Legislature(1997 - 1998)
04/07/1998 09:05 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 345
"An Act relating to apportionment of business income."
ANNETTE KREITZER, staff to Senator Loren Leman, chair,
Senate Labor and Commerce committee was invited to join the
committee. She said this bill was introduced after an
Alaska Supreme Court ruling in State of Alaska vs. OSG Bulk
Ships, Inc., Feb. 20, 1998 ruling, which effects a new tax
on foreign flagged ships and aircraft shipping goods to and
from Alaska. In effect, the ruling would make Alaska the
only state taxing the net income of foreign flagged or owned
ships, aircraft, railroad rolling stock and communication
satellites. SB 345 amended the section of the Alaska Net
Income Tax Act which adopted section 883 into Alaska law,
expressly stating that nothing in the Alaska tax statutes
may be construed as an exception to or modification of
section 883 of the IRS code. The purpose of section 883 was
not only to prevent the double taxation of foreign income
but to insure income earned by U.S. companies was not taxed
in other nations. Section 883 upholds a logical concept in
international trade. Ms. Kreitzer indicated that the Senate
Labor and Commerce committee chair would have no opposition
to an immediate effective date clause on SB 345 if the
committee desired to make that amendment. There had been
suggestion that a severability clause might be necessary.
She said further that there had been some questions raised
about the constitutionality of the legislation but there
were others available to testify regarding that matter. She
did say that in going over the matter with the drafter it
was his opinion that the Court had never held that the State
could not use its money or income in the manner described in
the bill. The State gives its own money away to private
individuals through the permanent fund dividend program.
Senator Adams asked about amendment #1 and the retroactive
clause. He said they would have to go back to old records
and he maintains that it would make the bill
unconstitutional if they did that. Ms. Kreitzer said that
Senator Leman did not personally like retroactive clauses
but he was willing to leave the clause in this bill because
he believes it reaches as far back as the department would
conceivably go to collect those taxes. She knows that there
have been issues raised as to the unconstitutionality and
she briefed the Senator before coming to the hearing this
morning. In further response to Senator Adams regarding the
constitutionality of the bill she felt she had made Senator
Leman's petition clear on the bill.
Senator Parnell also addressed some of Senator Adams'
concerns and referred to AS 01.10.090 Retrospective Statute,
which says no statute is retrospective unless expressly
declared therein. Senator Adams felt that this section
should be eliminated from the bill because it violated the
public purpose of the Constitution.
DEBORAH VOGT, Deputy Commissioner, Department of Revenue was
invited to join the committee. She further explained in
reference to the State Supreme Court decision issued in
February 1998. It held that an exemption that is part of
Federal law is not incorporated into the State's corporate
income tax because it was found that the Federal system of
taxation was so different from the State's that their intent
in adopting an apportionment system of tax precluded the
automatic incorporation of a provision that the Court found
was in the Federal statutes for the purpose of avoiding
double taxation. She explained that this dispute arose out
of an assessment in 1990 for tax years 1979 through 1988.
(Tape #116, Side A switched to Side B.)
She said this was a good case for the State whether or not
this legislation passed for the reason that it indicated our
Courts had unanimously decided to respect what it construes
the legislative intent concerning Alaska's tax statutes.
She also called the committee's attention to a memo from
Department of Law regarding the retroactive issue.
Referencing comments by Senator Parnell she said it was
perfectly legal to make a law retroactive. However, the
difficulty with the retroactive repeal of a tax is that it
raises public policy concerns. She said the department's
fiscal note estimated a revenue loss of approximately $3
million and $8.5 million. She said the range was so broad
because they did not have good information from which to
draw up a more accurate fiscal note.
Senator Torgerson asked if there were any other states
taxing vessels. Ms. Vogt said foreign boats and vessels
were not being taxed by other states. Senator Torgerson
further asked if there was revenue coming in to the State
under this provision and Ms. Vogt said no. Senator
Torgerson asked if the Anchorage International Airport was
classified as a foreign trade zone. Ms. Vogt indicated the
tank farm at the airport has been activated as a foreign
trade center where foreign carriers are fueled.
