                                                                    
Co-Chair Stoltze OBJECTED for the purpose discussion.                                                                           
JOE  MICHEL, STAFF,  REPRESENTATIVE  BILL STOLTZE,  discussed                                                                   
two  changes in  the  committee  substitute, version  D.  The                                                                   
first change, found  on page 2, lines 11 and  12, removed the                                                                   
words  "qualified small  businesses." The  second change  was                                                                   
found where line  12 would have been and designated  that the                                                                   
words "qualified  small  businesses" had  a meaning given  in                                                                   
Section 1202  of the Internal  Revenue Code, which  was found                                                                   
in Title 26 of  the United States Code, as  that section read                                                                   
on  January  1,  2012,  as  not   including  a  construction,                                                                   
transportation, utility, or fisheries business.                                                                                 
Co-Chair  Stoltze queried  if  the changes  in the  committee                                                                   
substitute  had a  substantive  effect in  fiscal costs.  Mr.                                                                   
Michel   replied  in   the  affirmative   and  related   that                                                                   
eliminating  a  number  of  small  businesses  that  did  not                                                                   
qualify  for the  change would  reduce the  amount of  audits                                                                   
that the  Department of Revenue  (DOR) would need  to conduct                                                                   
regarding the proposed legislation.                                                                                             
Co-Chair   Stoltze   requested    an   explanation   of   the                                                                   
substantive  changes  to  the   bill  structure.  Mr.  Michel                                                                   
explained that  originally, DOR  would have needed  to assign                                                                   
three auditors  in order to  administer the proposed  change,                                                                   
but that due  to the elimination of some types  of qualifying                                                                   
businesses, the  department had indicated that  it would need                                                                   
only one auditor.                                                                                                               
Vice-Chair  Fairclough inquired  if the  revised fiscal  note                                                                   
had been given to the committee.                                                                                                
Co-Chair Stoltze  requested that  the updated fiscal  note be                                                                   
distributed to committee members.                                                                                               
2:15:32 PM                                                                                                                    
AT EASE                                                                                                                         
2:18:48 PM                                                                                                                    
Mr. Michel discussed  the updated fiscal note for  HB 252 and                                                                   
related that  it reflected the  changes in the  new committee                                                                   
substitute.  The note added  a new  position and showed  that                                                                   
there would be no change in revenue to the state.                                                                               
2:19:33 PM                                                                                                                    
Co-Chair  Stoltze  WITHDREW  his OBJECTION.  There  being  NO                                                                   
further OBJECTION, Work Draft 27-LS1085\D was ADOPTED.                                                                          
Representative Edgmon  observed that the fiscal  note did not                                                                   
point to  any generated  revenue, but  offered that  this was                                                                   
because the  department was unwilling  to project  the impact                                                                   
of the bill that far forward.                                                                                                   
Representative   Costello   requested  a   clarification   of                                                                   
Representative   Edgmon's  comments.  Representative   Edgmon                                                                   
reiterated  his comments  and  pointed out  that new  revenue                                                                   
would be generated  by bill because it would  have a positive                                                                   
effect.    Representative   Costello    responded   in    the                                                                   
affirmative and voiced agreement.                                                                                               
ADAM KRYNICKI,  INTELLECTUAL PROPERTY  SPECIALIST,  OFFICE OF                                                                   
INTELLECTUAL  PROPERTY AND  COMMERCIALIZATION, UNIVERSITY  OF                                                                   
ALASKA FAIRBANKS,  FAIRBANKS (via  teleconference),  spoke in                                                                   
support of  the legislation. He  related that  the University                                                                   
of Alaska  Fairbanks performed  approximately $120  million a                                                                   
year in research,  which resulted in amazing  discoveries. He                                                                   
discussed   the  university's   research  efforts   regarding                                                                   
Alzheimer's  disease,  sudden   infant  death  syndrome,  and                                                                   
unmanned  aerial  vehicle  components.  He  shared  that  the                                                                   
Alaska Center for  Energy and Power had  produced discoveries                                                                   
in  energy solutions  and road  construction.  The Office  of                                                                   
Intellectual  Property and  Commercialization was  part  of a                                                                   
new  effort   to  create  economic  opportunities   from  new                                                                   
discoveries.  He related that  patenting, building,  testing,                                                                   
and  commercializing  viable  technologies  took  significant                                                                   
investment,  without  which  most   ventures  could  not  get                                                                   
started.  He concluded  that HB  252  encouraged the  private                                                                   
sector to invest  in Alaskan technologies and  that it highly                                                                   
incentivized   investment   in    Alaskan   qualified   small                                                                   
businesses that used those technologies.                                                                                        
Co-Chair  Stoltze asked  whether the  testifier was  speaking                                                                   
on behalf  of the University.  Mr. Krynicki responded  in the                                                                   
JOSHUA WALTON,  STAFF, REPRESENTATIVE  MIA COSTELLO,  relayed                                                                   
that Mr. Tyler Arnold had submitted video testimony.                                                                            
Co-Chair Stoltze  noted that  Representative Gara  had joined                                                                   
the committee.                                                                                                                  
2:23:52 PM                                                                                                                    
TYLER  ARNOLD,  CO-FOUNDER,  SIMPLY  SOCIAL,  ANCHORAGE  (via                                                                   
teleconference),  testified  in  support of  the  legislation                                                                   
via video and shared  that the bill would make  it easier for                                                                   
