Legislature(2021 - 2022)BARNES 124
04/21/2021 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB54 | |
| HB130 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 54 | TELECONFERENCED | |
| *+ | HB 130 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 130-CORP. TAX: REMOVE EXEMPTIONS/CREDITS
1:28:01 PM
CHAIR PATKOTAK announced that the final order of business would
be HOUSE BILL NO. 130, "An Act relating to exclusions from
income, credits, and deductions against the Alaska net income
tax; establishing an income tax on oil or gas business entities;
and providing for an effective date."
1:28:40 PM
REPRESENTATIVE ADAM WOOL, Alaska State Legislature, as prime
sponsor, introduced HB 130. He paraphrased the Sponsor
Statement [included in the committee packet] which read as
follows [original punctuation provided]:
House Bill 130 is designed to close loopholes and
ensure fairness in Alaska's corporate income tax
structure. The bill resolves three important issues.
First, it expands the jurisdiction of Alaska's
existing corporate income tax to all oil and gas
producers doing business here. Currently, only "C"
corporations pay this tax on their Alaska profits.
This is increasingly concerning as new, smaller
companies begin producing. The Department of Revenue
has estimated that 30% of Alaska's current oil
production is by companies who are organized as
something other than C-corporations and thus exempt
from our current tax structure. This is costing Alaska
an estimated $25 to $30 million per year in lost tax
revenue, potentially much higher should oil prices
recover. With the passage of HB130, all oil and gas
producers will pay the same rate of tax based on their
Alaska-derived profits.
Second, it resolves a new issue that has arisen with
the passage of the federal CARES Act coronavirus
relief bill. Typically, a corporation who experiences
an operating loss can carry that loss forward to
reduce their future year taxes. The CARES Act allows
corporations to carry any 2018-2020 losses backwards
to a prior tax year. Because Alaska law incorporates
most provisions of the IRS tax code, that same item
applies to Alaska's tax. In practice, this means that
Alaska will be paying retroactive tax refunds to
corporate taxpayers, for a forecasted total of $162
million between FY2021 and FY2022. HB130 severs this
link to the federal tax code for this specific issue,
preventing Alaska from having to pay these refunds
during our historic budget crisis.
Finally, it closes two small but important loopholes
that were identified in the state's "Indirect
Expenditures Report." It restricts the ability of
corporations to claim federal tax credits for work
that has nothing to do with Alaska, and removes the
ability to deduct foreign royalties from a company's
income calculation. These provisions provide no policy
benefits and give an unneeded tax break to several
hundred companies. Together, they are estimated to
cost the state $3.5 to $5 million per year.. Together,
the three items will earn or save Alaska close to $200
million next year, and take an important step towards
a comprehensive fiscal plan.
1:36:22 PM
KEN ALPER, Staff, Representative Adam Wool, Alaska State
Legislature, gave a PowerPoint presentation [hard copy included
in the committee packet] on behalf of Representative Wool, prime
sponsor of HB 130, titled "House Bill 130 Corporate Income Tax
Reform." He presented slide 2, "What Does HB130 Do?", which
read as follows [original punctuation provided]"
Three separate reforms to Alaska's Corporate Income
Tax, each closing a loophole or exemption that costs
the state money
1. Federal CARES Act loss-carryback issue forces the
state to pay large tax refunds;
2. Oil and gas companies who are not "C" corporations
do not have to pay the same tax as those who do;
3. Several smaller tax credits or "indirect
expenditures" that don't appear to have any current
purpose or value
?but first a little background on our Corporate Income
Tax
MR. ALPER presented slide 3, "Alaska's Corporate Income Tax,"
which read as follows [original punctuation provided]:
? All states have some sort of corporate taxation
? State taxes are typically tied to the federal
corporate income tax
o National ("water's edge") profits are
apportioned to Alaska based on certain key ratios:
club Percentage of Sales, Property, and Payroll
club Based on the federal "UDITPA" (Uniform
Division of Income for Tax Purposes Act), which we
adopted in 1959
o For oil and gas taxpayers, Alaska has set up a
separate, parallel system.
