Legislature(2005 - 2006)

04/30/2005 02:15 PM L&C

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SB 158-MUNI TAX ON STATE CONSTRUCTION CONTRACTS                                                                               
3:11:47 PM                                                                                                                    
CHAIR ANDERSON announced  that the final order  of business would                                                               
be SENATE  BILL NO.  158, "An Act  prohibiting the  imposition of                                                               
municipal  sales and  use taxes  on state  construction contracts                                                               
and certain subcontracts; and providing for an effective date."                                                                 
SENATOR  CHARLIE  HUGGINS,  Alaska  State  Legislature,  sponsor,                                                               
began  by saying  that  SB  158 represents  the  interest of  the                                                               
citizens of  Alaska.   This legislation  will maintain  what most                                                               
believe  is already  the case.   He  posed a  situation in  which                                                               
there  is  a state  airport  project  for  $8  million.   In  the                                                               
process, a  subcontractor is subjected  to a 5 percent  sales tax                                                               
on  that  subcontractor's  $400,000 contract,  which  amounts  to                                                               
about  $21,000.    However,  that wasn't  the  process  when  the                                                               
subcontractor  bid on  the project.   In  discussions with  folks                                                               
about  this,  [subcontractors]  didn't  view  the  aforementioned                                                               
scenario as appropriate and even  inquired as to how much [money]                                                               
a  community  wants  from  them.   Therefore,  SB  158  has  been                                                               
SENATOR  HUGGINS  informed  the  committee that  SB  158  doesn't                                                               
preclude  taxation on  the equipment  leased in  the locale.   He                                                               
emphasized that  this legislation isn't about  "rural" or "urban"                                                               
areas but rather about how the  state does business.  In a normal                                                               
year,   the  state   has  about   $350-$400   million  worth   of                                                               
construction  contracts.    If  the  state  doesn't  take  action                                                               
similar to what's encompassed in  SB 158, an unstable environment                                                               
will be  created.  He  informed the committee  that he has  an e-                                                               
mail from the  Alaska Municipal League (AML)  that indicates that                                                               
communities using a certain law  firm have a policy of collecting                                                               
sales tax  from subcontractors doing  business in  the community,                                                               
regardless of the funding source.                                                                                               
3:15:43 PM                                                                                                                    
SENATOR HUGGINS  said that when  talking with state  agencies, it                                                               
was  foggy  at best  regarding  the  state's position  on  taxing                                                               
authority.   This  legislation clarifies  the aforementioned  and                                                               
provides a predictable business environment.                                                                                    
3:16:17 PM                                                                                                                    
CHAIR ANDERSON  noted that his  research has determined  that the                                                               
impact of  [such taxation practices]  is de minimis,  although he                                                               
acknowledged  that it  adversely impacts  the City  of Nome.   He                                                               
asked if there is a  way to grandfather in current infrastructure                                                               
where there  are taxes, or would  that defeat the purpose  of the                                                               
SENATOR  HUGGINS  indicated  that  from  his  conversations  with                                                               
average Alaskans,  the question is  how much is enough.   Senator                                                               
Huggins  emphasized  that  [allowing  the  current  situation  to                                                               
continue] will  drive up  the cost of  contracting and  will cost                                                               
all Alaskans.   In  response to  Chair Anderson,  Senator Huggins                                                               
said, "Where we're  going out to enhance that  community, that to                                                               
reach out and carve  money out of that and drive  up the price of                                                               
contracting is not right."                                                                                                      
3:17:39 PM                                                                                                                    
REPRESENTATIVE CRAWFORD inquired as to  what the contract was for                                                               
that cost  the subcontractor  in the  earlier example  $21,000 in                                                               
SENATOR HUGGINS explained that it  was an electrical contract for                                                               
$400,000  and the  community imposed  a  5 percent  tax on  that.                                                               
Senator Huggins reiterated that such a practice isn't right.                                                                    
REPRESENTATIVE   CRAWFORD   posed   a  situation   in   which   a                                                               
[subcontractor]  had  a  contract  to construct  a  fence  at  an                                                               
airport.   If  that [subcontractor]  miscalculated the  amount of                                                               
fencing necessary and  purchased the remainder of  the fencing in                                                               
the location  of the construction, would  that [subcontractor] be                                                               
charged the sales tax.                                                                                                          
SENATOR  HUGGINS replied  yes.   In the  case that  prompted this                                                               
legislation, the electrical company spent  just shy of $80,000 in                                                               
the community on things from hotel  rooms to rental cars and paid                                                               
tax on those items.  The legislation doesn't [change that].                                                                     
