Legislature(2005 - 2006)SENATE FINANCE 532

04/15/2005 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved Out of Committee 4/14
Moved Out of Committee 4/14
Moved Out of Committee 4/11
Moved CSSB 131(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSSSSB 16(TRA) Out of Committee
Moved SB 88 Out of Committee
Heard & Held
Moved SB 158 Out of Committee
Scheduled But Not Heard
     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 second  hearing for  this bill in  the Senate  Finance                                                            
SENATOR  CHARLIE   HUGGINS,  the  bill's  sponsor,  explained   that                                                            
business  conducted  in this  State  should occur  in  a stable  and                                                            
predictable  climate.  "A  known"  incident   that  "highlights  the                                                            
difficulty"  encountered  when  this  is not  the  case was  when  a                                                            
subcontractor,  conducting an approximate  $400,000 State  contract,                                                            
was levied a $20,000 tax assessment from a local community.                                                                     
Senator  Huggins  continued  that  that  incidence  is  becoming  "a                                                            
trend", as  addressed in an Alaska  Municipal League correspondence                                                             
[copy  not  provided],  which  noted  that  three  communities  have                                                            
adopted  "a policy  of collecting  sales taxes  from subcontractors                                                             
doing  business  in  their  community  regardless   of  the  funding                                                            
source".  Those communities  have retained  legal representation  in                                                            
this regard.  He warned  that while  the practice  might be  limited                                                            
today, without  being addressed, it could become a  statewide issue.                                                            
The potential cost of this  practice "would place an undue burden on                                                            
the State; it would be  "unfair to contractors" were the Legislature                                                            
"not to correct that situation".  The solution proposed in this bill                                                            
is simple: it  would work for all parties; it would  create a stable                                                            
business environment; it  would protect the State; and would clarify                                                            
the rules  in this  regard going  forward. "It  is not punitive  and                                                            
does not seek to recoup any monies".                                                                                            
9:46:09 AM                                                                                                                    
STEVE  BOYD,   Alaska  Chapter,  National   Electrical  Contractors                                                             
Association  (NECA), testified  via teleconference  from  Anchorage,                                                            
and noted that he was available to answer questions.                                                                            
9:46:21 AM                                                                                                                    
KATHIE WASSERMAN,  Alaska Municipal League, spoke  against the bill.                                                            
She stressed that, "no  municipality in the State taxes a contractor                                                            
on  a  State  job.  This  issue  is  about  the  tax  imposed  on  a                                                            
subcontractor,  hired  by the contractor".  This  legislation  could                                                            
expand the  exemption to  such things  as the hotel  bed tax  or the                                                            
meal tax  charged to contractors  while performing  a State  job. It                                                            
could also  "be extended  to include  a subcontractor  hired  by the                                                            
subcontractor that is hired  by the contractor. Sales tax is a local                                                            
provision"  and, therefore,  "local governments  should exert  local                                                            
control  over  those  taxes.  Restrictions  on  local  sales  taxes"                                                            
currently exist  through the local  election process. The  State has                                                            
curtailed  its municipal  support  that  came in  the  form of  such                                                            
things as revenue  sharing and capital  matching grants while  local                                                            
community  expenses   relating  to  such  as  fuel  and  the  Public                                                            
Employees'  Retirement System  and the Teachers'  Retirement  System                                                            
(PERS/TRS)  have increased  "dramatically". "Tax  revenue is  one of                                                            
the  few  remaining  revenue  streams  left  to  communities".  Even                                                            
thought the State is exempt  from municipality property taxes, State                                                            
"properties  receive  the  same  benefits   and  services  as  local                                                            
property"  taxpayers do. The  decision as to  whether or not  to tax                                                            
subcontractors  should   be  made  by the  municipality.   Were  the                                                            
imposition  of such  a  tax to  have "a  detrimental  affect on  the                                                            
economy of the  community", local elected officials  should initiate                                                            
changes to those ordinances.                                                                                                    
Ms. Wasserman  stated that the terms  "consistency" and "stability"                                                             
have been used  throughout this legislation's proceedings,  "yet the                                                            
State has chosen  not to impose any State taxes".  That decision has                                                            
