Legislature(2011 - 2012)BARNES 124

02/22/2012 03:15 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved Out of Committee
Moved CSHB 252(L&C) Out of Committee
Heard & Held
                  HB 252-INCOME TAX EXEMPTION                                                                               
3:48:41 PM                                                                                                                    
CHAIR OLSON  announced that the  next order of business  would be                                                               
HOUSE BILL  NO. 252, "An  Act exempting certain  small businesses                                                               
from the  corporate income  tax; and  providing for  an effective                                                               
3:48:51 PM                                                                                                                    
REPRESENTATIVE MIA COSTELLO,  Alaska State Legislature, explained                                                               
that  HB 252  would exempt  certain "qualified  small businesses"                                                               
with aggregate  assets of  $50 million or  less from  the state's                                                               
corporate  income  tax.    The   industries  that  would  qualify                                                               
dovetail with  the federal C  Corporations identified  in section                                                               
1202 of the Internal Revenue  Code (IRC).  These corporations are                                                               
defined as ones  using 80 percent or more of  their assets in the                                                               
active conduct of  their businesses.  The types  of companies the                                                               
bill  is designed  to  encourage  include intellectual  property,                                                               
software  industry, and  innovation.   The  reason  the state  is                                                               
trying to  attract the  C Corporations is  because they  have the                                                               
ability to attract unlimited investors.   The federal legislation                                                               
allows for investors to be exempt  from capital gains tax if they                                                               
keep the  funds in the company  for at least five  years.  Alaska                                                               
has found that many companies avoid  filing as a C Corporation to                                                               
avoid  the fifth  highest corporate  tax in  the country,  or 9.4                                                               
percent   rate  on   $90,000  in   earnings.     Instead,   these                                                               
corporations  have  been  filing  as S  Corporations,  which  has                                                               
limited  investors.   This  bill aims  to  attract industries  to                                                               
Alaska that are not currently  here and to attract the investment                                                               
that comes with those startups.                                                                                                 
3:51:25 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  made  a  motion  to  adopt  Amendment  1                                                               
labeled 27-LS1085\M.2, Nauman, 2/17/12, which read, as follows:                                                                 
     Page 1, lines 10 - 11:                                                                                                     
          Delete "that is actively engaged in a qualified                                                                   
     trade or business"                                                                                                     
          Insert "and that meets the active business                                                                        
      requirement in 26 U.S.C. 1202(e) as that subsection                                                                   
     read on January 1, 2012"                                                                                               
     Page 1, line 14:                                                                                                           
          Delete "AS 46.20.012"                                                                                                 
          Insert "AS 43.20.012"                                                                                                 
     Page 2, lines 5 - 15:                                                                                                      
          Delete all material.                                                                                                  
     Renumber the following paragraph accordingly.                                                                              
     Page 2, following line 18:                                                                                                 
          Insert a new paragraph to read:                                                                                       
               "(1)      "Alaska    corporation"   means   a                                                                    
     corporation that has been incorporated  in the state or                                                                    
     is authorized to do business in the state;"                                                                                
     Page 2, lines 19 - 20:                                                                                                     
          Delete "(1) "aggregate gross assets," "parent-                                                                        
     subsidiary   controlled    group,"   "qualified   small                                                                    
     business," and "qualified trade or business""                                                                              
          Insert "(2) "parent-subsidiary controlled group"                                                                      
     and "qualified small business""                                                                                            
     Page 2, line 21:                                                                                                           
          Delete ";"                                                                                                            
          Insert "."                                                                                                            
     Page 2, lines 22 - 27:                                                                                                     
          Delete all material and insert:                                                                                       
        "* Sec.  3. AS 43.20.012  is repealed  and reenacted                                                                
     to read:                                                                                                                   
          Sec. 43.20.012. Limitation on application of                                                                        
     chapter; credits. The tax imposed  by this chapter does                                                                  
     not apply  to individuals  or to  fiduciaries. However,                                                                    