The same tax rates apply, but a different formula:
Global profits are apportioned to Alaska based on
different ratios
club Percentage of Sales, Property, and
Extraction (i.e. production)
? Tax is paid based on apportioned Alaska profits
based on the tax table in AS 43.20.011. Top marginal
rate is 9.4% of profits above $222,000.
MR. ALPER continued to slide 4, "Who Pays This Tax?", which read
as follows [original punctuation provided]:
? "C" Corporations. Legally these are entities that
hold the company's assets and income separate from
that of the individual owners of the company
o Profits are retained within the company and
taxed separately
? All corporations have to file a tax return with the
Department of Revenue, but type "S" corps are
currently exempt from the actual tax
? About 17,000 file tax returns, but only the 6,000
"C" Corps are liable to pay
? DOR reports the tax collections separately for oil
and non-oil companies
o Oil tax is quite "elastic" with oil prices;
average of the last five years is only $33 million,
but over $500 million / year during the 2005-2014
period
o Non-oil tax is much more stable; average of the
last five years was $103 million and was $123 million
/ year during the 2005-2014 period
? Overseen by a staff of about 16 auditors and tax
technicians in Anchorage and Juneau
MR. ALPER presented slide 5, "Who Pays This Tax?", which showed
a graph of non-oil corporate taxes by industry sector.
1:42:37 PM
REPRESENTATIVE HOPKINS asked what type of oil companies could be
impacted by the provisions under HB 130.
MR. ALPER responded that HB 130 would create a definition for
"oil or gas business entity", which carries forth from the
existing split in the corporate income tax between producer and
transporter. He noted that the profits of a for-profit pipeline
would be subject to the tax change.
MR. ALPER continued his presentation with slide 6, titled "Part
1: CARES Act Carry-Back Issue," which read as follows [original
punctuation provided]:
The 2020 CARES Act included a provision for federal
corporate taxpayers
o Any 2018-2020 losses can be carried backwards
to a prior tax year
o Companies could then re-file an older tax
return, and potentially get a refund of previously
paid taxes
Alaska has adopted the IRS Code "by reference" unless
specifically excepted
o HB130 creates an exception, de-linking Alaska's
corporate income tax from the CARES Act rule
The Department of Revenue has estimated that the state
is liable for about $162 million in tax refunds
MR. ALPER continued to slide 7, "Part 1: CARES Act Carry-Back
Issue," which showed two graphs from the spring 2021 revenue
forecast presentation to the House Finance Committee on March
16, 2021. The graphs showed the revenue lost due to the
provisions detailed in the previous slide, totaling the
aforementioned $162 million. He said, "These are refunds that
the state would be on the hook to write checks for: past paid
taxes that are getting paid back to the taxpayer." He clarified
that currently, net operating losses can be used to lower the
tax liability of future profits. He explained that under HB 130
there would be more state revenue now and less in the future; if
it doesn't pass, however, there would be much less state revenue
now but a little more in future years. "Representative Wool
believes ... we need the money now. By 2024, hopefully, we've
resolved our underlying fiscal situation, whereas $160 million
is a lot of money, facing the uncertainty that Alaska's facing
right now," he said.
1:49:05 PM
REPRESENTATIVE SCHRAGE expressed optimism that the state's
fiscal deficit will be fixed in the coming years and said that
funding from the American Rescue Plan Act of 2021 (ARPA) is
"somewhat" guaranteed. He asked, "Can you share your
perspective on why we wouldn't want to just go ahead and take
care of this now while we do have that ARPA funding and keep the
burden in future years lower, so that should we end up in an
unfortunate situation where we don't have a resolved budget,
that's not an additional burden on us?"
REPRESENTATIVE WOOL explained that the ARPA funds include many
provisions, some which prohibit the money from being used for
paying expenses such as pensions and taxes, and that the funds
are already allocated. He characterized the state budget as
"roughly balanced," but said the permanent fund dividend (PFD)
hasn't been "worked in" to the budget. He noted that in 2020
the PFD paid out $680 million, of which the $162 million in
potential tax refunds would help cover.