3:19:28 PM                                                                                                                    
SENATOR HUGGINS, in response  to Representative LeDoux, clarified                                                               
that  even under  SB 158  the  [subcontractor] in  Representative                                                               
Crawford's example would pay the  tax on the fencing purchased in                                                               
the  location  of  the  construction.   In  further  response  to                                                               
Representative  LeDoux, Senator  Huggins  informed the  committee                                                               
that at least  two boroughs or cities, Sand Point  and Nome, have                                                               
levied the tax  [on a state contract] at least  once.  Both those                                                               
communities are advised by the same  law firm.  He mentioned that                                                               
Unalaska may  potentially be the  third such community.   Senator                                                               
Huggins remarked  that the specific communities  aren't important                                                               
because  without something  like SB  158, this  business practice                                                               
will spread  throughout the state.   He noted that in  the Senate                                                               
only three members didn't agree with this legislation.                                                                          
3:20:46 PM                                                                                                                    
REPRESENTATIVE LEDOUX  related her  understanding that a  city or                                                               
borough can't tax the state.                                                                                                    
SENATOR  HUGGINS answered  that  it's not  clear.   Although  the                                                               
state assessor would  agree that a city or borough  can't tax the                                                               
state,  he would  include  a  "but" clause.    Therefore, SB  158                                                               
clarifies the situation.                                                                                                        
3:21:23 PM                                                                                                                    
REPRESENTATIVE LEDOUX inquired as to how this occurs now.                                                                       
SENATOR HUGGINS specified  that the city or  borough merely taxes                                                               
the  subcontractor.   He  reiterated  that SB  158  is about  the                                                               
people of Alaska and whether the  desire is to increase the price                                                               
of  contracting or  establish a  mechanism such  that across  the                                                               
state purchases at the location of the project would be taxed.                                                                  
3:22:50 PM                                                                                                                    
REPRESENTATIVE LEDOUX  inquired then  as to how  this legislation                                                               
is different from the current practice.                                                                                         
CHAIR  ANDERSON clarified  that  Senator  Huggins is  delineating                                                               
between  tangible  items [such  as  the  purchase of  nails]  and                                                               
providing a service [the subcontractor's work].                                                                                 
3:23:31 PM                                                                                                                    
SENATOR HUGGINS explained  that in the example  with the airport,                                                               
the contract was  to fix the airport to a  standard the community                                                               
would like.  When [the  subcontractor] purchases something in the                                                               
community, there would be a tax on that purchase.                                                                               
REPRESENTATIVE  LEDOUX surmised  then that  under SB  158 if  the                                                               
subcontractor  was  located in  the  community  and sold  his/her                                                               
services to someone,  not to a contractor on a  state project, in                                                               
the community,  then there would  be a  sales tax.   However, the                                                               
subcontractor who sells  his/her services to the  contractor on a                                                               
state project  would not be  taxed, even if the  subcontractor is                                                               
located in the community.  Representative LeDoux specified:                                                                     
     You  could have  a contractor  come in  from Anchorage,                                                                    
     for example, but then they  hire somebody from ... Nome                                                                    
     to be the  subcontractor on it.  Now  normally, if that                                                                    
     subcontractor  were selling  to  anybody  else in  Nome                                                                    
     there would  be a tax on  that.  So, how  would this be                                                                    
     different, then?                                                                                                           
SENATOR HUGGINS  expressed his desire  that both  contractors and                                                               
subcontractors  for   the  state   would  be  taxed   [for  items                                                               
purchased]  and  not  be  penalized  by  the  location  of  their                                                               
3:25:45 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  said  that  he  finds  the  concept  of                                                               
potential double  taxation very compelling and  thus he expressed                                                               
his support  of SB 158.   However, Representative LeDoux  makes a                                                               
good  point  in  regard  to  whether there  is  a  definition  of                                                               
subcontractor  in statute.   Furthermore,  he questioned  whether                                                               
there  is  a  distinction  between the  service  component  of  a                                                               
subcontractor and a  supplier of materials that  would be taxable                                                               
in the  local municipality.  Representative  Rokeberg opined that                                                               
there  is  the desire  to  avoid  the  double taxation,  but  the                                                               
legislation  shouldn't be  used  to avoid  the  payment of  local                                                               
