Legislature(2005 - 2006)SENATE FINANCE 532

04/13/2005 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 16 POWERS/DUTIES DOTPF/TRANSPORTATION PLAN TELECONFERENCED
Scheduled But Not Heard
+ SJR 14 REPEAL FEDERAL ESTATE TAX TELECONFERENCED
Moved SJR 14 Out of Committee
+ SB 158 MUNI TAX ON STATE CONSTRUCTION CONTRACTS TELECONFERENCED
Heard & Held
+ SB 147 SPORT FISHING FACILITY REVENUE BONDS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
= SB 70 CRIMES INVOLVING CONTROLLED SUBSTANCES
Scheduled But Not Heard
                                                                                                                                
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.                                                                              
                                                                                                                                

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