     an individual may  file a return under  this chapter to                                                                    
     receive a tax credit under AS 43.20.013.                                                                                   
        * Sec. 4.  Sections 1 and 2 of this  Act take effect                                                                  
     July 1, 2012.                                                                                                              
        *  Sec.  5.  Section  3 of  this  Act  takes  effect                                                                  
     July 1, 2023."                                                                                                             
CHAIR OLSON objected for the purpose of discussion.                                                                             
3:51:52 PM                                                                                                                    
REPRESENTATIVE COSTELLO  explained that page  1 lines 1-4  of the                                                               
Amendment 1 would incorporate subsection  (e) of Internal Revenue                                                               
Code (IRC)  section 1202 that requires  at least 80 percent  of a                                                               
qualifying business'  assets must be  used in the  active conduct                                                               
of the business.   The next change on page  1, lines 6-8 corrects                                                               
a typographical  error.  She then  referred to page 1,  lines 10-                                                               
11,   which  would   remove  the   requirement  that   qualifying                                                               
businesses file  a report documenting  their eligibility  for the                                                               
3:52:14 PM                                                                                                                    
REPRESENTATIVE HOLMES related her  understanding that this change                                                               
is  being made  since the  corporation has  previously filed  the                                                               
information  with  the  federal  government  and  this  would  be                                                               
REPRESENTATIVE COSTELLO agreed.                                                                                                 
3:52:23 PM                                                                                                                    
REPRESENTATIVE COSTELLO  referred to  page 1, lines  15-18, which                                                               
removes   the  requirement   that   a   qualifying  business   be                                                               
headquartered  in Alaska  to avoid  potential  violations of  the                                                               
Equal  Protection  and Interstate  Commerce  Clause  of the  U.S.                                                               
Constitution.   The bill originally  required the business  to be                                                               
headquartered  in  Alaska,  but  that provision  was  changed  to                                                               
require the work be conducted in  Alaska.  The next changes would                                                               
delete definitions  no longer  used in  the statute  and corrects                                                               
the punctuation.   Finally, a  sunset provision was added  to the                                                               
bill so the program would sunset July 1, 2023.                                                                                  
3:53:21 PM                                                                                                                    
CHAIR  OLSON  removed  his  objection.   There  being  no  father                                                               
objection, Amendment 1 was adopted.                                                                                             
3:53:55 PM                                                                                                                    
JOSH  WALTON, Staff,  Representative Mia  Costello, Alaska  State                                                               
Legislature,  stated that  HB 252  would provide  state corporate                                                               
tax exemptions  for qualifying  small businesses  as the  term is                                                               
defined  in IRC  code section  1202.   That section  is meant  to                                                               
encourage investment,  in particular, venture  capital investment                                                               
targeted   at  startup   companies  involved   in  research   and                                                               
development,  innovation,  intellectual  property,  and  software                                                               
development.  These  are the sorts of companies  that represent a                                                               
very fast  growing sector.  He  offered that if the  state wishes                                                               
to diversify its  economy, one way is to branch  out into sectors                                                               
that will grow  quickly.  Thus this bill would  help to diversify                                                               
Alaska's economy.   Although this bill offers an  exemption it is                                                               
an exemption  that will not  last forever.   In order  to qualify                                                               
for an exemption under IRC Section  1202 a company must have less                                                               
than $50  million in  aggregate gross  assets.   Additionally, 80                                                               
percent or more of its assets  must be used in the active conduct                                                               
of  the business,  which he  related as  a significant  hurdle to                                                               
overcome.   However,  special provisions  in the  tax code  allow                                                               
research costs,  startup costs, and  experimentation costs  to be                                                               
counted  toward  the  80 percent,  which  helps  these  companies                                                               
engaged in those  activities crest that bar a little  easier.  He                                                               
suggested  that  in practice  Section  1202  has been  used  most                                                               
effectively to encourage investment in  companies that tend to be                                                               
more innovative or research-based ones.                                                                                         
3:57:16 PM                                                                                                                    
MR. WALTON pointed out that  a number of industries are excluded.                                                               
The  sponsor  has  received   anecdotal  information,  such  that                                                               