1:52:27 PM
MR. ALPER continued his presentation with slides 9, 10, and 11,
all titled "Part 2: Oil and Gas Taxpayer Equitable Treatment,"
which read as follows [original punctuation provided]:
? The corporate income tax is not the production tax.
These are completely different issues
? Corporate income tax is one of four major petroleum
revenue sources
1. Royalty (landowner share) when production is
on state land. At least ? of royalties go to Permanent
Fund
2. Property (ad valorum) Tax on pipeline,
equipment, and facilities. About 80% of petroleum
property tax is credited back to local governments
3. Production (severance) tax on net profits with
a minimum tax "floor"
? Alaska has a long history of treating oil producers
different from other companies within the corporate
income tax
o Current "extraction" formula and worldwide
apportionment
o 1978-1981 use of "separate accounting" (Alaska
specific profits) rather than apportionment; upheld by
Supreme Court 10
? For most of Alaska's history as a major oil
producing state, the vast majority of the production
has been from traditional, integrated companies that
paid the corporate tax as "C-Corps"
? In recent years, newer, smaller companies have
entered Alaska, and some of the older producers have
sold their assets
? Currently, about 30% of our oil production is from a
company that is organized as something other than a
-Corporation." Typically, these producers are "S-
Corporations"
? HB130 changes the statute so that all oil and gas
producers would pay this tax at the same rate
Why aren't these profits being taxed?
? A type S corporation is taxed in the same way as a
Partnership or LLC
? They calculate their profits, and file a federal tax
return, but their profits are not legally retained by
the company.
? Profits are "passed through" to their owners, and
taxes are paid via the owners' personal income tax
returns
? This works in the federal system, but because Alaska
has no individual income tax, these profits are not
taxed at all by the State
MR. ALPER clarified that the purpose of HB 130 is to resolve the
issue of untaxed profits within Alaska. He noted that the tax
information of S corporations ("S corps") is private, but since
oil and gas companies have similar cost structures and
profitability, possible state revenue could be extrapolated from
what is already received from oil and gas companies operating as
C corporations ("C corps").
1:57:46 PM
REPRESENTATIVE MCKAY said that he objected to Mr. Alper's
assertion that a major oil company has the same cost structure
as an individually-owned S corp, such as Hilcorp. He said,
"Hilcorp is known to operate at a much lower overhead, so to
speculate and assume that they have the same cost structure as a
major [oil and gas company], I think, is incorrect."
MR. ALPER said that he agrees that Hilcorp is known for
operating on smaller margins; however, since it's an S-corp.,
its finances can't be publicized; therefore, he was estimating.
He noted that because of its efficiency, Hilcorp may actually be
more profitable, resulting in more revenue to the state under HB
130.
1:59:12 PM
MR. ALPER resumed his presentation with slides 13-16, "Part 3:
Corporate Tax Indirect Expenditures," which read as follows
[original punctuation provided]:
Alaska statutes have a large number of tax breaks
that in some way reduce revenue.
o These are generally referred to as "Indirect
Expenditures"
? The legislature started looking closely at these in
2014, with the passage of HB306 by Rep. Thompson
o This bill requires periodic reports from both
the Legislative Finance Division and the Department of
Revenue
? HB130 addresses two specific "indirect expenditures"
identified in these reports
o Both were previously proposed for elimination
in 2018, in HB399 by Rep. Thompson (bill passed the
House and died in Senate Finance)
1. Federal Tax Credits that reduce a taxpayer's
federal tax liability can be apportioned to Alaska and
reduce a company's Alaska tax liability, regardless of
whether the credit was in any way related to the
company's Alaska activity
o Example: A company earns a $10 million federal
credit for investing in an "opportunity zone" in
California. Per HB130, that expenditure would no
longer be used in the apportionment of that company's
income to Alaska. Depending on the company, our
hare" could be a couple hundred thousand.
