Legislature(2001 - 2002)
04/27/2001 03:30 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 258-CHANGE BUSINESS LIC. FEE TO RECEIPTS TAX CHAIR MURKOWSKI announced that the final order of business before the committee would be HOUSE BILL NO. 258, "An Act converting the business license fee to a business license tax; adding, as an element of that tax, computation of the tax based on the taxpayer's gross receipts; establishing adjustments to that tax; and transferring administration of the levy to the Department of Revenue; and providing for an effective date." Number 0343 REPRESENTATIVE DREW SCALZI, Alaska State Legislature, testified as the sponsor of HB 258. Representative Scalzi noted that HB 258 is before the committee for discussion purposes only and he hoped to gather some comments from both business and the general public during the interim before attempting to finalize a statewide tax. This legislation would transfer the business licensing function and enforcement from the Department of Community & Economic Development (DCED) to the Department of Revenue. The current fee for the annual business license is $25 a year. In addition to the $25 license tax, each business would be required to pay a 2 percent gross receipts tax up to $2,000 per item. REPRESENTATIVE SCALZI pointed out that a gross receipts tax is easier to calculate and verify than a sales tax. Furthermore, a gross receipts tax would be on every level of sell, but wouldn't require a separate listing on sales receipts. The gross receipts tax would be invisible to the consumer because the business owner would review the total sales of business and calculate a 2 percent tax. For those items over $2,000, the business owner would need to separate those sales and add a $40 tax for each item. This legislation has a limited number of exemptions as it exempts gross receipts from educational, religious, many nonprofit activities, hospitals, and municipally owned and operated utilities. Additionally, home handicraft sales would be exempted up to $500 annually. He informed the committee that Alaska had a gross receipts sales tax from 1949 to 1979. REPRESENTATIVE SCALZI pointed out that HB 258 has two fiscal notes, which he wanted to explain. One fiscal note is for approximately $261,000 for the five personnel that currently operate the business licensing. The fiscal note shows a negative for the positions [currently within DCED] because their duties would be moved to the Department of Revenue. The other fiscal note addresses what this tax would collect, which is estimated at about $320 million. However, this is difficult to calculate because of the $2,000 cap. REPRESENTATIVE SCALZI informed the committee that the packet includes information regarding Vermont's gross receipts tax analysis. This information should be helpful in analyzing the host of options available and thus he encouraged members to read this information. In response to Chair Murkowski, Representative Scalzi reiterated that there was a gross receipts tax from 1949-1979. In 1979 the income tax was eliminated as well. Representative Scalzi related a discussion he had with Representative James in which Representative James said that there needs to be a validation of the gross receipts tax, which the income tax helped provide. He explained that an income reporting system would validate what one's gross receipts were. Therefore, implementing this tax would probably necessitate regulations requiring a Schedule C to accompany this tax in order to demonstrate the annual revenue. Number 0800 REPRESENTATIVE CRAWFORD related his understanding that Representative Scalzi views the fact that people wouldn't notice a gross receipts tax as a positive aspect. However, Representative Crawford did not because the gross receipts tax is a hidden tax that people don't realize they are paying. Representative Crawford said that he had a problem with people not being able to recognize what they are paying in taxes. REPRESENTATIVE SCALZI remarked that it didn't bother him when the [gross receipts tax] was in place before. He indicated that when the municipality implements a tax, people have [concerns]. Representative Scalzi noted that the Alaska Municipal League (AML) has announced its opposition to a state sales tax, as encompassed in HB 233, because it believes that a state sales tax would hinder municipalities from collecting sales taxes. Therefore, [a gross receipts tax] wouldn't preclude a municipality from adding a sales tax if the municipality didn't already have one. In the case of Juneau, if there was a 7 percent [sales tax] and there was the need to add more, then he believes the municipality would be less reluctant to add more than if the state had a visible sales tax. REPRESENTATIVE ROKEBERG recalled that the old [gross receipts] tax had a significant number of exemptions, which can become problematic. He asked if there was review of the total amount of revenue generated by the 2 percent sales tax versus the gross receipts tax. REPRESENTATIVE SCALZI answered that the 2 percent sales tax would generate approximately $200 million, without the $2,000 cap. This legislation, HB 258, would implement a 2 percent tax with a $2,000 cap for which the department estimated would generate over $300 million. However, Representative Scalzi pointed out that the gross receipts tax would be pyramiding in that each time there is a sale, the item is taxed. Therefore, by the time the item comes to the consumer, there have been multiple taxes and thus the consumer is probably really