Legislature(1995 - 1996)
04/12/1996 01:30 PM Senate JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 341 TAX APPEALS/ASSESSMENT/LEVY/COLLECTION
REPRESENTATIVE GREEN, sponsor of HB 341, gave the following
overview of the legislation. HB 341 was introduced last year as a
tax court bill but during interim hearings the parties involved
determined a tax court would not be the best approach to streamline
and create a more fair method of appeals. In January the
Administration submitted a tax bill and the two bills were merged.
The Department of Revenue has spent many hours working with
Representative Green's staff on this legislation however two areas
of dispute remain.
The first point of contention is the establishment of a tax appeal
board that would be nominated by the Governor and confirmed by the
legislature. The second point of contention is the ability of the
tax applicant to go directly to Superior Court and seek a de novo
review after the first informal review by the Department of
Revenue. Under current law the Department of Revenue holds both an
informal review and formal review. After the formal review, the
case can be appealed to Superior Court but the Court generally
reviews the record and does not have a de novo review. Taxpayers
want a complete review, starting from scratch. The Department of
Revenue has agreed the formal review should be conducted elsewhere.
In the House Finance Committee review of HB 341, Paul Frankel, a
national tax expert, testified that the final appeal should be
removed as far as possible from the Department of Revenue. One
additional minor problem is the transition for people who have
appealed under existing law, but may fall under the new law.
Number 274
SENATOR ADAMS commented he planned to offer an amendment for the
Department of Revenue to delete AS 43.05.242, which allows the
direct appeal to the Superior Court, and to change the appointments
section. He asked Representative Green his opinion of the
particular amendment.
REPRESENTATIVE GREEN stated the goal was to try to establish, in
fact and perception, a review process that was removed from any
bias. He hoped as an Alaskan citizen, the department would have a
bias, since they issue what they believe to be a fair tax statement
however, when a taxpayer disputes the amount owed, independent
people need to review the case, hence the reason for legislative
confirmation of the appointments of administrative law judges.
REPRESENTATIVE GREEN noted the ability to go directly to court
after the information review is not an uncommon situation. When it
is obvious the issues of contention remain after an informal
review, it is both expensive and time consuming to go through a
second review with the same people to get the same result, and then
go to a Superior Court judge who can only review the hearing
records.
SENATOR ADAMS asked Representative Green if his strongest objection
is to the appointment of the administrative law judges by the
Administration. REPRESENTATIVE GREEN responded of the two issues,
his strongest objection is to the fact the Department of Revenue
does not support a direct avenue for taxpayer appeal to the
Superior Court. He stated he was willing to modify the method of
selecting the administrative law judges.
Number 315
DAN SECKERS, Chairman of the Tax Committee for the Alaska Oil and
Gas Association (AOGA), gave the following testimony on HB 341.
AOGA is a trade association whose 19 members comprise the majority
of the oil and gas exploration, production, transportation,
refining, and marketing activities in the State of Alaska. The
present tax appeal process is seriously flawed in practice and
denies the taxpayers the opportunity to have their tax appeals
heard and decided by a truly independent and impartial tribunal.
HB 341 would significantly reform this process by establishing a
form outside the Department of Revenue and independent of it, where
tax appeals would be heard, tried, and decided. The bill would
also clarify the standards to be used when reviewing claims and
positions asserted by the department against the taxpayers. The
bill would promote greater efficiency and speed, and provide for
greater control over the discovery process, an area of abuse in the
past. The great majority of the provisions of the CSHB 341(FIN)
reflects consensus not only within industry, but also between the
industry and the Department of Revenue. There are two significant
areas in the bill the department opposes and AOGA supports:
legislative confirmation of the administrative law judges; and the
option for taxpayers to go directly to Superior Court instead of to
the administrative law judges.
MR. SECKERS stated AOGA supports legislative confirmation of the
administrative law judges. They may decide cases involving tens, or
even hundreds of millions of dollars in tax claims and their
decisions could affect all Alaska taxpayers. It is essential they
be qualified, capable, and fair. To achieve this, AOGA believes
there need to be three essential elements in the process of
appointment. First, there must be an opportunity for taxpayer
comment on the qualifications of potential appointees before
confirmation. Second, the process must be public and open. Third,
there must be some independent body or entity in the process to act
as a check on the executive branch's otherwise unlimited discretion
in making these appointments to prevent any improper influence the
executive branch might otherwise have in the appointment or
reappointment of judges. Legislative confirmation provides all
three of these essential elements in the appointment process.