2. 80% of Foreign Royalties received by a company are
currently excluded from income before it is
apportioned to Alaska
o These are generally royalties for intellectual
property, patents, copyrights, etc. Not the resource
"royalties" we usually think about here
o Example: a software company licenses their
operating system to a company in Europe. The licensee
pays a royalty to the taxpayer based on their sales to
customers. Per HB130, those royalty payments would now
be fully counted in the income apportionment to Alaska
o A New York judge recently ruled that foreign
royalties could not be excluded, and that requiring
taxes to include these payments from non-resident
companies was not unconstitutional
? Together, these two items cost the state an average
of $4.0 million / year during the 2015-2018 period
(last complete years available)
? In the current Indirect Expenditures report (pages
164-165), DOR said there would be no cost to
administer either change if they were eliminated
MR. ALPER presented slide 17, "Fiscal Note Summary," which
showed the subcomponents of HB 130 and their projected revenue
over the next six years, as well as the cost for two new
corporate income tax auditor positions. He concluded his
presentation with slide 19, "Technical Amendment," which read as
follows [original punctuation provided]:
DOR identified several small issues that could impact
implementation. We have submitted a proposed amendment
(G.1) to the Chair that would resolve them:
? In the reference to the Federal CARES Act
legislation, an incorrect subsection number is used
? Concern that a taxpayer who already re-filed and
received a refund for a carry-back loss could have to
pay penalties and interest if the bill passes and they
must pay back these refunds. Amendment allows for
waiver
? Authorizes DOR to write regulations that are
retroactive to the effective date of the bill
2:05:13 PM
REPRESENTATIVE MCKAY referred to Section 2, page 2, lines 15-18
of HB 130 which read as follows:
* Sec. 2. AS 43.20.011 is amended by adding a new
subsection to read: (g) In this section, "oil or gas
business entity" means a person engaged in the
production of oil or gas from a lease or property in
this state or engaged in the transportation of oil or
gas by pipeline in this state.
REPRESENTATIVE MCKAY said he would prefer that Section 2 be
addressed separately from the proposed legislation. He then
referred to comments he made on the House floor in which he
"quoted the Fraser Institute, which ranked Alaska forty-ninth in
the country, only second to New York State, in business
friendliness," and expressed that HB 130 could "put us at 51."
He opined that Hilcorp extended the life of Cook Inlet oil
fields and has increased production at Prudhoe Bay, which had
been in decline for 45 years. He said, "The idea that we should
target S corporation companies for specific taxes may be to our
detriment; S corporations operating our oil fields may be the
future, and we have to be prepared for that." He hypothesized
that, should HB 130 pass, Hilcorp may cease operations in
Alaska. He then said, "I also wonder, is it constitutional to
target one company in our state in such a fashion? It's right
here in the slides, we're going after Hilcorp." He expressed
curiosity at how other oil-producing states treat the taxes of S
corps, LLCs, and partnerships.
REPRESENTATIVE WOOL explained that HB 130 doesn't target
Hilcorp; rather, Hilcorp was highlighted because they acquired
the land previously operated by BP, which had been in
partnership with ConocoPhillips Alaska, Inc. and ExxonMobil
Corporation in Prudhoe Bay, and had been taxed as a C corp. He
noted that California has an income tax, so a shareholder of an
S-corp. there would have a tax liability. He expressed
understanding of the wariness of tax changes and the possible
business implications but said that taxes change often, and
businesses also make decisions based on other factors.
2:14:21 PM
REPRESENTATIVE FIELDS asked whether this proposed legislation
would apply only to Hilcorp at this time.
REPRESENTATIVE WOOL said that while Hilcorp is known to be an S
corp, he doesn't know whether there are any other oil and gas
companies that are S corps.
MR. ALPER said under Alaska tax law, anyone who owns a share of
an oil field is an oil producer.
REPRESENTATIVE FIELDS asked what the tax differences are for
business that are not oil and gas producers, whether they are C
corps or S corps, and if a similar discrepancy exists.