startup businesses  to be  based in  Alaska. He related  that                                                                   
his company  was a global 1202  C corporation that  was based                                                                   
in  Alaska. He  stated that  Alaska  had one  of the  highest                                                                   
state  corporate income  tax rates  in the  country and  that                                                                   
the  legislation would  not only  remove the  burden of  high                                                                   
tax   rates,   but  would   increase   the   state's   global                                                                   
competiveness.  He   related  a  story  about   his  business                                                                   
history  in  Alaska  and his  new  startup  business,  Simply                                                                   
ALLAN    JOHNSTON,   CHIEF    ENCOURAGEMENT   OFFICER,    THE                                                                   
ENTREPRENEURS  AND  MENTORS  NETWORK   INC.,  ANCHORAGE  (via                                                                   
teleconference),  vocalized support  for the legislation.  He                                                                   
pointed out that  Alaska was missing many tools  that did not                                                                   
fit the state's  business model; Alaska did not  have a small                                                                   
business  investment   company  (SBIC),  a   venture  capital                                                                   
company,  or an  organized angel  network.  He observed  that                                                                   
Alaska  was  the  only  state   in  the  country  without  an                                                                   
organized  angel network  and  offered that  the  legislation                                                                   
was  a tool  that would  help  the state  make  up for  other                                                                   
missing tools.  He related  that the  bill would make  Alaska                                                                   
the  most competitive  state  in  the nation,  tax-wise,  for                                                                   
these  types  of high-growth  businesses.  He  observed  that                                                                   
many  emergency  room  physicians were  attracted  to  Alaska                                                                   
because of  its outdoor lifestyle  and opined that  the state                                                                   
had a great opportunity to target high-end individuals.                                                                         
Vice-Chair  Fairclough inquired  what an  angel network  was.                                                                   
Mr.  Johnston replied  that an  "angel investor"  was a  U.S.                                                                   
Securities  and Exchange  Commission  term for  a person  who                                                                   
was well-off  financially and  had either $200,000  in income                                                                   
for the  last two  years or  $1 million  in net worth.  Angel                                                                   
investors could  afford to make investments in  companies and                                                                   
could   afford  to   lose  their   money.   He  stated   that                                                                   
entrepreneurs  generally wanted angel  investors in  order to                                                                   
help reduce  business risk. He  pointed out that  the fastest                                                                   
growing  demographic in  Alaska  were individuals  that  were                                                                   
over  50 years  of  age and  that  many people  qualified  to                                                                   
become angel  investors but  did not know  how it  worked. He                                                                   
concluded that the  bill would help organize  people to learn                                                                   
how to become angel investors.                                                                                                  
2:31:13 PM                                                                                                                    
Vice-Chair  Fairclough  inquired   if  angel  investors  were                                                                   
wealthy  people  who  were  willing   to  invest  in  smaller                                                                   
companies and provide  less risk to businesses,  while taking                                                                   
risk   themselves.   Mr.  Johnston   responded   that   angel                                                                   
investors  were people  who invested  on a  regular basis  in                                                                   
someone  else's   business  and   related  that   in  Alaska,                                                                   
investors had a  tendency to invest in their  own businesses.                                                                   
He shared that  the idea behind angel investing  was that the                                                                   
investor generally  did not want to control or  own the whole                                                                   
company,  but instead  preferred  diversity.  He stated  that                                                                   
there were  300 individuals who  contributed $1,000  per year                                                                   
to the  University of Alaska  Anchorage and opined  that most                                                                   
of these donors  would be qualified as an angel  investor. He                                                                   
related  a hypothetical  scenario  of how  university  donors                                                                   
could become  angel investors and encourage  business growth.                                                                   
He  shared  that  angel  investing   took  advantage  of  the                                                                   
experience of  individuals who had  retired and were  part of                                                                   
the  long-term  infrastructure  of Alaska  by  getting  those                                                                   
individuals  engaged   in  the  community.  He   stated  that                                                                   
engaging  and  organizing  the  experience  of  leaders  with                                                                   
Alaska's youth and  the leaders of tomorrow  was critical. He                                                                   
concluded  that  every other  state  had an  organized  angel                                                                   
network for  sharing experience  and references and  that the                                                                   
legislation  would help  enable the establishment  of  such a                                                                   
network in Alaska.                                                                                                              
Representative   Wilson  inquired  if   DOR  knew   how  many                                                                   
businesses would  qualify under the legislation  and how much                                                                   
loss in revenue it would represent to the state.                                                                                
2:35:05 PM                                                                                                                    
JOHANNA BALES,  DEPUTY DIRECTOR, TAX DIVISION,  DEPARTMENT OF                                                                   
REVENUE,  ANCHORAGE  (via  teleconference),   explained  that                                                                   
there were three  requirements in order to qualify  under the                                                                   
legislation.  The first  requirement was  being engaged  in a                                                                   
qualified small  business, which  was a narrow  category. The                                                                   
second  requirement  was  that   a  business  must  have  $50                                                                   
million or  less in aggregate  assets. The third  requirement                                                                   
was  that  80  percent  of the  total  assets  must  be  used                                                                   
actively  in the  business. She  stated  that the  department                                                                   
could  examine   corporate  income  tax  returns   and  could                                                                   
determine the  first two requirements,  but that it  was very                                                                   
difficult  to determine  the  third requirements,  which  was                                                                   