been  left  to  local   communities.  It  would  be  impossible   to                                                            
incorporate a  consistent taxation methodology as  the more than 190                                                            
communities that do tax  have "different needs, different resources,                                                            
different  locations;  there is  not and  cannot  be consistency  in                                                            
taxing".  Oil  companies  that  operate  globally  must familiarize                                                             
themselves  with  different   tax  structures  in  each  locale.  "A                                                            
nationwide  tax  would  be more  consistent,  probably  make  things                                                            
easier for oil  contractors, but would it be great  for the State of                                                            
Ms.  Wasserman   reminded  the  Committee   that  the  majority   of                                                            
Department  of Transportation and  Public Facilities (DOT)  projects                                                            
are conducted  in either Anchorage  or Fairbanks. The concern  about                                                            
large  taxation  on DOT  projects  therefore  should  be  alleviated                                                            
because neither  of these  two communities  imposes sales taxes.  In                                                            
addition, most airport  projects occurring in the Sate are typically                                                            
92 percent  to 100 percent  funded through  Federal Aviation  Agency                                                            
(FAA)  funds  rather  than State  funding.  In  conclusion,  AML  is                                                            
requesting that the Legislature  "trust local communities to do what                                                            
is right for our shared constituents".                                                                                          
Senator  Olson inquired  as to  how local communities  address  road                                                            
maintenance  issues such as  broken asphalt  that might result  from                                                            
heavy equipment used in DOT contract projects.                                                                                  
Ms. Wasserman  responded that  the community  where she resides  has                                                            
had to  deal with such  issues. In  one case,  the community  had to                                                            
address  boardwalk   damage  with   community  general  maintenance                                                             
funding.  Demands to  the contractor  for  money to  fix the  damage                                                            
would  be  inappropriate  as  all  he  had  done  was  to  "run  the                                                            
equipment"   for   a  contracted   project   down   the   Boardwalk.                                                            
Unfortunately  the Boardwalk  construction  was inadequate for  that                                                            
type of use.                                                                                                                    
Senator  Olson inquired as  to what other,  oftentimes inadvertent,                                                             
burden  communities   might  have  had  to  address  in  regards  to                                                            
subcontractors or contractors.                                                                                                  
Ms. Wasserman  replied  that typically  when  a contractor  conducts                                                            
work in a community,  a certain amount  of administrative  work must                                                            
be conducted by  the city. This is usually not accounted  for in the                                                            
project  expenses.  It  is acknowledged   that the  workers  on  the                                                            
project do contribute  to the local economy via such  things as meal                                                            
taxes  and  bed  taxes,  and  other  support  of  local businesses.                                                             
However, "there  is still a very big  revolving seed of money  where                                                            
the majority of the money  and the payroll" moves between the agency                                                            
to the large  contracting corporations.  "The cities a lot  of times                                                            
certainly do not come out as well as other entities".                                                                           
9:52:18 AM                                                                                                                    
Senator Olson noting that  during the April 13, 2005 hearing on this                                                            
bill,  he had  asked  Steve  Boyd of  the  Alaska Chapter  of  NECA,                                                            
whether  a local  building  permit  is required,  as  that  building                                                            
permit fee would assist  in supporting associated city expenses. The                                                            
reply from Mr.  Boyd was that no local building permit  was required                                                            
for the  contract work.  To that  point, he inquired  to the  reason                                                            
that for the permit exemption.                                                                                                  
9:52:39 AM                                                                                                                    
Ms. Wasserman  understood that State  projects are typically  exempt                                                            
from the permitting process.                                                                                                    
Senator Olson pointed out  however, that the contractor is a private                                                            
Ms. Wasserman surmised  that when a contractor is working on a State                                                            
project, the State exemption would apply.                                                                                       
Senator Stedman stated  that many communities have imposed a maximum                                                            
tax  limitation,  of, for  example,  $1,000 or  $500,  as the  total                                                            