venture capitalists seek  vehicles in which to invest.   Very few                                                               
opportunities exist  since the  high-growth company  must be  a C                                                               
Corporation, which is the only  corporate class structure that is                                                               
not a  pass-through corporation, but  one that maintains  its own                                                               
corporate  income  tax  liability.   As  the  sponsor  previously                                                               
mentioned, the state has the  fifth highest corporate tax rate in                                                               
the  U.S.   He stated  that entrepreneurs  in Alaska  desiring to                                                               
start an  innovative driven company  will look to states  such as                                                               
Montana since its  corporate taxes are much lower.   He explained                                                               
that  the   companies  tend  to   be  highly  mobile,   with  few                                                               
geographical constraints.   Thus the state has  an opportunity to                                                               
attract  these businesses  to  Alaska, except  for  the high  tax                                                               
3:59:09 PM                                                                                                                    
REPRESENTATIVE  SADDLER asked  for the  types of  industries that                                                               
are exempt under the IRC Section 1202.                                                                                          
MR. WALTON related that currently  there are not many examples of                                                               
companies  in Alaska,  but nationwide  the companies  tend to  be                                                               
technology   based  companies   such  as   bio-tech,  information                                                               
services, computer  networking, software,  and a wide  variety of                                                               
companies seeking to develop new products.                                                                                      
4:00:36 PM                                                                                                                    
REPRESENTATIVE SADDLER  asked whether the types  of companies the                                                               
state is  trying to  attract would be  companies such  as Hewlett                                                               
Packard or Apple were startup companies thirty years ago.                                                                       
MR. WALTON answered yes.                                                                                                        
4:00:48 PM                                                                                                                    
MR. WALTON  said that it  may seem unusual  that this issue  is a                                                               
problem in Alaska since other  types of corporate structures such                                                               
as the  limited liability corporations  (LLC) or  S corporations,                                                               
which are pass-through entities exist.   He offered that start up                                                               
activity occurs  in businesses  using those  structures; however,                                                               
the problem is  that severe limitations exist on  who can invest.                                                               
He explained  that the amount  of capital  that can be  raised is                                                               
limited.  Therefore, if a company  seeks to be the next Google or                                                               
Apple, they must have the ability  to raise a lot of capital very                                                               
quickly and  to do so require  lots of shareholders.   He pointed                                                               
out that S Corporations are  limited to 100 shareholders with one                                                               
class  of  stock  and  other   companies  cannot  invest  in  the                                                               
corporation.    He concluded  that  a  corporation  must be  a  C                                                               
Corporation in order for a venture  capital firm to invest in the                                                               
company.   He hesitated  to suggest  that Alaska  is less  than a                                                               
welcoming  place  for  entrepreneurs, because  it  is  welcoming;                                                               
however, Alaska's  tax structure is not  particularly friendly to                                                               
those companies that want to  grow quickly and become publically-                                                               
traded companies.   He characterized this bill as  one that would                                                               
create  a  nursery for  companies  that  will eventually  outgrow                                                               
their exemptions and become taxpayers.                                                                                          
4:02:37 PM                                                                                                                    
REPRESENTATIVE  MILLER asked  whether a  small company  which has                                                               
not incorporated could qualify under the bill.                                                                                  
MR.  WALTON  answered  that  this exemption  relates  only  to  C                                                               
REPRESENTATIVE  MILLER  asked  whether a  preponderance  of  work                                                               
would be performed in Alaska under the bill.                                                                                    
MR.  WALTON  answered  that  a   C  Corporation's  corporate  tax                                                               
liability  depends  on  the   business  activities  performed  in                                                               
Alaska.   If a  corporation carries out  all of  their activities                                                               
and meets  the overall  criteria for the  exemption, then  all of                                                               
their  activities   would  be  exempted.     He   explained  that                                                               
originally  the bill  required companies  to be  headquartered in                                                               
Alaska, but the Department of  Law advised that doing so violated                                                               
the Interstate  Commerce Clause and  Equal Protection  Clauses of                                                               
the U.S. Constitution  so those provisions were removed.   Thus a                                                               
1202 C  Corporation headquartered anywhere would  be eligible for                                                               