how companies used  assets. She stated that  the numbers were                                                                   
indeterminate at  the current  time, but that  the department                                                                   
expected  it to  be,  as far  as existing  corporations  were                                                                   
concerned, fairly narrow.                                                                                                       
Representative  Wilson  requested   a  ballpark  figure  that                                                                   
assumed   the  businesses   qualified  for   the  first   two                                                                   
requirements. Ms.  Bales responded that there  would probably                                                                   
be 300  to 400  very small  companies involved  and that  the                                                                   
department  would have  to examine how  those companies  were                                                                   
using assets.  She reiterated  that the  companies were  very                                                                   
small  and  that  the department  did  not  have  information                                                                   
regarding their revenues.                                                                                                       
Representative  Wilson  indicated   that  she  supported  the                                                                   
bill, but  expressed caution.  She queried if  the department                                                                   
knew how  much the  300 or  400 companies  currently paid  in                                                                   
corporate taxes.  Ms. Bales replied  that the  department had                                                                   
a general  idea of  the revenues  of the  companies, but  had                                                                   
only  examined  one  year  of  information  and  the  amounts                                                                   
varied greatly.  She observed  that due  to losses  and other                                                                   
factors, some  of the  qualifying companies  did not  pay any                                                                   
taxes  and  that it  was  difficult  to determine  the  exact                                                                   
taxes paid if the companies had carried forward losses.                                                                         
Co-Chair Stoltze CLOSED public testimony.                                                                                       
Representative Doogan  inquired whether a  larger corporation                                                                   
could form  a subsidiary,  which met  the qualifications,  in                                                                   
order to  take advantage of  the program. Mr.  Walton pointed                                                                   
to  a provision  in  Section  1202  of the  Internal  Revenue                                                                   
Code,  which dealt  with  subsidiaries.  He stated  that  the                                                                   
legislation  treated parent  and  subsidiary corporations  as                                                                   
one  entity.   When  combined,  the  parent   and  subsidiary                                                                   
companies  had to be  below the  $50 million aggregate  gross                                                                   
assets  cap  in  order  to  qualify  under  the  legislation;                                                                   
furthermore, both  the parent and subsidiary would  also have                                                                   
to  be   involved  in  one   of  the  qualifying   trades  or                                                                   
businesses,  as well  as meet  the 80  percent working  asset                                                                   
2:39:44 PM                                                                                                                    
Representative  Doogan wondered  why DOR  was unable  to make                                                                   
an estimate  on the  potential revenue loss  if the  bill was                                                                   
enacted. He  inquired if the bill  sponsor had a  better idea                                                                   
of what  the potential  losses might  be. Mr. Walton  replied                                                                   
that it  was difficult to  determine the potential  losses in                                                                   
revenue that  would result  from the  bill's passage,  as DOR                                                                   
had   previously   stated.   He    indicated   that   through                                                                   
discussions with  DOR, numbers  that were based  on different                                                                   
criteria had  been "drilled  into," but  that the 80  percent                                                                   
working asset  requirement made  calculations very  difficult                                                                   
because  DOR  did  not  track that  information  in  as  much                                                                   
detail as  the first two  requirements. He shared  that based                                                                   
on the  other criteria, there  were a number of  sectors that                                                                   
may  be   able  to   apply  for   the  exemption,   but  that                                                                   
eligibility for  the exemption would  be determined by  a DOR                                                                   
auditor;  this was  the reason  there was a  position for  an                                                                   
auditor in the fiscal note.                                                                                                     
Representative  Doogan  was  not   comfortable  with  unknown                                                                   
costs  as  a  matter  of  policy.   He  opined  that  if  400                                                                   
companies  fit the  requirements  and received  $10  million,                                                                   
the bill  would represent  a lot of  money. He was  surprised                                                                   
that the  department could not  provide a better  estimate on                                                                   
the potential losses  in revenue. He offered that  it did not                                                                   
instill confidence  in him that  DOR was unable  to determine                                                                   
the fiscal impact.                                                                                                              
Representative  Doogan inquired how  confident the  state was                                                                   
in  determining the  bill's  $50 million  asset  requirement,                                                                   
given  that it  was unable  to determine  how many  companies                                                                   
were affected  by the  legislation. Mr.  Walton replied  that                                                                   
the $50  million in assets  was something that  corporate tax                                                                   
payers filed  with as part of  a corporate income  tax return                                                                   
to the state of  Alaska; as a result, it was  a category that                                                                   
DOR had a pretty  good handle on. The department  was able to                                                                   
determine  how many  companies  were  below the  $50  million                                                                   
gross  asset cap and  also had  some ability  to examine  the                                                                   
industry  criteria in Section  1202 of  the Internal  Revenue                                                                   
Code  and eliminate  certain  industries;  however, what  was                                                                   
being done with  a company's assets was not  reported to DOR.                                                                   
He stated that  the intent of the legislation  was to promote                                                                   
smaller,  startup businesses  by tying  into the federal  tax                                                                   
provisions;  the federal  tax  provisions  were used  because                                                                   
they had  been shown  to be successful  at encouraging  those                                                                   
types  of businesses.  He  mentioned that  through  extensive                                                                   
searching, the  sponsor was unable  to find a  single example                                                                   