amount of tax  that could be collected  on a single sale.  Therefore                                                            
$1,000  might be the  total tax  amount collected  on a one  million                                                            
dollar  State contracted  project occurring  in a  community with  a                                                            
local five percent sales  tax. However, it should be noted that some                                                            
communities do not have a limit. That is a local prerogative.                                                                   
Senator Stedman  theorized a scenario in which the  contractor might                                                            
pay the  tax on the entire  project; however,  due to the fact  that                                                            
most projects  have multiple  subcontractors,  it might be  feasible                                                            
that each of those subcontractors  would also be required to pay the                                                            
local sales tax  on work relating to that project.  This would raise                                                            
the issue of  multiple layer or "double"  taxation. While  he agreed                                                            
that the sales tax issue  should be a decision of local governments,                                                            
at some point,  there is a concern  when dealing with large  capital                                                            
projects that  a local sales tax might be charged  numerous times on                                                            
the same project.                                                                                                               
9:54:51 AM                                                                                                                    
Ms. Wasserman  appreciated the concern; however, countered  that DOT                                                            
could take the  position "that this doesn't work for  us", and, as a                                                            
result,  were negative  affects to  occur on the  community then  it                                                            
could address the situation  and make changes. Another option, which                                                            
she believed would not  occur as such jobs are sought after, is that                                                            
contractors could decide  not to accept jobs in various communities.                                                            
In conclusion,  the decision should be left to the  community rather                                                            
than DOT or the contractors.                                                                                                    
Co-Chair Green  opined that the local community could  also refuse a                                                            
project if they  felt that "the detriment to the community  would be                                                            
greater than the appeal".                                                                                                       
Senator Hoffman stated  that the issue of double taxation could also                                                            
apply  to the purchase  of,  for instance,  a case  of apples.  That                                                            
product would be subject  to multiple taxes ranging from the airport                                                            
tax levied  on the carrier delivering  it to the community,  the gas                                                            
tax charged  to the transporter  delivering  it from the airport  to                                                            
the store,  or,  it could  be transported  from the  airport to  the                                                            
store in  a rented vehicle  to which a local  tax would be  applied.                                                            
The store  would than collect  the local tax  from the consumer  who                                                            
purchased the apples. It  could be difficult to separate the various                                                            
taxes in order to specify that only one tax would be levied.                                                                    
Co-Chair Green  expressed that there is a "distinction"  between the                                                            
imposition  of a local  tax on a  purchase of a  product such  as an                                                            
apple and "the  State paying millions of dollars for  local projects                                                            
… which money  does not go to the project". That is  the issue being                                                            
addressed in this legislation.                                                                                                  
9:57:40 AM                                                                                                                    
Senator Dyson  observed that "the  sales tax on the services  that a                                                            
subcontractor  provides"… differs  "in order of magnitude"  from the                                                            
taxes  placed on  the sale  of  consumer goods  such  as apples.  He                                                            
agreed with Co-Chair  Green's comment that the action  of imposing a                                                            
local  tax on  State  resources that  are  being used  to  construct                                                            
something  of "significant  value to  the local  community …  sounds                                                            
like the  local community  is looking  for another  way to bite  the                                                            
hand  that is feeding"  it  or "providing  a huge  resource at  very                                                            
little direct cost to that community".                                                                                          
Co-Chair  Wilken  moved  to  report the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal note.                                                                        
There being  no objection, SB 158  was REPORTED from Committee  with                                                            
zero fiscal  note #1,  dated April  6, 2005 from  the Department  of                                                            
Commerce, Community and Economic Development.                                                                                   
9:59:40 AM                                                                                                                    

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