Legislature(2005 - 2006)SENATE FINANCE 532
04/13/2005 09:00 AM FINANCE
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
9:31:50 AM SENATE BILL NO. 158 "An Act prohibiting the imposition of municipal sales and use taxes on state construction contracts and certain subcontracts; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. DEBBIE GRUNDMAN, Staff to Senator Charlie Huggins, read testimony into the record as follows. During the course of business in the last couple of years, subcontractors in the construction industry, who work in some areas of the state have experience negative financial impact due to the imposition of local sales taxes on State DOT/PT funded projects. These taxes have been assessed on the value of the subcontract - we are not talking about the 1. purchase of incidental materials, 2. renting of equipment, 3. purchasing food or lodging Those items would be taxed. Again, we are talking about the construction contract or subcontract. 1. The State cannot afford to have an increase in the cost of construction projects due to the levying of sales taxes on the State construction contracts and subcontracts awarded directly in connection with the project funded under the construction contract. 2. While all municipalities do not assess this sales tax, and many municipalities DO have tax caps - the policy needs to be consistent statewide. Example: In one instance, on a Nome Airport Project, a construction contract was awarded to Quality Asphalt Paving (QAP). QAP and Diamond Electric entered into a subcontract directly in connection with the project funded under the construction contract. Dimond Electric was assessed a sales tax of over $20,000 on the value of their subcontract. This tax was unexpected and not considered in their bid. SB 158 will prohibit the imposition of municipal sales and use tax on State construction contracts and certain subcontracts and remedy the inequity that exists. Co-Chair Green ordered the bill HELD in Committee until later in the meeting. 10:42:02 AM SENATE BILL NO. 158 "An Act prohibiting the imposition of municipal sales and use taxes on state construction contracts and certain subcontracts; and providing for an effective date." This bill was heard earlier in the meeting. STEVE BOYD, Alaska Chapter of National Electrical Contractors Association read his testimony into the record as follows. We feel that the scope of the State projects logically links the subcontractors to the general contractor and therefore subcontract values should be exempt from local taxes. Bids on projects are generally solicited from a general contractor for a total project including subcontractor work and the coordination of their work thereof. Subcontractors can therefore only work for the State via this "conduit" established by the State and the general contractor and language that binds the subcontractor to the State as much like the general contractor is bound to the State. It has come to our attention that subcontractors have been charged local sales taxes and in particular the City of Nome assessed Diamond Electric ($20,000), Alaska Industrial Insulation and Fireproofing($6,100), Midnight Sun Services, Northland Tile, Arctic Striping and Premier Construction on an airport project in Nome, While AirTek from Soldotna was assessed a tax of $1,800 by the City of Sand Point on an airport project. This is not just an electrical contractor issue, but one that impacts any subcontractor. For example a painting contractor… Negative financial impact to the State. For example a tax of $20,000 assessed on a subcontractor would probably result in a mark-up of, for discussion sake, of ten percent, or $22,000 included in the bid to the general contractor, which perhaps marks up the value of the subcontract by ten percent, so the State would see $24,200 increase in project cost. As an industry association it is our goal to create a consistent and equitable practice statewide so everyone knows the rules. This is why we are here today after evaluating the steps the contractor took in seeking relief. We feel clarification of the statute would be in the best interest of the State and our industry. 10:45:51 AM Senator Olson asked the amount of the subcontract with Diamond Electric. Mr. Boyd replied the amount was approximately $419,000. 10:46:26 AM SENATOR HUGGINS, sponsor of the bill told of three elements instigating this legislation. The first was the experience of Diamond Electric and others in Nome. It was determined that State agencies had no established guidelines to address the taxation of subcontractors in Alaskan communities. Secondly, this practice created an "unstable, cloudy business environment". Finally, the practice "wasn't right." In talking with parties across the State, this was agreed upon. Senator Huggins read an e-mail message addressed to the director of the Alaska Municipal League demonstrating this was not "just a community that stumbled on an isolated practice" and would expand to other communities if allowed to continue. He noted that identifying information is omitted. "I think most communities that use as their legal firm, [name of firm], have a policy of collecting sales tax from subcontractors doing business in the community regardless of the funding source." Senator Huggins restated the communication that communities that are clients of certain legal firms would adopt this taxation and the practice would spread. 