of a Section  1202 C corporation in Alaska.  He observed that                                                                   
he was  not saying  that no companies  could qualify  for the                                                                   
exemption,  but that  the definition  for  a qualified  small                                                                   
business under Section  1202 was more geared  toward allowing                                                                   
qualifying  companies to  issue  stock, which  was exempt  to                                                                   
capital gains  tax. He  shared that  the sponsor had  adopted                                                                   
the  definitions of  the  qualified small  businesses,  which                                                                   
must  meet particular  criteria.  He  stated that  a  typical                                                                   
Section  1202 C  qualifying small  business tended  to be  in                                                                   
the   technology,   research    and   development,   biotech,                                                                   
pharmaceutical,  telecommunication,  or information  services                                                                   
and software industries.                                                                                                        
2:45:56 PM                                                                                                                    
Vice-Chair Fairclough  directed the committee's  attention to                                                                   
page 88 of  the Department of Revenue's Revenue  Sources Book                                                                   
and noted  that it  listed the income  to state from  general                                                                   
corporate  tax,  as  well as  petroleum  corporate  tax.  She                                                                   
offered that  the Revenue Sources  Book showed that  in 2011,                                                                   
the state received  $157 million in general  corporate income                                                                   
tax  and  $542  million  from   petroleum  related  corporate                                                                   
income tax. She  noted that the Revenue Sources  Book figures                                                                   
gave the committee an outside number.                                                                                           
Co-Chair  Stoltze  offered  that  Vice-Chair  Fairclough  was                                                                   
referencing $157  million of income  to the state if  all the                                                                   
companies listed  fell under the $50 million  gross aggregate                                                                   
assets cap.                                                                                                                     
Vice-Chair  Fairclough  pointed  out  that  petroleum  income                                                                   
would not  apply to  the bill  because those companies  would                                                                   
be over the $50 million asset limit.                                                                                            
Mr.  Walton  provided  some  of   the  exclusions  that  were                                                                   
already  in the  federal  tax  code in  order  to inform  the                                                                   
committee  what  industries  would   not  qualify  under  the                                                                   
legislation.  He  related  that  under Section  1202  of  the                                                                   
Internal Revenue  Code, which  was found in  Title 26  of the                                                                   
United  States  Code,  the performance  of  services  in  the                                                                   
following    industries   were    excluded:   health,    law,                                                                   
engineering,  architecture,  accounting,  actuarial  science,                                                                   
performing  arts, consulting,  financial services,  brokerage                                                                   
services,  or  any  trade or  business  where  the  principle                                                                   
asset of  such trade or business  is the reputation  or skill                                                                   
of one  or more of  its employees. He  offered that  the last                                                                   
exception  was added to  prevent sole  proprietors and  other                                                                   
service  providers   from  avoiding  taxes  and   added  that                                                                   
farming,   banking,   insurance,  financing,   leasing,   and                                                                   
similar industries  were also explicitly excluded  in federal                                                                   
tax  code.  Also  excluded  in   the  federal  tax  code  was                                                                   
resource  extraction, such  as the raising  or harvesting  of                                                                   
trees,  as  well as  the  oil,  mining, and  gas  industries;                                                                   
restaurants,  hotels,  motels   or  similar  businesses  were                                                                   
likewise excluded.  He pointed out  that real estate  was not                                                                   
specifically  excluded  from the  tax  code, but  that  there                                                                   
were  requirements  for  qualification   as  to  the  maximum                                                                   
amount  of  real  estate holdings;  a  real  estate  business                                                                   
leasing, renting,  or selling property did not  count towards                                                                   
the active  business requirements  for  those assets  and the                                                                   
companies were  functionally excluded.  Regulated  investment                                                                   
firms, real  estate investment  trusts, real estate  mortgage                                                                   
investment        companies,         cooperatives,        and                                                                   
domestic/international   sales  corporations  also   did  not                                                                   
qualify  under the  tax code.  He  added that  if a  business                                                                   
held more  than ten  percent of  its net  assets in  stock in                                                                   
another corporation,  it did  not meet  the 80 percent  asset                                                                   
in  the active  conduct  of  business requirement.  With  the                                                                   
adoption  of the  new committee  substitute, the  legislation                                                                   
also  expressively  excluded   the  construction,  utilities,                                                                   
transportation, and  fisheries industries. He  mentioned that                                                                   
there   were  a   broad  range   of   industries  that   were                                                                   
specifically  included  and  could   not  qualify  under  any                                                                   
circumstance. He  related that through discussions  with DOR,                                                                   
his  understanding  was  that   under  the  legislation,  the                                                                   
sectors  that  may  still  qualify   included  manufacturing,                                                                   
retail, wholesale, and other sectors.                                                                                           
2:49:50 PM                                                                                                                    
Representative Doogan  understood that DOR needed  to conduct                                                                   
audits on  expenditures in  order to  make sure the  expenses                                                                   
conformed to the  tax code and the legislation,  but wondered                                                                   
whether  the department  would  be  required to  publish  the                                                                   
information in  order to enable  the committee to  keep track                                                                   
of the issue.                                                                                                                   
Mr.  Walton  responded   that  as  the  bill   was  currently                                                                   