The Department of Revenue proposed, in the House Finance Committee,
to run the appointments through the Alaska Judicial Council in a
manner similar to that used in appointing judges to the state
courts. At that time the AOGA Tax Committee had not had sufficient
time to consider the proposal. AOGA believes that properly framed,
the judicial council approach can be a reasonable alternative to
legislative confirmation, and has developed an amendment to do so.
The amendment closely follows the one offered by Rep. Brown on
behalf of the Department of Revenue in the House Finance Committee,
with two changes. The first change is a technical amendment on
page 1, lines 9-12, which clarifies there is no requirement to
create additional administrative law judge positions besides the
chief, but if an additional judge is appointed, the Governor must
choose each from a slate of nominees presented by the Judicial
Council. The second difference is also technical: it clarifies a
judge cannot be reappointed if the Judicial Council recommends
against the appointment. This proposed amendment does not mean
AOGA is withdrawing its support of legislative confirmation, rather
it finds the judicial council approach equally acceptable.
Although the Governor is not opposed to legislative confirmation,
the Department of Revenue is, therefore the possibility of a veto
exists. AOGA wants tax reform this year and can accept either
alternative; it defers to the legislature's judgment to decide
which approach should be included in the bill.
MR. SECKERS discussed the provision allowing taxpayers to appeal
directly to Superior Court instead of to the administrative law
judges. AOGA did not propose this option but finds merit in the
proposal and endorses it. AOGA agrees with the Administration that
most taxpayers will prefer to use the tax expertise and procedural
rules of the new system of administrative law judges, but there may
be times when it may be more efficient and expedient to proceed
directly to court. A dispute may involve constitutional issues
which an administrative law judge cannot rule on. As Mr. Frankel
testified before the House Finance Committee, even the federal
system offers taxpayers a choice. Additionally, over one-half of
the states allow such an option. Superior Court judges are
competent professionals who have responsibility for hearing very
complex cases, such as royalty and commercial litigation. Under
current law, Superior Court judges review the formal hearing
decisions of the Department of Revenue. The option would not cost
the state additional money and may result in reduced expenditures.
This bill also requires that the standards of review used by the
Superior Court judges under this option be the same as under the
administrative law judge system. By making this option available,
the state will ensure taxpayers it is committed to a fair tax
appeal process.
MR. SECKERS noted while confirmation and the "go directly to court"
option are the only two major unresolved issues in the bill, AOGA
has some concerns over the transitional provision. Both AOGA and
the Department agree in principle that taxpayers who are still in
the first stages of the existing formal hearing process should be
allowed to use the new procedures. Though AOGA and the department
have not come to agreement on the precise wording of such a rule,
AOGA will continue to work on options for an appropriate transition
rule.
MR. SECKERS concluded CSHB 341 (FIN) is an excellent bill. AOGA's
testimony on the few remaining areas of disagreement must not
detract from the fact that there is great deal more consensus and
compromise in the bill than controversy.
Number 456
SENATOR ADAMS asked Mr. Seckers to review his proposed amendment to
see if it is compatible with AOGA's amendment.
DEBORAH VOGT, Deputy Commissioner of the Department of Revenue,
discussed the department's position on CSHB 341(FIN). The
department opposes HB 341 in its present form. It has worked hard
on the legislation with a variety of people for several months,
however has reached an impasse over at least one major provision.
The Department of Revenue's current procedures for resolving tax
appeals involves the following. A dissatisfied taxpayer has the
option of going to an informal conference. No depositions are
taken, no witnesses are heard, and the proceedings are not
recorded: the proceeding is not adversarial. The taxpayer gets an
opportunity to present arguments and missing information. The
informal conferee issues a written decision. A taxpayer can skip
the informal conference and instead have a formal hearing in the
Commissioner's Office held by a specialized hearing officer or the
Commissioner. Because the Commissioner can sit in a judicial
capacity, when the case enters the formal hearing process, the
Commissioner must distance him/herself from the management of that
case on a day-to-day basis. That dual role presents difficulties
for every Commissioner of the Department of Revenue which is one of
the reasons the department supported moving the hearing process out
of the department. The formal hearing is a requirement before
going to court. This model is similar to many other administrative
agencies, both state and federal, and has been litigated and upheld
many times. There is a perception by taxpayers that this tax
system is stacked against the taxpayer which is the second reason
the department agreed to consider moving the tax dispute resolution
program out of the department.