paying a 2.3 or 2.4 percent tax. Representative Scalzi related his belief that in this case, the gross receipts tax would generate more money than a flat 2 percent sales tax. Furthermore, the 2 percent sales tax would probably include other exemptions, which is why he included the $2,000 cap in HB 258. He remarked that when a tax is visible, people come to lobby for exemptions. However, when a tax that isn't visible, there is less pressure for exemptions. Number 1108 REPRESENTATIVE ROKEBERG likened this to a European-style added value tax. He posed a situation in which a purchase from a wholesaler would be a taxable event and if those items are sold at retail that would be another taxable event. Therefore, he surmised that the same commodity would have a 4 percent tax. REPRESENTATIVE SCALZI replied no. He reiterated that it is a pyramid tax that would amount to more than 2 percent but not 4 percent. He pointed out that the original [gross receipts tax] in Alaska had no tax up to $20,000, after which the tax was .5 percent and over $100,000 in gross receipts had a .75 percent tax. Therefore, it was similar to an income tax because it was graduated. REPRESENTATIVE MEYER asked if he would be charged an additional $2,000 if he purchased a car. REPRESENTATIVE SCALZI answered that in such a situation Representative Meyer would be charged an extra $40. Therefore, if one purchases a $30,000 car, that person would be taxed on the first $2,000. REPRESENTATIVE MEYER inquired as to who a gross receipts tax would impact the most. REPRESENTATIVE SCALZI said that such a tax would impact everyone. He pointed out that a gross receipts tax is less regressive than a sales tax because the gross receipts tax more fairly taxes all businesses, not just point of sale items. REPRESENTATIVE MEYER expressed concern with regard to whether such a tax would hurt Alaska commerce in the sense that people may purchase items out of state or over the Internet in order to avoid the markup for the gross receipts tax. REPRESENTATIVE SCALZI remarked that anytime one implements a tax or increases the sales price, there will be competitive disadvantages whether it's a hidden sales tax or specified sales tax. He said that it is all dependent upon the level and how well the entire taxing scheme in Alaska is balanced. In further response to Representative Meyer, Representative Scalzi indicated that the gross receipts tax would include services such as engineering and consulting services. Number 1308 REPRESENTATIVE HALCRO related his understanding that a gross receipts tax is only paid by the business who pays a tax based on their annual sales. For instance, a retailer with a $28 hammer can't build in the 2 percent gross receipts tax into the price because the business is paying 2 percent on $28.50. Representative Halcro emphasized that the problem with the gross receipts tax is that the consumer doesn't bear any part of it. He inquired as to how such a tax could be passed on to the consumer. REPRESENTATIVE SCALZI said that the business could markup the item. REPRESENTATIVE HALCRO posed the following example: If I have a $28 hammer and I know that at the end of the day, I'm going to have to pay a 2 percent gross receipts tax on that. I can't pass that through to you [the consumer] because that means I would have to charge $28.20 for that hammer to you [the consumer]. But ... I'm going to pay 2 percent on $28.20 not on $28. So, there is no way you can pass ... to the consumer. REPRESENTATIVE SCALZI clarified that the business wouldn't be adding 2 percent to the $28 hammer because the business would have already paid the 2 percent when the hammer was purchased. Therefore, the price to the consumer is marked up. The 2 percent is absorbed in the initial purchases. There is no 2 percent that is added at the end. REPRESENTATIVE HALCRO reiterated that a gross receipts tax is a tax on the businesses gross receipts, which is defined as the total revenue done by a business in a given time. Therefore, a hardware store purchases a $20 hammer from a wholesaler, the hardware store doesn't pay tax on that. The wholesaler will pay tax on the $20 and that's on the gross receipts at the end. There is no way to pass that along. He pointed out that the [wholesaler] will have to pay the same percentage on whatever amount [the purchaser] is charged. REPRESENTATIVE ROKEBERG agreed with Representative Halcro that at the end of the day, the business is at the top of this tax pyramid. Therefore, if competitive pressures are such that the business has to lower the cost of its good, then the business would have to absorb it. Representative Rokeberg remarked that the playing field is fairly level because everyone is in the same situation. REPRESENTATIVE MEYER inquired then why anyone would do business in Alaska. Number 1576 REPRESENTATIVE KOTT expressed similar concerns as Representative Meyer. He said he was concerned about in-state businesses such as VECO, whom the state has encouraged to use in-state contractors. REPRESENTATIVE CRAWFORD related the following question he had received via e-mail. He asked if a travel agent sold a $1,500 plane ticket, how would the gross receipts be calculated since the travel agent only receives $25. REPRESENTATIVE SCALZI estimated that it would amount to about $30 worth of tax. He remarked that the travel agent could charge $1,530 in order to absorb the tax. He agreed that the consumer may then decide to book on the Internet. Number 1752 BRETT FRIED, Economist, Department of Revenue, turned to an earlier question