written, it did  not have an explicit  reporting requirement,                                                                   
but  pointed  out  that  when a  corporation  filed  for  its                                                                   
corporate  income  tax,  it  was   required  to  include  its                                                                   
federal  income tax  return. Qualifying  corporations  needed                                                                   
to  indicate  eligibility  for exemptions  on  their  federal                                                                   
returns;  at this time,  the information  would be  available                                                                   
to the  state. He  mentioned that  there were  confidentially                                                                   
requirements  and that tax  payer, as  well as corporate  tax                                                                   
payer information  could not be shared in a  way that exposed                                                                   
the  internal  financial dealings  of  individual  companies;                                                                   
however,  in some  cases, such  as with  C corporations,  the                                                                   
companies  were  publicly  listed  and  may  be  required  to                                                                   
report through the U.S. Securities and Exchange Commission.                                                                     
Representative  Doogan  expressed  that  he would  feel  more                                                                   
confident if the  bill included an audit provision.  He noted                                                                   
that  the legislation  entered  "fresh  territory," but  that                                                                   
the state  had only  a rough  idea of  what the result  would                                                                   
Vice-Chair Fairclough  pointed out  that the existing  Alaska                                                                   
Statutes explicitly  stated that  all corporations  that were                                                                   
members  of the  same parent/subsidiary  control group  shall                                                                   
be treated as  one corporation. She directed  the committee's                                                                   
attention  to line  22, Section  5 of  legislation and  noted                                                                   
that it stated  that Section 3 took effect July  1, 2023; she                                                                   
inquired if this  was because the federal code  was ending at                                                                   
that date.  Mr. Walton responded  that line 22, Section  5 of                                                                   
the  bill provided  a  sunset date.  Section  3 returned  the                                                                   
statutes  that  were altered  by  the  bill to  the  original                                                                   
language. He  stated that Section  4 specified  that Sections                                                                   
1 and 2  take effect July  1, 2012. Section 5  specified that                                                                   
the language  in the  statutes would revert  back on  July 1,                                                                   
2023 to what it had originally been.                                                                                            
Vice-Chair Fairclough  believed it  was a complicated  sunset                                                                   
provision and clarified  that the bill would  sunset about 10                                                                   
years  after the  law took  effect. Mr.  Walton responded  in                                                                   
the  affirmative  and stated  that  the  sunset date  was  11                                                                   
years from the  effective date, but that the  exemption could                                                                   
not  be claimed  until  the beginning  of  January, 2013.  He                                                                   
stated that the  sponsor wanted the bill to have  at least 10                                                                   
full  years   before  its   sunset  in   order  to   see  the                                                                   
legislation's   effect.   He    concurred   with   Vice-Chair                                                                   
Fairclough   regarding   the   complexity   of   the   sunset                                                                   
2:54:22 PM                                                                                                                    
Vice-Chair   Fairclough   agreed   with   the   comments   of                                                                   
Representative  Doogan  regarding the  benefit  of the  state                                                                   
receiving  a report  on the  legislation  in a  few years  in                                                                   
order to see who  was accessing it. She pointed  out that the                                                                   
state was  forgoing revenue  and was  not decreasing  it. She                                                                   
opined that  it would  take some time  for regulations  to be                                                                   
written in  order to  enable the  department to ascertain  if                                                                   
80 percent  of the  assets were being  used for a  particular                                                                   
corporation.  She believed  that there  may be some  pushback                                                                   
from companies that  were trying prove the 80  percent use of                                                                   
their   assets.  She   offered  that   the  legislation   was                                                                   
worthwhile and  that it might  help younger minds,  which may                                                                   
be   more    IT   savvy,    to   "put   packages    together"                                                                   
internationally. She  mentioned the video presentation  by an                                                                   
Alaskan  who was  doing  business  in Romania  and  concluded                                                                   
that the  legislation seemed like  an opportunity to  try and                                                                   
move  forward;  however,  she  requested  that  a  report  on                                                                   
program be  presented in the  future. She offered  that three                                                                   
years may  be the wrong  point at which  to conduct  a report                                                                   
because it  would take  a year to  write the regulations  and                                                                   
inquired  what  timeline the  department  expected  regarding                                                                   
the  regulations.  Ms. Bales  responded  that  it would  take                                                                   
approximately  six  to eight  months  for the  department  to                                                                   
draft  the  regulations;  however,  because  the  legislation                                                                   
piggy-backed  the federal  code,  the department  would  also                                                                   
count on the  federal regulations to assist  in administering                                                                   
the bill.                                                                                                                       
Vice-Chair Fairclough  asked for a  repeat of the  time frame                                                                   
regarding the  regulations. Ms.  Bales replied that  it would                                                                   
be approximately six to eight months.                                                                                           
Representative  Edgmon   pointed  out  that   the  department                                                                   
estimated  that the bill  would bring  300 to 400  businesses                                                                   
to  Alaska  and  inquired  if the  new  businesses  would  be                                                                   
primarily  smaller  information technology  companies,  which                                                                   
came  to the  state because  of  the tax  credit. He  further                                                                   
inquired if  the companies would  be big enough to  pay taxes                                                                   
at  some  point   and  have  audits  conducted.   Mr.  Walton                                                                   
responded  that  his  understanding  of what  Ms.  Bales  had                                                                   