Senator Adams asked if the revenue loss indicated on the
fiscal note was commencing in 1999. Ms. Vogt said no
analysis of any retrospective effect had been done.
Assuming the legislation passed the Legislature has cut the
department's budget to the bare minimum and therefore there
was no administrative reason to dedicate any resources to a
tax the Legislature had repealed. Therefore, she felt they
would not be going out after folks.
JOE KYLE advised the co-chair that he was available to
respond to questions and did not want to testify.
BILL EILANDER, President, Anchorage Convention and Visitors
Bureau was invited to join the committee. He said he was
representing his board of directors and 1379 businesses that
make up the membership of the organization. He said they
unanimously supported the passage of this bill. They had
been very active in marketing on the international level.
Personally he had travelled with the last four governors and
members of the Legislature to oversee destinations, i.e.
Korea, Japan and Europe in extending Alaska's hand in
business. Failure to pass this bill and impose corporate
income tax would be severely damaging to Alaska's reputation
and of the Administration's. He noted that Korean Airlines
had been a very strong ally of tourism and they were the
only scheduled foreign air carriers today flying passengers
direct from Seoul, Korea to Alaska. He explained their
handicap under the Jones Act. Korean Air willingly puts
passengers on the aircraft, knowing that when they get off
the flight in Anchorage they will have to fly with empty
seats to and from New York before they can put passengers on
again in Anchorage. Currently they were working with China
Air and also other Japanese air carriers to create more
direct passenger flights. Northwest Airlines has also
recently announced they would fly direct flights Tokoyo-
Anchorage which has helped stimulate competition with the
foreign carriers. This was good for Alaska and the
industry.
In response to Senator Adams, Mr. Eilander said he had many
questions himself regarding the retroactive clause. He
suggested more research needed to be done on how the
retroactive clause would work. Other states feel it is a
threat. He felt Alaska was making a statement that they
were not open for business. He did not think the fiscal
note could be big enough to take the risk of any retaliation
on the other end if Alaska enforced the tax.
PAM LABOLLE, President, Alaska State Chamber of Commerce was
invited to join the committee. She said they supported SB
345. The State Chamber did not support any new tax that was
not part of an overall long-range plan that had been
reviewed and supported by businesses. This is a new tax and
is an ad hoc tax. She said it was particularly ill-founded
at this time seeing the decrease in oil production and low
oil prices. Urgent economic diversification was needed in
Alaska. Otherwise there would be a chilling effect on
businesses. Alaska's tax laws should be readable and
understandable by any citizen and not ambiguous so as to
contain implied applications as the Supreme Court maintains
exists. The language in SB 345 is clear and precise and
removes any ambiguity on the issue. She said the most
significant impact on all Alaskans will be the increase in
the cost of transportation. She further noted that three
other states had tried this tax and it was repealed. She
again urged the committee to move SB 345 forward.
GREG CHAMPION, General Manager, Sheraton Anchorage Hotel was
invited to join the committee. He said their parent company
was Korean Air and they had been doing business in Alaska
for twenty years. He reviewed some of the business dealings
and holdings, including real estate, apartment buildings,
catering facilities, laundry and linen companies, the
Sheraton Anchorage Hotel; also passenger and cargo flights
through Anchorage International Airport. He noted that
Korean Air was the largest international carrier at the
Anchorage airport, having thirty-six flights per week. He
said the total Alaskan employees were about three hundred
fifty. He gave a brief history on their connection with the
Anchorage International airport. Since 1988 they had only
been able to get twelve international carriers back into the
airport. He said to impose a tax now would negate all
treaties with foreign countries and they in turn would tax
us. It would be sad to see Alaska move backwards.
BOB STILES, President for Development and Marketing of
Beluga Coal Resources was invited to join the committee. He
read a brief statement into the record. He urged passage of
SB 345.