activities in Alaska.                                                                                                           
4:04:33 PM                                                                                                                    
CHAIR OLSON  recalled that  in the past  six years  the committee                                                               
has had  bills similar to  this with the commonality  that Alaska                                                               
has  been  working  to  be competitive  with  other  states  that                                                               
currently  have  advantages  over  Alaska.   He  inquired  as  to                                                               
whether  he was  aware of  any other  states beyond  Montana that                                                               
Alaska has competing with who would be affected by this bill.                                                                   
MR. WALTON did not  recall who is on bottom of  the list in terms                                                               
of income tax.   He recalled that this would  be the only program                                                               
in the  country of  this type.   In response  to Chair  Olson, he                                                               
agreed that Alaska would be  considered innovative.  Alaska would                                                               
move from being the fifth  least encouraging environment to being                                                               
tied for first place if not  outright becoming first place in the                                                               
4:06:29 PM                                                                                                                    
TYLER ARNOLD,  Founder, Tyler  Systems; Chief  Executive Officer,                                                               
SimplySocial,  Inc.,  stated  that  SimplySocial,  Inc.  provides                                                               
social media  services.  He  explained that  he is a  19-year old                                                               
entrepreneur born  and raised  in Anchorage,  Alaska.   He stated                                                               
that he  was 16 years old  when he started his  first information                                                               
technology  company,  Tyler  Systems,  which won  the  SBA  young                                                               
entrepreneur of  the year  award in 2011.   His  current startup,                                                               
SimplySocial, Inc. brings together a global  team all a part of a                                                               
1202 C Corporation  founded in Alaska.  The  C Corporation status                                                               
allows  his company  to be  more attractive  to investors  and is                                                               
geared towards international business.   It allows the company to                                                               
be a  high growth company.   They may  be global, but  act local.                                                               
He suggested that Alaska has  one of the highest corporate income                                                               
tax rates  in the country.   This bill, HB 252,  would remove the                                                               
burden but would strengthen the  global competitiveness.  He said                                                               
he is  currently in Romania  working with  the team until  we all                                                               
come to Alaska in April to  launch our project publically the end                                                               
of April.   He hoped to  show the global co-founders  that Alaska                                                               
plays to our advantage and is  an easy place for startups to call                                                               
home.   He  thanked the  committee.   In response  to a  question                                                               
about the good reception, he answered that he is using Skype.                                                                   
4:08:38 PM                                                                                                                    
REPRESENTATIVE  SADDLER  asked  if  he had  considered  going  to                                                               
anyplace else in the nation for either of his businesses.                                                                       
MR. ARNOLD  answered no.   When they  founded their  company last                                                               
October,  the founders  understood  Alaska could  be  one of  the                                                               
first to  consider the  IRC Section 1202  exemption.   He related                                                               
that the  legislators and venture  capitalists in  Silicon Valley                                                               
were not considering  the exemption.  He explained  that they did                                                               
not look  at any other  states due  to the exciting  prospects of                                                               
this bill.  In response  to a question,  Mr. Arnold  advised that                                                               
Romania is 11 hours ahead of Alaska's time zone.                                                                                
4:09:56 PM                                                                                                                    
JOHNATHAN BITTNER,  Director, Business and  Economic Development;                                                               
Anchorage  Economic  Development   Corporation  (AEDC)  expressed                                                               
support  for  HB 252.    The  company does  a  lot  of local  and                                                               
national outreach  to generate support  for Anchorage  and Alaska                                                               
as a  place to do  business and to  incorporate a business.   The                                                               
competition is very fierce among  other states who are working to                                                               
provide incentives  to attempt to attract  businesses.  Anchorage                                                               
is  a good  place  to do  business,  but tools  like  HB 252  are                                                               
crucial  in  terms  of  placing  Alaska at  the  forefront.    He                                                               
reiterated AEDC's support for the bill.                                                                                         
ALLAN  R. JOHNSTON,  Chief Encouragement  Officer, Team  Network,                                                               
Inc. stated that he has been  with Wedbush Securities Inc. for 35                                                               
years and regional  manager for most of that time.   He said that                                                               
he is  now transitioning into his  encore career.  He  has raised                                                               
three children in Alaska.  He  offered that his focus has been to                                                               