previously  expressed  was that  the  300 to  400  businesses                                                                   
were  companies  that  were  already in  Alaska  and  may  be                                                                   
eligible   to   receive  the   exemption   immediately.   The                                                                   
intention  behind  the bill  was  to encourage  companies  in                                                                   
sectors  where there  were  a low  number  of businesses.  He                                                                   
reiterated that  the sponsor had  looked for existing  1202 C                                                                   
corporations  in Alaska, but  had been  unable to locate  any                                                                   
and mentioned  that Mr. Arnold,  who had had given  the video                                                                   
testimony, intended  to structure  his business in  Alaska as                                                                   
a  1202   C  corporation.  He   concluded  that   the  bill's                                                                   
intention  was  to exempt  revenue  that  the state  was  not                                                                   
currently  receiving  in  order to  attract  businesses  that                                                                   
would grow to become corporate tax payers.                                                                                      
Representative  Edgmon queried  if the  bill was intended  to                                                                   
not  only  attract  businesses  to the  state,  but  also  to                                                                   
attract angel investors  and an angel network  to Alaska. Mr.                                                                   
Walton  responded in  the affirmative  and  that the  current                                                                   
federal  tax  provisions encouraged  investment.  He  pointed                                                                   
out that there  were venture capitalists and  angel investors                                                                   
in  Alaska, but  that  it was  difficult  to find  investment                                                                   
vehicles in the  state. He opined that Alaska,  in some ways,                                                                   
was good  place to start  a small business,  but that  it was                                                                   
not a friendly  place to start a small business  that was a C                                                                   
corporation.  He  stated  that  C  corporations  could  issue                                                                   
multiple shares of  stock and could have an  unlimited number                                                                   
of investors;  these types of  companies could attract  a lot                                                                   
of  capital  for  financing  and had  a  good  ability,  once                                                                   
started, to grow  large. He offered that small  businesses in                                                                   
Alaska  were   usually  started   as  S  corporations,   sole                                                                   
proprietorships,   or  limited  liability   companies  (LLC);                                                                   
these   structures   were  referred   to   as   "pass-through                                                                   
entities"  and under them,  the corporate  tax liability  was                                                                   
passed to  the owners  as personal  income tax liability.  He                                                                   
offered  that  in a  state  without  a personal  income  tax,                                                                   
pass-through  entities  could   be  very  attractive.  If  an                                                                   
investor wanted to  start a business that could  be traded on                                                                   
the  stock  exchange,  it  needed   to  be  started  as  a  C                                                                   
corporation. Once  a C corporation  reached $90,000  per year                                                                   
in income,  it was  already in the  9.4 percent tax  bracket,                                                                   
which  was  the fifth  highest  bracket  in the  country.  He                                                                   
discussed  anecdotal evidence  of  Alaskan entrepreneurs  who                                                                   
were investing  in starting companies  in Montana  because of                                                                   
that  state's  lower  tax  rate.   He  offered  that  Alaskan                                                                   
investors  would  probably  prefer  to  start  businesses  in                                                                   
Alaska, but pointed  out that the state's tax  rates had such                                                                   
a  negative   impact  on  the   business  plans   of  startup                                                                   
companies.  He  stated  that  statistically,  for  every  ten                                                                   
small businesses  that were started, there would  be one left                                                                   
standing after  five years. He  concluded that  the sponsor's                                                                   
intent  with HB  252  was to  make  it easier  for  qualified                                                                   
businesses  to start  and  grow,  as well  as  to provide  an                                                                   
investment vehicle for Alaska's venture capital sector.                                                                         
3:03:11 PM                                                                                                                    
Representative  Edgmon  surmised  that  the  purpose  of  the                                                                   
legislation   was  multifold   and  that   it  grew   Alaskan                                                                   
fledgling   industries,  while   also  bringing  in   venture                                                                   
capital. He inquired  if an Alaskan corporation  must consist                                                                   
of  a  small  group  of  individuals,   rather  than  a  sole                                                                   
proprietor  in order to  qualify under  the legislation.  Mr.                                                                   
Walton replied  that it  was possible  for a sole  proprietor                                                                   
to  begin  a  business  and structure  it  as  an  LLC,  sole                                                                   
proprietorship,  S corporation, or  a C corporation;  not all                                                                   
of these  structures would  fit very  well in  the case  of a                                                                   
sole  proprietorship.  He  observed  that it  was  much  more                                                                   
complicated to  start a C  corporation and that  starting one                                                                   
would  only   be  done  if  the   desire  was  to   get  more                                                                   
sophisticated stock  offerings and have  a lot of  owners. He                                                                   
stated   that  an   S   corporation   was  limited   to   100                                                                   
shareholders and  that they had  to be individuals  and could                                                                   
not be  companies. He  shared that  most venture  capitalists                                                                   
did not  invest their personal  money, but instead  created a                                                                   
firm to serve as  a holding company for their  assets and let                                                                   
the firm  do the  investments;  in the case  of those  firms,                                                                   
the corporation  must be a C  corporation or it could  not be                                                                   
invested in.                                                                                                                    
Representative  Edgmon  supported  the  bill,  but  indicated                                                                   
that he  still had questions  regarding Section 3.  He stated                                                                   
that   Section  3   discussed   the  tax   not  applying   to                                                                   
individuals or fiduciaries.                                                                                                     
Vice-Chair   Fairclough   interjected    that   the   section                                                                   