MR. ALPER responded that S corps don't pay any state income tax,
no matter what type of business, and that many small businesses
are S corps. In response to Representative Fields' follow-up
question, Mr. Alper clarified that when he was a shareholder in
an S-corp., he paid federal taxes for the business through his
personal income taxes but had no tax liability to the state.
REPRESENTATIVE FIELDS asked how many S-corps operate in Alaska.
MR. ALPER replied that approximately 10,000 S corps operate
within Alaska.
2:19:05 PM
REPRESENTATIVE GILLHAM said that he's concerned about how HB 130
could affect the gold mining and fishing industry, Wal-Mart, and
Fred Meyer.
REPRESENTATIVE WOOL explained that large, publicly-traded
companies are C corps, and that S corps which are not oil and
gas companies would not be affected by HB 130.
2:20:03 PM
REPRESENTATIVE HANNAN noted that Hilcorp is paying taxes on
profits earned in Alaska to the federal government instead of to
the State of Alaska, and that HB 130 wouldn't change the amount
of taxes being paid, only which governmental entity would
receive the revenue.
MR. ALPER responded, "Yes, Mr. Hildebrand pays tax to the
federal government, presuming that his numbers are positive."
He noted that under HB 130, every incremental dollar that
Hilcorp would pay to the State of Alaska would reduce its
federal tax liability.
2:21:58 PM
REPRESENTATIVE RAUSCHER asked whether Hilcorp would be providing
testimony on HB 130.
CHAIR PATKOTAK said that, as far as he knows, Hilcorp has not
been contacted.
2:22:40 PM
REPRESENTATIVE CRONK asked why HB 130 is specific to oil and gas
companies instead of all S corps. He noted that Alaska gets
12.5 percent on "every barrel that goes through that pipeline,"
and he questioned negating that production and pondered where
"the happy medium" may be.
REPRESENTATIVE WOOL replied that there would be 10,000 new state
income taxes filed, which he characterized as "a much heavier
lift." He commented that he is not sure he would want to do
that. If he were to propose enacting a broad-based tax, he
added, he was not sure it would be on S corps. He observed that
if the state were to enact a state income tax, "every business
owner that owns an S corp would have to pay it through their
personal state income tax," which, he opined, would be a more
equitable way to tax. He said that the Prudhoe Bay [oil field]
has, until recently, been owned by three large corporations that
have paid taxes to the State of Alaska, and now that an S corp
has bought one of those shares, the state could potentially lose
the $50 million in annual revenue it had previously been
getting.
2:26:18 PM
RYAN FITZPATRICK, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources (DNR), presented excerpts from a
PowerPoint on HB 130 [hard copy included in the committee
packet], titled "Petroleum Revenue Systems: Royalties." He
clarified that the purpose of his presentation is to provide
context around the petroleum revenue system and noted that slide
9, "Total Petroleum Revenue by Restriction and Type, Millions of
Dollars," provides background information detailing the major
types of petroleum revenue. He then paraphrased slide 2, "State
Oil & Gas Lease Revenue Types," which read as follows [original
punctuation provided]:
Royalty
? Share of gross production of oil and gas from the
lease owed to the landowner.
? Set as a fraction (e.g. 1/8) or percentage (e.g.
12.5%) or production.
? Owed upon severance from the lease.
? May be taken as payment in value ("RIV") or as
delivery in kind ("RIK").
? Generally free of costs of production (CAPEX and
OPEX), but subject to transportations costs.
Net Profit Share
? Share of net profits generated by the lease from oil
and gas production.
? Set as a percentage (e.g. 30%, 40%, 79.59%) of net
profits.
? Owed once developments costs have been recovered
(with interest).
? Always taken as a payment.
? Paid on net profits after deducting costs of
production (both OPEX and CAPEX).
Bonus Bid
? Cash payment paid when lease is issued.
? Typically the bid variable, so lessees compete on
the bonus bid amount.
Lease Payment
? Annual cash payment, may be credited against royalty
? Set as a dollar per acre amount for each lease, some
leases include increases during the lease term.