MS. VOGT explained the provisions of the bill. HB 341 sets up an
independent office of tax appeals within the Department of
Administration. It sets criteria for selection of administrative
law judges who must have tax expertise. The administrative law
judge would serve for a term certain and would be dismissible only
for cause. Those two provisions were included to give taxpayers
the assurance that appointments of administrative law judges would
not be arbitrary. The administrative law judge would issue
decisions that would not be adopted by any Commissioner.
Currently, decisions made by the hearing officer must be adopted by
the Commissioner of the Department of Revenue. Moving the program
to the Department of Administration empowers the administrative law
judge to issue a final administrative decision: it does not have to
be adopted by anyone before it can be appealed to Superior Court.
The administrative law judge could adopt regulations governing
procedures in tax cases. The legislation establishes a standard of
review for tax cases. Actual determinations would be decided upon
the preponderance of the evidence unless a different standard is
set by law. Legal determinations would be made on a substitution
of judgment basis. Issues that are committed to the agency's
discretion, whether they be factual or legal, would remain within
the department. HB 341 makes some provisions for curbing the
rampant discovery that has characterized the large oil and gas
cases in the past.
Number 530
CHAIRMAN TAYLOR asked how the bill takes care of abusive discovery
practices. MS. VOGT replied the bill makes substantial steps but
does not go quite as far as the Department of Revenue would like.
It requires the parties to come before the administrative law judge
with a discovery plan. The plan has to be consistent with the
efficient, speedy, and just resolution of the case. Mr. Frankel
testified that he does not believe there should be any discovery in
tax cases.
MS. VOGT continued. The legislation also requires the parties to
make fact stipulations wherever they can. It establishes a system
for publicizing and compiling tax decisions so that taxpayers and
the state will know what the precedent is. The rules would be
available for all to see, auditors would know how to audit, and
other taxpayers would know how to fill out their tax returns.
The department agrees with these provisions but has two major
problems with the bill, the first being the appointment of
administrative law judges. The original draft of HB 341, and the
Governor's bill, simply moved the hearing officer to the Department
of Administration. The change to legislative confirmation is
unconstitutional according to Hammond v. Bradner. The response to
the constitutional issue was to create a board of tax appeals
rather than a single judicial officer however this approach more
than doubles the fiscal note and makes for a hybrid, cumbersome
agency. Usually boards and commissions operate like a committee,
with a quorum and majority votes. Normally when a board or
commission has judicial powers, it hires a hearing officer to make
recommendations. The commissioners of a board of tax appeals would
be the judges. The Department of Revenue proposed the judicial
council alternative which would provide the assurance to taxpayers
that they will receive independent review, and will allow the
fiscal note to reflect the need for only one administrative law
judge and one half-time clerk. The Administration stongly prefers
the judicial council approach.
TAPE 96-36, SIDE B
MS. VOGT emphasized the more difficult problem is the provision
that allows taxpayers to go directly to court and is the reason the
department cannot support the legislation. The provision on page
16 negates everything in the bill prior to it because it allows the
taxpayer to go from informal conference straight to court. The
consequences of this provision are that there would be no
limitations on discovery as discovery would follow Superior Court
rules, there would be no fact stipulations, and the judge deciding
the case would not be required to have any tax expertise. It is
incumbent on the Department of Revenue and the legislature to think
carefully about the administration of its tax provisions because
the most important aspect of sovereignty is the power to tax. Tax
laws must provide for expertise, uniformity, balance, and
certainty. A judge without tax expertise would decide a case and
set a precedent for tax law. Tax laws can be arcane, complex and
confusing and very controversial. The precedents these cases can
set for other cases can be very important. One of the consequences
of the direct to court rule is that Superior Court decisions are
not published and they are not binding on one another. HB 341
provides that the decisions of the tax appeals office be published.
Cases should go from an administrative law judge to the Superior
Court because the trial court decision would be made public.
MS. VOGT provided tables describing how other states handle this
issue. Every state has some sort of body of experts who have been
empaneled to decide tax cases. In some states that body is in-
house, others have created independent boards or tribunals. The
tables divide the jurisdictions into three categories. Table 1
applies to states where tax authorities conduct tax appeals.