Representative  Edgmon  was  referring   to  was  the  sunset                                                                   
provision, which she had previously inquired about.                                                                             
Representative   Edgmon  further   inquired   if  Section   3                                                                   
excluded  a  corporation  that was  individually  owned.  Mr.                                                                   
Walton  responded to  the question  and  stated, "that's  the                                                                   
way that  the law exists now,  which would be changed  by the                                                                   
bill and  revert back to  that language." [The  wording "that                                                                   
language" was made in reference to Section 3 of the bill.]                                                                      
Co-Chair Stoltze  observed that there was some  complexity in                                                                   
the  bill  and  that  it  was   his  intention  to  give  the                                                                   
committee a chance to think about it overnight.                                                                                 
Representative  Gara supported  the concept  of the bill.  He                                                                   
related  that he  liked startup  businesses,  but that  there                                                                   
were few  incentives in  Alaska to  encourage those  types of                                                                   
businesses. He  pointed out that  he was a co-sponsor  of the                                                                   
legislation, but  related that  he had several  questions. He                                                                   
noted that  in Alaska, only  C corporations currently  paid a                                                                   
corporate tax  and that  if an investor  was trying  to avoid                                                                   
taxes and  could set up as an  LLC or an S  corporation, they                                                                   
did so. He related  that he was an owner of  a restaurant and                                                                   
was  a LLC  member. He  explained  that being  an LLC  member                                                                   
meant that there  was a main person who ran  the business and                                                                   
made the decisions  over the other investors;  investors like                                                                   
himself could invest  money in the business, but  did not run                                                                   
it. He  inquired why the LLC  structure would not  be perfect                                                                   
for  angel  investors.  He  explained   that  under  the  LLC                                                                   
structure,  there  were  one  or  several  people  that  were                                                                   
actually  running the  company,  there were  many  investors,                                                                   
and  there was  no corporate  tax.  He inquired  why the  LLC                                                                   
structure did  not allow and  attract startup  businesses, as                                                                   
there was not a  tax on LLCs in Alaska. Mr.  Walton responded                                                                   
that  the answer  depended on  what  was planned  to be  done                                                                   
with  the business  afterwards.  For instance,  a  restaurant                                                                   
structured  under a C  corporation could  expand to  multiple                                                                   
branches  and  not start  "bumping  up  against some  of  the                                                                   
limits  of  the  LLC  business   structure."  However,  if  a                                                                   
restaurant  wanted to issue  and trade  stock, the  structure                                                                   
of the business  would need to be  changed from a LLC  to a C                                                                   
corporation because  the LLC structure limited  the amount of                                                                   
capital that  could be  brought into a  company. In  the case                                                                   
of  an S  Corporation, corporate  income tax  was shifted  to                                                                   
personal income tax.  He observed that the problem  with an S                                                                   
corporation  was that  it was  limited  to 100  shareholders,                                                                   
who must to be individuals.                                                                                                     
3:09:13 PM                                                                                                                    
Representative  Gara provided  an  example related  to a  law                                                                   
firm. He shared  that a law firm did not have  much assets in                                                                   
the form  of equipment, but  made a lot  of money.  He opined                                                                   
that a law firm  might have less than $50 million  in assets,                                                                   
but that  it had  high money making  potential. He  expressed                                                                   
concern that  it would  be difficult  to tax companies  under                                                                   
the asset  criteria and  wondered whether  there should  be a                                                                   
limitation, which  specified that  once a company  had earned                                                                   
certain amount of profits, it was required to pay some tax.                                                                     
Mr.  Walton  responded  that  he  was  unable  to  provide  a                                                                   
definitive answer.  He related  that generally speaking,  the                                                                   
types  of  business  that  started  as  C  corporations  were                                                                   
looking  to produce  something.  He  explained  that the  law                                                                   
firm example worked  well because the firm  provided services                                                                   
and that  the costs  associated  with a law  firm might  only                                                                   
consist of  a place  to house the  offices that provided  the                                                                   
service.   He  related   that  C   corporations  were   often                                                                   
producing  something  and  that   investment  in  assets  was                                                                   
required  to  create  the  product.  He  concluded  that  the                                                                   
problem,  which  was  brought   to  light  by  the  law  firm                                                                   
example,  was not  really characteristic  of C  corporations;                                                                   
however,  he  would gather  more  information  regarding  the                                                                   
possible   extent   to   which  it   could   characterize   C                                                                   
Representative   Gara  wondered   if  there   had  been   any                                                                   
discussion  regarding whether  a tax should  be imposed  on a                                                                   
qualifying  company  after  a  certain number  of  years.  He                                                                   
pointed  out that the  wholesale and  retail industries  were                                                                   
covered  by the  legislation and  inquired whether  wholesale                                                                   
liquor stores  could take advantage  of the legislation.  Mr.                                                                   
Walton  replied  that  he  did  not  believe  that  wholesale                                                                   
liquor stores were  exempted under the legislation,  but that                                                                   
he would follow  up with a definitive answer.  He shared that                                                                   
the  retail  and  wholesale  businesses   were  not  excluded                                                                   
because the  sponsor wanted to  attract businesses  that were                                                                   
selling  a   product  and  did   not  want  to   adopt  broad                                                                   