taxes  that  would  occur  under  normal  circumstances  for  the                                                               
purchase of an item.                                                                                                            
SENATOR  HUGGINS agreed  that there  will be  a tax  on materials                                                               
purchased in a community.                                                                                                       
REPRESENTATIVE ROKEBERG posed a situation  in which the supply of                                                               
materials is subcontracted out.                                                                                                 
SENATOR HUGGINS specified that materials aren't exempt.                                                                         
3:27:35 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG   returned  attention  to   the  earlier                                                               
hypothetical regarding  the fencing  project, and inquired  as to                                                               
the tax  ramifications if the  subcontractor merely  supplied the                                                               
SENATOR HUGGINS said that he didn't know.                                                                                       
3:29:25 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  related  his understanding  that  the                                                               
contractor isn't  taxed, but the  subcontractor is taxed  for the                                                               
total  value, regardless  of  services.   He  then  asked if  all                                                               
subcontractors  are  taxed, regardless  of  the  location of  the                                                               
SENATOR    HUGGINS   reiterated    that    this   [taxation    on                                                               
subcontractors] will  spread throughout  the state if  nothing is                                                               
done.   However, he agreed  that there should be  assurances that                                                               
there  shouldn't be  a way  to circumnavigate  [appropriate local                                                               
taxation].  Senator  Huggins said that he would  obtain an answer                                                               
for Representative Guttenberg.                                                                                                  
REPRESENTATIVE GUTTENBERG  inquired as to  whether this is  a new                                                               
practice or ordinance.                                                                                                          
SENATOR HUGGINS specified that this is a new practice.                                                                          
3:32:00 PM                                                                                                                    
DAVID  LANTZ,  General   Manager/Owner,  Dimond  Electric;  Board                                                               
Member,  National  Electrical  Contractors Association  -  Alaska                                                               
Chapter  (NECA), informed  the  committee that  he  bid the  Nome                                                               
project in August 2001 and performed  the work in 2002.  He noted                                                               
that Dimond Electric  had done work on the Nome  airport over the                                                               
course of the last 15 years.   During those 15 years, the tax had                                                               
never been  an issue  because by definition  it's a  retail sales                                                               
tax.   Dimond Electric purchased  some $75,000 worth  of services                                                               
and goods in the city and paid  taxes on those.  The company also                                                               
paid the  sales tax on the  gross amount of the  subcontract, and                                                               
therefore Dimond  Electric was double  taxed on the  portion paid                                                               
on  the items  and services  purchased in  the city.   Mr.  Lantz                                                               
highlighted that  it wasn't  until 2002 that  [the City  of Nome]                                                               
applied the  sales tax to  Department of Transportation  & Public                                                               
Facilities projects, and thus there  was a change in the [city's]                                                               
interpretation of how to apply the tax.                                                                                         
3:34:26 PM                                                                                                                    
MR.  LANTZ opined  that Dimond  Electric was  caught by  surprise                                                               
with the change,  and therefore the company paid  some $20,000 in                                                               
taxes  as well  as  another $10,000  or so  in  attorney fees  to                                                               
resolve the issues.   As a NECA board member,  Mr. Lantz informed                                                               
the  committee that  research discovered  that  there were  other                                                               
instances,  beyond  the  Nome  project,  in  which  the  [double]                                                               
taxation occurred.  Mr. Lantz expressed  the need to have a known                                                               
playing field  with regard to  what's taxed on state  projects in                                                               
communities across the state.                                                                                                   
3:36:51 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG asked if, in  a normal bid document for                                                               
a state  project, [the  subcontractor] would  receive all  of the                                                               
taxation policies that would apply.                                                                                             
MR. LANTZ, drawing on his 20  years of working on state projects,                                                               
that  subcontractors worked  under the  assumption that  they, as                                                               
well as  the general contractor,  were not subject to  sales tax.                                                               
Therefore, it hasn't  been an issue on state  projects because in                                                               
practice state projects have been exempt from the sales tax.                                                                    
3:37:53 PM                                                                                                                    
REPRESENTATIVE LEDOUX surmised that the  real problem is that Mr.                                                               
Lantz's company was caught between  the changes made between 2001                                                               
and  2002.    Therefore,  if the  subcontractor  now  knows,  she                                                               
inquired  as to  how  difficult it  would be  to  check with  the                                                               
communities regarding taxation just as  they would check fuel and                                                               