Senator Donley reminded the committee and the testifier that
it was the Administration was the one who brought the
lawsuit and got the Court to rule on the matter. Not all
the blame should be laid on the Court.
Mr. Stiles indicated that it was his understanding the way
the matter progressed someone at the Department of Law had
written an opinion saying the State could tax under 883 and
the exemption did not apply. He felt the State and
Administration had no choice but to attempt to enforce the
matter and if challenged to pursue it through the Courts.
Co-chair Sharp noted for the committee and public that there
was a 10:30 a.m. time limit on the bill. He had
teleconference scheduled for that time on HB 51.
SUSAN BURKE, Esq., Law Firm of Gross and Burke was invited
to join the committee. She said her services were retained
by Northwest Cruise Ship Association to provide legal
consultation and assistance on the bill as it was going
through the Legislature. She said she did not believe there
was a constitutionality problem with the retroactive
section. It would have no effect whatsoever on the validity
of the prospective provision of the bill. Another section
in Title 1, Alaska Statutes, which provided for a
presumption of severability if a provision of the bill can
stand alone, even if one other section has been declared
unconstitutional, that provision stands. She said it was
true that retroactive tax repeals and retroactive tax
exemptions always raise a question whether they are valid or
not. However, if there was a public purpose the Courts will
defer to the legislative judgment that there is a public
purpose and will uphold the legislation. She cited two
California cases in reference. One was an exemption from
local sales taxes for sales of geothermal energy
(California). The Court held there was a public purpose
both in the prospective and retroactive exemptions in
encouraging sales of geothermal energy. Another California
case regarding assessment practices of oil fields was also
cited.
Senator Adams asked if she had worked on retroactive clauses
in the past that were unconstitutional? Ms. Burke said she
basically had worked on both sides of the matter and in fact
cited an opinion that she drafted in 1980 that had to do
with a proposal to go back and refund past individual income
taxes. She said that in her opinion at the time and still
today that there wouldn't be a valid public purpose in those
circumstances.
Senator Adams asked what she would like to see for her
clients regarding this bill? Ms. Burke said she would
rather the matter not be left up to the Department of
Revenue and said the Legislature should make the decision.
At this point Co-chair Sharp advised the committee and
public that HB 51 would be moved to tomorrow's calendar.
JEFF BUSH, Deputy Commissioner, Department of Commerce and
Economic Development was invited to join the committee. He
said there may be some undue criticism around the table
regarding the Department of Revenue and the Supreme Court.
The Administration firmly believes the Department of Revenue
did the right thing in bringing the litigation and the
decision of the Court is a good one. He felt the committee
should recognize the decision, also as being a good one. It
would allow this body to enact tax provisions and tax laws.
He also felt it was important for the committee to pass SB
345 because from a policy point of view it was an important
piece of legislation. It was up to the Legislature to make
the decision and not the Internal Revenue Service or anyone
else at the Federal level. In reference to the fiscal note
submitted by the Department of Revenue, he said it was
admittedly difficult to analyze the amount of the impact.
However, he felt it was insignificant in relation to the
amount of potential loss of business to Alaska. It was
important for Alaska to maintain a good perception in the
international trade arena. He therefore urged passage of
the bill.
Senator Donley said this was a valid justification for the
case, but it did not explain not taking action three years
ago to remove the big question of the back tax. He felt the
Administration could have proposed this change at least
three years ago and the back tax exposure could have been
avoided.
Senator Pearce said she felt the bill was the right thing to
do because of overriding interests of industries such as,
timber, natural gas pipeline, oil and mining, seafood
processors and the domestic airline carriers that do
business overseas.
(Tape #116, Side B switched to Tape #117, Side A.)