restrictions,  which might exclude  the retail and  wholesale                                                                   
3:13:00 PM                                                                                                                    
Representative  Gara  stated  that  the bill  should  have  a                                                                   
cleaner  sunset  clause. Co-Chair  Stoltze  interjected  that                                                                   
the  sunset   clause  was  one   of  the  reasons   that  the                                                                   
legislation would  be held for a  day or more and  noted that                                                                   
it was the  committee's desire to create a  substantive piece                                                                   
of legislation.                                                                                                                 
Vice-Chair Fairclough  queried whether the $50  million asset                                                                   
cap was  created at the state  level or whether  it currently                                                                   
existed under  Section 1202 of  the federal code.  Mr. Walton                                                                   
replied  that the  number  came  directly from  the  Internal                                                                   
Revenue Code.                                                                                                                   
Vice-Chair  Fairclough inquired  if  an "Alaska  corporation"                                                                   
under the legislation  meant that the business  was in Alaska                                                                   
or that it was  simply incorporated in the  state. Mr. Walton                                                                   
responded that initially,  the requirement had  been that the                                                                   
company  had to  be  headquartered in  Alaska,  but that  the                                                                   
Department  of Law  (DOL), via  DOR,  had expressed  concerns                                                                   
that  the requirement  may  violate the  Interstate  Commerce                                                                   
Clause and  equal protection.  In response  to concerns  from                                                                   
DOL,  the  requirement   of  headquartering  in   Alaska  was                                                                   
removed  from   the  legislation.   He  explained   that  the                                                                   
exemption  removed  corporate   income  liability,  but  that                                                                   
there  was no  liability for  business  activities that  were                                                                   
conducted  out  of  Alaska.  He  stated  that  if  a  company                                                                   
incorporated  in Alaska  but did not  conduct business  here,                                                                   
it  did not  incur  corporate  income  tax liability  in  the                                                                   
state.   He  offered   that  there   were   cases  in   which                                                                   
corporations  would  incorporate  and do  business  somewhere                                                                   
else  because  of  beneficial  legal  provisions  in  another                                                                   
jurisdiction. He  concluded that  the exemption did  not help                                                                   
companies  that  were  incorporating   in  Alaska  and  doing                                                                   
business  in  another   state  because  they  would   not  be                                                                   
generating any liability.                                                                                                       
Vice-Chair Fairclough  surmised that  the bill created  a tax                                                                   
shelter  for investment  up to  $50  million, which  required                                                                   
the investors to  "keep the assets rolling."  She pointed out                                                                   
that  the  legislation  encouraged  investors  to  invest  in                                                                   
something in  Alaska and that  it enabled angel  investors to                                                                   
put their  assets  to work and  forego the  tax expense.  She                                                                   
observed that  based on the  federal code, the  threshold cap                                                                   
for qualification  was set at  $50 million in  assets instead                                                                   
of  using  another  method. Mr.  Walton  responded  that  the                                                                   
extent of the  tax shelter for investors was  provided in the                                                                   
federal   code,  which   provided   all   the  benefits   for                                                                   
investments. He offered  that the bill created  a tax benefit                                                                   
for  startups in  Alaska  and opined  that  generally, a  tax                                                                   
shelter referred  to a measure with the purpose  of defraying                                                                   
an  income  tax  or  tax  liability   that  already  existed;                                                                   
however, the  bill did not have  that effect. He  stated that                                                                   
the  legislation  simply  exempted the  corporations  in  the                                                                   
non-prohibited  areas, as  well  as the  types of  businesses                                                                   
that  the  sponsor  was  trying  to  promote  in  Alaska.  He                                                                   
furthered that  if investors  were using Alaska's  businesses                                                                   
as  a tax  shelter, they  did so  under the  auspices of  the                                                                   
federal code.                                                                                                                   
Co-Chair  Stoltze  referred  to the  concerns  and  questions                                                                   
that were  raised regarding HB  252 and encouraged  committee                                                                   
members to work  with the sponsor on possible  changes to the                                                                   
legislation.  Representative   Costello  responded  that  she                                                                   
welcomed  comments  and  would   work  with  members  of  the                                                                   
committee on the bill.                                                                                                          
3:17:36 PM                                                                                                                    
HB  252  was   HEARD  and  HELD  in  Committee   for  further                                                                   
Co-Chair  Stoltze   handed  the  gavel  over   to  Vice-Chair                                                                   
3:17:47 PM                                                                                                                    
AT EASE                                                                                                                         
3:19:44 PM                                                                                                                    

Document Name Date/Time Subjects
CS (L&C) House Bill 252 Sectional Summary.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-26 USC 1202.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Alaska Chamber support letter color.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Brent Fisher email.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Alaska Chamber support letter color.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
Explanation of Changes - HB252 vs. CSHB252(L&C).pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Andrew Mitton email.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Allan Johnston Support Letter.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-State Positions-AK Chamber.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 Supporting Documents-Kauffman Foundation Report.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HCR24-NEW FN- LEG- 2-28-12.pdf HFIN 2/29/2012 1:30:00 PM
HCR 24
HCR 24 Sponsor Statementpdf.pdf HFIN 2/29/2012 1:30:00 PM
HCR 24
HB252 Fairbanks Ec. Dev Corp Letter.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HB252 CS WORKDRAFT 27-LS1085-D 2.29.12.pdf HFIN 2/29/2012 1:30:00 PM
HB 252
HCR 24 Snyder Testimony.pdf HFIN 2/29/2012 1:30:00 PM
HCR 24
HCR24 Alaska Food Policy Council Strategic Plan.pdf HFIN 2/29/2012 1:30:00 PM
HCR 24
HB252-NEW-DOR-TAX-02-29-12.pdf HFIN 2/29/2012 1:30:00 PM
HB 252