2:30:38 PM
The committee took an at-ease from 2:30 p.m. to 2:37 p.m.
2:37:41 PM
MR. FITZPATRICK finished showing the information on slide 2 and
continued to slides 3 and 4, titled "Royalty Calculation
Examples" and "Net Profit Share Calculation Examples." He
explained that the royalty calculation begins with the price of
a barrel of oil; pipeline tariffs and marine transportation
costs are deducted; net value is multiplied by total production;
and total production is multiplied by the royalty rate to find
the dollar amount of revenue to the state. For net profit share
leases, revenue to the state is determined by both the royalty
rate and a separate rate based on the profit made from the
commodity.
MR. FITZPATRICK concluded his presentation with slide 5, which
displayed a map of the North Slope showing state and federal
lands, the Arctic National Wildlife Refuge (ANWR), Arctic Slope
Regional Corporation (ASRC) lands, and private land holdings,
all of which provide revenue to the state.
2:44:55 PM
COLLEEN GLOVER, Director, Tax Division, Department of Revenue,
presented a PowerPoint on HB 130 [hard copy included in the
committee packet] titled "Oil and Gas Tax Revenue Overview."
She began on slide 2, "Agenda," which listed two tax revenue
sources as follows [original punctuation provided]:
1. Oil and Gas Revenue Tax Sources
? Property Tax Overview
? Production Tax Overview
? Corporate Income Tax Overview
2. Oil and Gas Total Revenues
MS. GLOVER presented slide 3, titled "Oil and Gas Fiscal System:
Overall Order of Operations," which displayed a flowchart
showing the relationship between royalties, which are the first
element of the fiscal system; property taxes, which are
considered lease expenditures and can be applied against
production tax; production tax, which comes after royalties are
subtracted and allows property tax as a deduction; state
corporate income tax, of which production tax, property tax, and
royalties are excluded; and federal corporate income tax, which
excludes all other royalties and taxes.
MS. GLOVER paraphrased slide 5, titled "Oil and Gas revenues:
Property Tax," which read as follows [original punctuation
provided]:
? Based on assessed value of oil and gas property
? State tax rate is 2% (20 mills) of assessed value
? Municipalities can levy property taxes at same rate
it taxes all non-oil and gas property
o Taxes paid to municipalities acts as credit
towards tax due to state
o Municipalities receive large majority of total
revenue
? Governing Statute AS 43.56; Regulations 15 AAC
56.005-.900
MS. GLOVER explained that oil and gas property tax is a tax on
production, pipeline, and equipment. She then moved on to slide
6, titled "Oil and Gas Revenues: Property Tax Distribution,
FY2020," which displayed a table showing the amount of tax by
jurisdiction and the proportions for state and local government.
She noted that the total tax revenue for fiscal year 2020 was
$280 million, of which the state kept approximately $123 million
with the remainder allocated to the communities.
2:49:36 PM
REPRESENTATIVE HOPKINS asked about the weighted average referred
to in the slide 6 footnote, which read as follows [original
punctuation provided]:
The Fairbanks North Star Borough, Kenai Peninsula
Borough, and Matanuska-Susitna Borough do not have a
uniform mill rate for petroleum properties. The rate
presented here is the weighted-average effective mill
rate based on the 2020 certified tax roll.
MS. GLOVER replied that she couldn't speak to specific
municipalities, but overall, communities "can only tax oil and
gas property to the same rate that they tax other property."
2:51:07 PM
REPRESENTATIVE HANNAN asked Ms. Glover whether she is able to
confirm the existence of more than one S corp in the oil and gas
industry in Alaska.
MS. GLOVER replied that the Department of Revenue can't state
who is or isn't a taxpayer. She said, "There are several
entities that are a[n] oil producer, or actually own the oil on
the North Slope or in the Cook Inlet, that are not C
corporations."
2:52:21 PM
REPRESENTATIVE FIELDS asked, "Why? I find this puzzling."