material prices.                                                                                                                
MR. LANTZ  said that he  didn't want to see  communities changing                                                               
their mind about taxation [between the  time a project is bid and                                                               
the work is performed].                                                                                                         
3:39:13 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked  whether the  general  contractor                                                               
paid a tax as well as Mr. Lantz.                                                                                                
MR. LANTZ explained that the  general contractor didn't pay a tax                                                               
on its contract, although he did  pay taxes on the local services                                                               
purchased  in the  community.    Several subcontractors  received                                                               
bills from the city.                                                                                                            
3:39:54 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD asked  whether a  private contractor  in                                                               
the City of  Nome would be charged sales tax  on the total amount                                                               
of a non-state contract.                                                                                                        
MR.  LANTZ related  his belief  that tax-exempt  status has  only                                                               
been applied  to state contracts  and thus contractors  pay local                                                               
taxes on private work in the City of Nome.                                                                                      
3:40:48 PM                                                                                                                    
DENISE MICHELS,  Mayor, City  of Nome,  noted that  the committee                                                               
should have a  copy of her three-page letter in  opposition to SB
158.    This  legislation,  she opined,  unfairly  restricts  the                                                               
city's ability to raise revenues  for services.  She informed the                                                               
committee that most  of the revenue received by the  City of Nome                                                               
is through property and sales taxes.   However, 40 percent of the                                                               
property in Nome is exempt,  yet those [residents] use the city's                                                               
services  like  everyone else.    When  contractors work  in  the                                                               
community,  they  too  use  the   city's  services.    Therefore,                                                               
collecting a  sales tax on  the subcontractors helps pay  for the                                                               
use of  those services.   Mayor Michels pointed out  that whether                                                               
or not  to charge  the sales  is an option.   She  indicated that                                                               
larger communities don't apply the  sales tax in this way because                                                               
they have a larger tax base.                                                                                                    
MAYOR MICHELS highlighted that the  rules of engagement differ in                                                               
each  community, and  in  fact the  state  request for  proposals                                                               
recommends  contacting the  local  government regarding  possible                                                               
fees.  She then turned attention  to the recent lack of municipal                                                               
revenue sharing, which she indicated  was a [contributing factor]                                                               
for  the City  of Nome  in 2004  to raise  its sales  tax from  4                                                               
percent  to  5  percent  in  order  to  help  offset  the  rising                                                               
operating  costs for  the  community.   Mayor  Michels said  that                                                               
taking away  this taxation  option would hurt  the City  of Nome.                                                               
She informed  the committee  that the  contractor is  exempt from                                                               
the sales tax  [on state projects] and obtains  a building permit                                                               
that provides  tax-exempt status on  purchases in the town.   The                                                               
subcontractor can also apply for a building permit.                                                                             
3:44:12 PM                                                                                                                    
REPRESENTATIVE ROKEBERG inquired as  to whether the tax exemption                                                               
for  a  general  contractor  is  in  the  City  of  Nome's  local                                                               
MAYOR MICHELS indicated that it's state law.                                                                                    
DEBORAH  GRUNDMAN,   Staff  to  Senator  Huggins,   Alaska  State                                                               
Legislature,  pointed  out  that  due to  the  state's  sovereign                                                               
immunity, the  state is immune  from taxation except when  it has                                                               
expressly been  waived by the  state.  Nothing in  statute waives                                                               
the state  from taxation, she  said.  Therefore, the  problem is:                                                               
"there's a  contract and a  subcontractor is tied right  to that,                                                               
defined as an  entity to whom the contractor sublets  part of the                                                               
contract."    Practices  such  as  in Nome  raise  the  price  of                                                               
construction projects.                                                                                                          
3:45:30 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  returned to  the earlier mention  that a                                                               
subcontractor  could apply  for  a building  permit  in order  to                                                               
receive an exemption from the sales and use tax.                                                                                
MAYOR MICHELS  clarified that the  holder of the  building permit                                                               
would not  have to  pay tax  on the  supplies purchased  in town.                                                               
She noted that most contractors  and subcontractors ship in their                                                               
materials to Nome.                                                                                                              
3:46:10 PM                                                                                                                    
