Legislature(2011 - 2012)BARNES 124
02/22/2012 03:15 PM LABOR & COMMERCE
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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 date." 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 exemption. 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 duplicative. 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 rates. 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 Corporations. 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 nation. 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.