MS. GLOVER explained that, while the Department of Revenue is
allowed to aggregate certain information, it's legally
prohibited from disclosing individual taxpayer information.
2:53:00 PM
DAN STICKEL, Chief Economist, Tax Division, Department of
Revenue, continued the PowerPoint presentation, titled "Oil and
Gas Tax Revenue Overview," with slide 8, "Oil and Gas Revenues:
Production Tax," which read as follows [original punctuation
provided]:
? Assessed on taxable barrels of oil and gas
? Taxed at segment level
o All North Slope one segment
o Cook Inlet fields are each separate segments
? Governing Statute AS 43.55; Regulations 15 AAC
55.010-.900
MR. STICKEL explained that "taxed at segment level" means that a
company may calculate tax according to the production value and
costs for the entire area in which it's operating, rather than
calculating for each individual field. He said that Cook Inlet
has a tax ceiling in statute, as well as lower overall
production, and both factors limit the revenue collected from
the Cook Inlet Basin.
2:56:53 PM
NICOLE REYNOLDS, Deputy Director, Tax Division, Department of
Revenue, continued the PowerPoint presentation, titled "Oil and
Gas Tax Revenue Overview," with slide 11, "Oil and Gas Revenues:
Corporate Income Taxable Entities," which read as follows
[original punctuation provided]:
? Generally, Alaska follows the Internal Revenue Code
when determining an entity's taxable status.
? Applies to C-Corporations only
MS. REYNOLDS explained that a C corp is an independent legal
entity owned by its shareholders, with profits taxed at the
entity level only. Alaska uses the federal provisions exempting
an S corp from tax at the entity level; rather, S corps are
treated as partnerships, so owners report a share of company
earnings on their individual tax returns. Alaska treats limited
liability companies (LLCs) as partnerships or sole
proprietorships, depending on their federal filing status. In
response to an earlier question asking how many S corps operate
in Alaska, she said that there are approximately 11,700
companies, which includes oil and gas companies.
2:58:46 PM
REPRESENTATIVE SCHRAGE asked whether aggregate data regarding
oil and gas companies could be provided.
MS. REYNOLDS replied that she would research whether she's
allowed to provide the information.
REPRESENTATIVE FIELDS said that he would like to know how many
oil and gas companies are S corps.
REPRESENTATIVE SCHRAGE clarified that he's not asking for
identifying information, only the number of oil and gas
companies operating as S corps.
3:00:12 PM
MS. REYNOLDS continued her presentation with slide 12, "Oil and
Gas Revenues: Corporate Income Tax," which read as follows
[original punctuation provided]:
? AS 43.19 Multistate Tax Compact (MTC)
o Regulations 15 AAC 19.011-.1490
? AS 43.20 Alaska Net Income Tax Act (ANITA)
o Regulations 15 AAC 20.010-.920
? 26 U.S.C. 1 1399 and 6001 7872
o Adopted, as amended, by reference in AS
43.20.021(a)
MS. REYNOLDS gave a brief history of tax laws adopted by the
State and explained that Alaska adopts any changes to the
Internal Revenue Code as they happen.
3:02:10 PM
REPRESENTATIVE HANNAN referred to Section 7 on page 3, [lines 8-
16], of HB 130, which read as follows:
Sec. 7. The uncodified law of the State of Alaska is
amended by adding a new section to read:
CARES ACT; NET OPERATING LOSS CARRYBACK.
Notwithstanding AS 43.20.021(a), changes made to 26
U.S.C. 172 by sec. 2302, P. L. 116-136 (CARES Act),
amending 26 U.S.C. 172(b)(1), providing for a
carryback of net operating losses arising in a taxable
year beginning after December 31, 2017, and before
January 1, 2021, do not apply to a state taxpayer
filing net income taxes under AS 43.20 for a tax year
beginning after December 31, 2017, and before January
1, 2021.
REPRESENTATIVE HANNAN asked Ms. Reynolds whether there is any
sense of how many taxpayers will apply net operating losses from
2020 to previous years' taxes.