10:48:37 AM Co-Chair Green asked the number of communities already involved. Senator Huggins told of at least three. Each community is a client of the unnamed legal firm. 10:48:57 AM Co-Chair Green asked if this practice continues whether it would impact the State capital budget. Senator Huggins answered "absolutely" and noted the State currently has appropriated approximately $500 million for capital projects and an assessment of five percent for subcontract taxes added to this amount would be "staggering". He added that the taxation would be assessed at the local sales tax rate, and the amount could be higher. 10:49:30 AM Co-Chair Green asked if the community that has chosen to do this did so to offset the loss of other funds. 10:49:42 AM Senator Huggins replied that the rational varies. 10:50:02 AM Senator Olson asserted that the Murkowski Administration supports local control and local self-funding. The practice outlined in this legislation has occurred for a number of years and cities have established a history of such; he knew of other projects. 10:51:05 AM Co-Chair Green remarked that the Committee should be aware of this practice in drafting the annual capital budget. 10:51:13 AM Senator Huggins noted the difficulty in that the City of Nome has been very inconsistent in applying this local tax. This creates a "sketchy business environment." 10:51:41 AM Senator Bunde commented that he appreciated local control. However in some areas, local support is defined in "spending other peoples' money" in lieu of local contributions. He characterized this practice as "double dipping" in that a community secures a State- funded improvement, then attempts to receive funding from that project. 10:52:43 AM Senator Hoffman commented on the need for uniformity. This matter was brought forward by a subcontractor unaware of the sales tax. The practice of other communities should be reviewed and a determination should be made whether those communities assess a tax on subcontractor activities or provide an exemption. Many contractors operate in small communities in which they are not based. The community must accommodate for these activities, for example through the repair and maintenance of roads damaged by the use of heavy equipment. 10:54:42 AM Senator Huggins agreed that the issue is uniformity. Other communities do not tax subcontractors. 10:55:06 AM Co-Chair Green understood that subcontractor employees would pay a sales tax on goods purchased in the community. Senator Huggins affirmed. 10:55:21 AM DAVID LANTZ, Owner and General Manager, Diamond Electric, testified via teleconference from Anchorage, that halfway through completion of the project, the City of Nome notified the subcontractor of the sales tax that would be levied. The amount of the tax was therefore not included in the bid. This tax is a retail tax and the subcontract was not a retail purchase. He attempted to work with the City to rectify the situation and also hired attorneys; however, the company was eventually presented with a tax lien and was forced to pay the tax. The tax and attorney fees totaled over $30,000. He noted the company and workers also paid sales tax on groceries, housing, concrete and rental of equipment. As a result, the company was double-taxed on almost 25 percent of the contract. 10:58:06 AM Senator Olson asked if the company purchased a permit or other licenses from the City. Mr. Lantz answered the company did not. 10:58:41 AM DENISE MICHELS, Mayor, City of Nome, testified via teleconference from Nome in opposition to the bill. The City views this sales tax as an option to generate local revenue. The City increased its sales tax to offset increased costs of insurance and other expenses. Unlike other communities, Nome does not have a large tax base. Subcontractors utilize City services, including roads, ambulances and police, who arrest workers acting unruly. This tax is fair to the City of Nome. She informed she is a contractor and understands the need to ensure that all fees are known; this tax should not have been a surprise for Diamond Electric. 11:01:34 AM Senator Huggins spoke highly of Mayor Michels. Senator Huggins explained that the Department of Transportation and Public Facilities imposes an administration fee on capital projects because it must provide staff to oversee the project. The City of Nome should benefit from the influx of subcontractors through revenue generated from hotels, restaurants, etc. Co-Chair Green ordered the bill HELD in Committee.