Senator Pearce continued saying the State had been a part of
upgrading the fuel facilities, runways, the aprons, the
taxiways and put together every single piece to have two
world-class cargo facilities and still Alaska had some of
the lowest landing fees in the Northwest United States and
Canada. They provide excellent service, good fuel, and good
weather. She did note for the record, however, that her
constituents, along with those of Senator Donley, Senator
Leman and Senator Wilken deal with a great more noise with
the arrival of the cargo flights. She said she was also one
of the lead complainers especially when the carriers did not
follow the noise abatement rules set out by the FAA. It was
the foreign carriers that were the "bad guys" in breaking
this rule rather than the domestic carriers. She noted for
the committee that she found it interesting that the same
international carriers that were present today asking for
the tax break were the same ones that voted "no" on the
Anchorage Airport expansion. She said if there was a way to
make an amendment that would tax one carrier and not the
other she would.
Senator Adams MOVED amendment #1. Senator Sharp OBJECTION.
Senator Adams explained this would delete line ten on page
one. He was afraid there would be a legal challenge. He
agreed that Alaska should be open for business but not give
the State away.
Senator Parnell said from the testimony today companies had
reasonably read existing statutes. It permitted them to be
exempt from taxation in a manner similar to other states.
They have made their investment, created jobs and provided
services based on a tax regime they reasonably thought
existed. However, it is now understood does not exist
according to the Supreme Court. He felt he had heard at
least three legitimate public purposes to retain the clause.
One, companies would have to pass the costs for back taxes
on to consumers; two, there is potential economic
retaliation by other sovereigns against our citizens; and
three, principals of equity and fair dealings are
implicated.
Senator Adams said the problem was with not knowing what the
amount would be to reimburse companies since 1993.
Senator Donley said he thought the testimony was that no one
paid during this time.
Ms. Vogt rejoined the committee. She said the 883 issue had
been raised with taxpayers who are before them for other tax
Issues. They have then assessed according to their
policies. In some cases the matters are resolved and taxes
actually paid. More often the department has asked for a
waiver of the statute of limitations pending the outcome of
the OSG cases.
Senator Donley asked if the department policy would be to
refund taxes to those individuals who had already paid? Ms.
Vogt said she was not completely clear what would be done.
However, that seemed likely.
Senator Donley said he would like to know the amount and
what the department would do. Ms. Vogt said it may not be
possible to identify an exact dollar amount between the
State and the taxpayer.
Senator Parnell asked about 883 exposure and what was
actually being settled with the Department of Revenue. Ms.
Vogt said they were settling their tax liability overall.
Therefore it is impossible to attribute any particular
dollar to any particular issue. The State makes its
assessment but it is not always clear there is a meeting of
the minds on those amounts.
Senator Donley asked if the Department of Law was available
but Ms. Vogt said they had a previous commitment.
Co-chair Sharp said he was not interested in making any
gigantic refunds if there is a possibility of refunds on
settlements. He understood from Ms. Vogt that at this time
it would be very difficult to tell. He noted amendment #1
was before the committee and there was pending objection.
He asked the Secretary to call the roll. By a roll call
vote of 1 yea (Adams) and 5 nays (Sharp, Pearce, Donley,
Torgerson, Parnell, Phillips) amendment #1 FAILED.
Senator Adams MOVED amendment #2. Senator Torgerson
OBJECTED. He explained the amendment would provide a sunset
on the year 2001. He felt all taxes should come under
review.
By a roll call vote of 1 yea (Adams) and 5 nays (Sharp,
Pearce, Donley, Torgerson, Parnell, Phillips) amendment #2
FAILED.
Senator Donley advised the co-chair that he would like to
hear from the Department of Law regarding settlement of back
taxes. Senator Adams concurred.
Co-chair Sharp said this was an important matter to resolve.
He HELD SB 345 over to tomorrow's calendar and asked the
Department of Law be present. He also reminded the
committee HB 51 would be heard first on tomorrow's calendar.
SB 344 State Agency Telecommunication Systems was assigned
to Senator Parnell and asked that he work on that bill with
the sponsor and provide a report back to the full committee.
He further outlined the Wednesday morning and afternoon
calendars.
ADJOURNMENT
Co-chair Sharp recessed the meeting at approximately 11:00
a.m.
SFC-98 -1- 4/07/98
| Document Name | Date/Time | Subjects |
|---|