assist youth in creating and focusing  on jobs in Alaska.  He has                                                               
been  involved   in  the  Alaska   Business  Plan,  which   is  a                                                               
competitive  and cooperative  effort  between  the University  of                                                               
Alaska (UAA), Alaska Pacific University  (APU), and University of                                                               
Alaska Fairbanks  (UAF).   The focus has  been to  break barriers                                                               
and work  collectively, to help  students think globally,  and to                                                               
heighten  their aspirations  of  what they  can  accomplish.   He                                                               
helps  them identify  problems and  be  part of  the solution  in                                                               
Alaska  instead  of  using a  business  model  developed  outside                                                               
Alaska.  He has observed  the opportunities and quality of living                                                               
in Alaska.  He  has also viewed HB 252 as a  vehicle and means to                                                               
attract people  who love  outdoors an  opportunity to  move their                                                               
small companies, children, and families  to Alaska - a state that                                                               
has  a  quality   of  life  second  to  none.     This  bill  has                                                               
specifically been  geared to  use a C  Corporation instead  of an                                                               
LLC or S Corporation.                                                                                                           
MR. JOHNSTON  offered his belief that  HB 252 is also  geared for                                                               
those   seeking   national   and  international   markets   whose                                                               
competitor is not just across the  street.  This gets back to the                                                               
whole idea of  raising aspirations of what can  happen in Alaska.                                                               
He  recalled Irv  Long, who  designed  the thermal  tubes on  the                                                               
Trans-Alaska  Pipeline System  (TAPS).   He  mentioned that  two-                                                               
thirds of  the wellspring  drills in  Vermont siphoning  and heat                                                               
tubes  and many  of  the  initial patents  were  filed by  people                                                               
including Joe Balash.   He also pointed out  Ed Clinton, Dowland-                                                               
Bach,  Inc., with  respect to  his work  on control  valves.   He                                                               
emphasized that  Alaska should  have been  exporting intellectual                                                               
property for  years.   He offered  his belief  that HB  252 could                                                               
help  bring  national  and  international  interest  due  to  its                                                               
quality of life  and as a state that is  also focused on national                                                               
and  international opportunities.    He shared  that  he is  very                                                               
passionate about  this and  recognizes HB 252  as a  tool, noting                                                               
several tools are  being developed.  He hoped  Alaska could train                                                               
people  to use  these tools.   He  said he  is so  impressed with                                                               
Jonathan Bittner's  startup for  software companies,  noting that                                                               
32   people   representing   six   startup   software   companies                                                               
characterized the  startup process as the  most exciting process.                                                               
He  expressed  excitement over  what  has  been happening  in  in                                                               
Alaska  in the  past year.   He  offered his  belief that  HB 252                                                               
could help create  a phenomenal opportunity for  Alaska at little                                                               
to no cost or perhaps even a negative cost.                                                                                     
4:16:15 PM                                                                                                                    
CHAIR  OLSON,  after first  determining  no  one else  wished  to                                                               
testify, closed public testimony on HB 252.                                                                                     
REPRESENTATIVE JOHNSON moved to report  HB 252, as amended out of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal  notes.   There  being  no  objection, CSHB  252(L&C)  was                                                               
reported from the House Labor & Commerce Standing Committee.                                                                    

Document Name Date/Time Subjects
Feb 22.pdf HL&C 2/22/2012 3:15:00 PM
HB301 ver A.PDF HL&C 2/22/2012 3:15:00 PM
HB 301
HB301 Fiscal Note-DNR-PM-2-17-2012.pdf HL&C 2/22/2012 3:15:00 PM
HB 301
HB301 Sponsor Statement.pdf HL&C 2/22/2012 3:15:00 PM
HB 301
HB301 Supporting Documents-Alaska's Boating Safety Dollars at Work 12-28-11.pdf HL&C 2/22/2012 3:15:00 PM
HB 301
HB301 Supporting Documents-Alaska Boating Safety Program - Funding History.pdf HL&C 2/22/2012 3:15:00 PM
HB 301
HB252 Draft Proposed Amendment ver M.2.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Explanation of Draft Proposed Amendment M.2.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Sectional Summary (ver A).pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Sponsor Statement.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-26 USC 1202.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Email Andrew Mitton 2-17-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Email Brent Fisher 2-17-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Kauffman Foundation Report Jan 2012.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Letter Alaska Chamber 2-2-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Letter Allan Johnston Support 2-10-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-Letter John Wanamaker 2-15-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 Supporting Documents-State Positions-AK Chamber.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB252 ver M.PDF HL&C 2/22/2012 3:15:00 PM
HB 252
HB300 Fiscal Note-ACS-APP-2-8-2012.pdf HL&C 2/22/2012 3:15:00 PM
HB 300
HB300 Fiscal Note-ACS-TRC-2-8-2012.pdf HL&C 2/22/2012 3:15:00 PM
HB 300
HB300 Sponsor Statement.pdf HL&C 2/22/2012 3:15:00 PM
HB 300
HB300 Supporting Documents-AS 22.35.010 and AS 39.27.020.pdf HL&C 2/22/2012 3:15:00 PM
HB 300
HB300 ver A.pdf HL&C 2/22/2012 3:15:00 PM
HB 300
HB252 Fiscal Note-DOR-TAX-02-20-12.pdf HL&C 2/22/2012 3:15:00 PM
HB 252
HB300 Supporting Document-AK Court System Review of Geographic Differentials.pdf HL&C 2/22/2012 3:15:00 PM
HB 300