MS. REYNOLDS answered that, as 2020 returns haven't been filed,
the Department of Revenue doesn't have a firm number.
REPRESENTATIVE HANNAN clarified her question.
MS. REYNOLDS responded that there have been taxes filed claiming
refunds from tax years 2018 and 2019.
3:04:04 PM
MS. REYNOLDS continued the PowerPoint presentation with slide
13, "Oil and Gas Revenues: Corporate Income Tax Calculation
Example," which showed how a C corp in Alaska calculates its
state corporate income tax liability. She clarified that the
tax rate applies to the net taxable income within the state
after deducting the net operating losses. She continued on to
slide 14, "Oil and Gas Revenues: Corporate Income Tax
Apportionable Income," which read as follows [original
punctuation provided]:
Oil & Gas C-Corporations use the "Worldwide Reporting
Method" under AS 43.20.144(b) to determine their
unitary combined groups and their apportionable
income.
MS. REYNOLDS clarified that for presentation purposes she would
focus on oil and gas producers and pipeline companies, as
identified in AS 43.20.144, referring to them as "oil and gas
taxpayers." She then explained that "apportionable income"
means the entire business income of a multi-state taxpayer
subject to apportionment. Oil and gas taxpayers apportionable
income is their federal taxable income with four primary
exceptions: taxes based on net income that were deducted in
determining federal taxable income are added back; intangible
drilling and development costs that were deducted as expenses in
determining federal taxable income are capitalized and
depreciated on a slower, straight-line expense approach rather
than the accelerated federal depreciation schedule; the
depletion deduction is allowed only on a cost depletion basis
rather than on a percentage depletion basis; or, depreciation is
computed using the pre-1981 federal rule, which is a slower,
straight-line expense approach rather than the accelerated
schedule under federal law. The apportionment formula is used
to determine how much of the taxpayer's apportionable income is
taxable by the State of Alaska. Taxpayers engaged in oil or gas
production as well as pipeline transportation generally use a
three-factor formula composed of property, sales, and
extraction, which are all added together and divided by three.
Taxpayers engaged in either oil and gas production or pipeline
transportation use a modified apportionment factor, depending on
their business activity. Sales for oil and gas taxpayers is
based on sales in Alaska rather than worldwide sales.
3:09:32 PM
MS. REYNOLDS continued her presentation with slide 16, "Oil and
Gas Revenues: Corporate Income Tax Net Operating Losses," which
read as follows [original punctuation provided]:
? Prior to 2017, NOLs could be carried back two years
and forward 20 years.
? Tax Cut and Jobs Act (TCJA) limited the ability of
corporations to carry back NOLs.
? CARES Act, Section 2303, reversed the TCJA treatment
of NOLs arising in 2018, 2019, and 2020 to provide
stimulus and cash infusion to economy.
? Change was to the timing of when these can be
applied not to the value of the NOLs
? Can be carried back five years
? Applies to losses in tax years 2018, 2019, and
2020 only.
MS. REYNOLDS explained that the purpose of the carry-back
provision was to provide stimulus to companies that suffered
large losses in 2018, 2019, and 2020 and to give the economy an
infusion of cash. She said that for tax year 2021, the law will
revert back to the TCJA treatment of net operating losses, so
those losses would be limited to 80 percent of taxable income
and "can only be carried forward indefinitely."
3:12:45 PM
REPRESENTATIVE HANNAN noted Ms. Reynolds' use of the phrase "can
only be carried forward indefinitely." She asked, "Does it mean
I can carry it forward until I choose to use that net operating
loss? Or, if I had so much of a loss that I could carry it
forward for forty years, I could do that?"
MS. REYNOLDS said that it means that a taxpayer would be able to
apply the loss in future years until they've exhausted the loss.
She illustrated that with a $100 million loss in tax year 2020,
and a future tax liability of only $10 million per year, a
taxpayer would be able to apply the $100 million loss to each of
those future years until the loss is exhausted.
3:14:49 PM
CHAIR PATKOTAK announced that HB 130 was held over.