REPRESENTATIVE   ROKEBERG  surmised   then  that   Mayor  Michels                                                               
believes that the issue of  double taxation could've been avoided                                                               
if  the subcontractors  had applied  for a  building permit.   He                                                               
inquired as to the fee for a permit on a $400,000 contract.                                                                     
MAYOR MICHELS answered  that the fee is based on  a percentage of                                                               
the project.                                                                                                                    
3:46:41 PM                                                                                                                    
KATHIE  WASSERMAN, Alaska  Municipal League  (AML), related  that                                                               
AML is  opposed to  SB 158,  which is outlined  in a  letter that                                                               
should  be in  the committee  packet.   Ms.  Wasserman said  that                                                               
AML's   main   concern   is  that   the   legislature   and   the                                                               
administration, through various actions,  have made it clear that                                                               
municipalities  will have  to survive  on  their taxing  ability.                                                               
She related  that AML  believes that  taxing decisions  should be                                                               
left to those at the local level.                                                                                               
REPRESENTATIVE  CRAWFORD inquired  as to  how Ms.  Wasserman felt                                                               
about the same construction dollars being taxed twice.                                                                          
3:49:01 PM                                                                                                                    
MS.  WASSERMAN, recalling  her experience  as a  contractor, said                                                               
that  when she  wasn't [working]  on  a state  project, she  paid                                                               
sales tax  on her contract as  well as the services  she incurred                                                               
while in the  community.  Ms. Wasserman highlighted  that in many                                                               
communities there are  state buildings that aren't  taxed at all,                                                               
while the  state receives the  same services as all  the property                                                               
taxpayers in the community.                                                                                                     
3:49:52 PM                                                                                                                    
SENATOR   HUGGINS   characterized   this  practice   [of   taxing                                                               
subcontractors  on state  projects]  as being  viewed as  revenue                                                               
sharing by  those communities  using it.   However,  he indicated                                                               
that doing  so drives  up the price  of contracting.   Therefore,                                                               
Senator  Huggins opined  that it's  a simple  question.   Senator                                                               
Huggins suggested  that people  could be charged  for the  use of                                                               
the local services, but "don't  go after the contractor" [because                                                               
either way  they pay  for the  services used].   He  reminded the                                                               
committee  that SB  158  would create  a  stable environment  and                                                               
contain the price of contracting.                                                                                               
3:52:32 PM                                                                                                                    
REPRESENTATIVE KOTT  announced that he  has a conflict  in voting                                                               
because   SB   158   could  potentially   impact   his   business                                                               
CHAIR ANDERSON  said that Representative  Kott would  be required                                                               
to vote.                                                                                                                        
3:53:02 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG said that  he's torn between both sides                                                               
of this issue.                                                                                                                  
CHAIR  ANDERSON  said  that  although   he,  too,  is  torn,  the                                                               
legislation should move forward.   He also recognized the dilemma                                                               
that municipalities face with budgeting.                                                                                        
3:54:28 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD  opined  that there  are  two  questions                                                               
here.   One is whether  there should be municipal  assistance and                                                               
revenue sharing  and the other  is whether state  projects should                                                               
be  taxed by  a  municipality.   He  noted  that  he believes  in                                                               
municipal assistance and revenue sharing,  but that's not what SB
158 is  about.   He recalled testimony  that the  local community                                                               
benefits when the state spends  state dollars in a community, and                                                               
therefore  he  opined  that those  dollars  shouldn't  be  taxed.                                                               
Representative  Crawford concluded  by announcing  that he  would                                                               
advance SB 158.                                                                                                                 
3:55:11 PM                                                                                                                    
REPRESENTATIVE  LEDOUX  said  that   she  wouldn't  hold  up  the                                                               
legislation.  However,  she reiterated that she  has some serious                                                               
problems with  it because she  didn't see any  difference between                                                               
the state  having a  contractor and  the municipality  taxing the                                                               
subcontractor or a private individual.                                                                                          
REPRESENTATIVE LYNN moved to report  SB 158 out of committee with                                                               
individual  recommendations  and  the  accompanying  zero  fiscal                                                               
note.  There being no objection, it was so ordered.                                                                             

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