regarding the department's estimates of the sales tax raising 1 percent per $100 million while the gross receipts tax would raise $160 million. The department viewed the sales tax as a traditional sales tax that would exempt sales for resale. However, the gross receipts tax didn't exempt sales for resale and thus accounts for the additional revenue. MR. FRIED, in response to Representative Rokeberg, confirmed that the 2 percent gross receipts tax without exemptions would raise $320 million with the $2,000 cap. The sales tax would raise $100 million on 1 percent tax with very few exemptions and no cap. There was indication that the department had not taken a position on HB 258. Number 1874 PAM LaBOLLE, President, Alaska State Chamber of Commerce, testified in opposition to HB 258. In response to Representative Meyer's earlier question regarding who a gross receipts tax would hurt the most, Ms. LaBolle said that those having the lowest profit margin would be hurt the most. The only people in Alaska who pay taxes to the state are businesses. The Alaska State Chamber of Commerce has said that it would support broad-based taxes that all Alaskans would pay. This proposed gross receipts tax would place the onus on the business to pay the tax and then determine how to get it from someone else. Such a tax will not be seen or appreciated by consumers. This tax will be detrimental to business. REPRESENTATIVE MEYER said that HB 258 seems to be anti-Alaska commerce legislation. MS. LaBOLLE pointed out that many businesses in this state operate on a 2 percent profit margin. For example, the travel agency industry and the mining industry. REPRESENTATIVE ROKEBERG pondered the gross receipts of the Red Dog Mine. MS. LaBOLLE remarked that this would be very far-reaching and not something that the state needs to look at for revenue. REPRESENTATIVE HALCRO related a personal experience in which his family had a business in Hawaii for years. When Hawaii's economy slumped and tourism declined in the early 1990s, Hawaii raised the gross receipts tax. That action placed the economy in a faster spiral. Therefore, he felt that a gross receipts tax is the fastest way to ruin a local economy, especially in isolated economies such as Alaska. Number 2097 JAMIE PARSONS, Executive Director, Juneau Chamber of Commerce, informed the committee that he is also a business owner. Mr. Parsons said that this legislation is not a good idea. The gross receipts tax is a hidden substitute for a sales tax. Mr. Parsons remarked that the consumer will ultimately pay for this and those impacted the most will be families and lower income people. He pointed out that much of this gross receipts tax will come from grocery stores, which impact those purchasing food. Mr. Parsons agreed with earlier comments that this gross receipts tax would add to the impetus for folks to purchase goods from the Lower 48 and the Internet. Number 2214 CATHERINE REARDON, Director, Division of Occupational Licensing, Department of Community & Economic Development, pointed out that the Division of Occupational Licensing currently administers the business licensing program that would be moved to the Department of Revenue with the implementation of the gross receipts tax. At this point, Ms. Reardon saw the issue as whether the gross receipts tax is appropriate. Once that is determined and if it does go forward, Ms. Reardon said that she would discuss the technical matters involving moving the business licensing program. She noted that there is a tobacco endorsement program that is associated with the business licensing program and thus she assumed the intent of the legislation would be to move that program with the business licensing program. REPRESENTATIVE ROKEBERG inquired as to the reason the division administers the business licensing program rather than the Department of Revenue. MS. REARDON remarked that there are a variety of departments in which the business licensing program could be housed. She noted that the business licensing program was housed in the Department of Revenue when the gross receipts tax was in place before. She related her understanding that once there wasn't a tax and the program became more of a licensing procedure, it was moved to her division because it didn't fit well with the Department of Revenue's mission. REPRESENTATIVE ROKEBERG asked if it is really a tax or an information gatherer for various purposes. MS. REARDON viewed it as both. It charges a $50 fee for a 2- year business license, which amounts to about $2 million per year. Furthermore, it provides information regarding what businesses exist and their primary activities. Ms. Reardon pointed out that the program has been appropriately housed in the division because it is a flat amount of money. The division doesn't need staff to determine whether businesses are calculating their taxes properly and the associated details, which she felt would be best for the Department of Revenue to handle. In further response to Representative Rokeberg, Ms. Reardon noted that the Division of Banking, Securities & Corporations registers business names and deals with the incorporation of businesses as well as partnerships. Therefore, the two divisions work with each other. Although she felt that the program is currently in the appropriate place, the administration would probably want to discuss where this function should be placed if a gross receipts tax is implemented. CHAIR MURKOWSKI announced that HB 258 would be held.
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