Number 532
CHAIRMAN TAYLOR asked if the Department of Revenue has had any
taxpayers go to court on oil and gas tax cases. MS. VOGT answered
yes.
Referring to Table 1, MS. VOGT indicated of the 25 jurisdictions
that have tax appeal boards within the taxing authority, 10 require
taxpayers to use it, 11 allow taxpayers to skip that forum if the
taxpayer pays all taxes due first. Among the states that allow the
taxpayer to skip the forum, the taxpayer must pay the taxes and
then sue for a refund. The court system is often used by taxpayers
when they challenge the validity of the law rather than the
application of the law.
Number 518
CHAIRMAN TAYLOR questioned whether that requirement was
contemplated as an alternative in the legislation. MS. VOGT
replied in HB 341 the taxpayer has to post a bond before going to
Superior Court, but does not have to prepay taxes. CHAIRMAN TAYLOR
asked if that alternative was part of the discussion. MS. VOGT
stated that alternative was never raised to the department as an
option.
CHAIRMAN TAYLOR asked if a prepayment requirement would act as a
significant constraint on people opting out of the administrative
law panel. MS. VOGT believed it would be a significant constraint,
but she did not know whether the other parties would support that
provision.
MS. VOGT drew the committee's attention to Table 2 which describes
state appeal procedures in states with independent forums. Seven
states that allow the taxpayer to skip the forum require prepayment
of taxes before going to court. New Hampshire and Idaho permit a
taxpayer to go straight to court without prepayment. Many states
that allow taxpayers to prepay before going to court do not allow
the taxpayer to go to court in defense of an assessment. If the
taxpayer pays the tax and has not challenged the law, and owes more
taxes after a reassessment, the taxpayer cannot go to court at that
time.
CHAIRMAN TAYLOR asked if that provision is in HB 341. MS. VOGT
answered none of that is in the bill.
In conclusion, MS. VOGT repeated the bottom line is that taxes are
such an important component of the governmental function, they
should be reviewed by experts. The Department of Revenue believes
if the tax function is going to be moved out, it needs to be done
in a way that everyone feels is fair, independent, unbiased, and is
protected from political influence. Once that system is in place,
however, everyone should be required to use it so that we have a
consistent body of tax law that taxpayers and auditors can rely on
and understand. Another aspect to this system is that the
Department of Revenue will not have the option of going to court if
it is ruled against.
CHAIRMAN TAYLOR indicated if the state is going to create the ball
field, it has to play on it. He noted if one party will have the
option of going to court, it needs to have some parameters, such as
the prepayment requirement, and suggested either side have the
option of going to court. He expressed concern that forum shopping
will occur. When a court decision favors a taxpayer on one issue,
but not on a second issue, another taxpayer will know whether to go
to court, depending on the issue. He believed the only
justification for depriving people of the opportunity to go
straight to court would be because of an inherent lack of
competence within the judicial system being able to handle the
complexity of the litigation involved.
Number 447
MS. VOGT did not believe the problem to be a lack of confidence in
the judicial system, but rather a lack of tax expertise. If the
judicial council approach is used, administrative law judges will
be chosen for their tax expertise. Some of the cases take up to
one year to decide. The judicial system has submitted a fiscal
note for the straight to court option of $149,000 in anticipation
of bringing in judges pro-tem to backfill behind Superior Court
judges assigned to major tax cases. That cost could be saved if
the direct to court option is deleted. The Department of Revenue
believes that option does more than even the playing field, it tips
the playing field in favor of the taxpayer.
Number 408
CHAIRMAN TAYLOR asked Ms. Vogt to discuss the issue of transition.
MS. VOGT explained the transition provision was originally drafted
to simply say whatever gets appealed after the effective date of
the act uses the new system, cases currently pending before the
Department of Revenue stay with the department. There are a number
of reasons existing cases should stay within the department. Many
of the cases are currently in progress, some have already been
heard and are awaiting a decision, but more importantly those cases
did not come up through the department in contemplation of new
provisions, and some cases may have skipped informal conference.
After this provision was crafted, one taxpayer approached the
department because he/she had chosen not to have an informal
hearing. The department gave the taxpayer the option of having an
informal hearing, and tried to craft language to accommodate that
taxpayer. That language appears on page 19 in Section 17 of the
bill and provides for trigger points based on whether there has
been material discovery by either party, or whether substantive
motions were filed. Both of those terms are very vague, and leave
up in the air who will decide whether a motion that was filed is
substantive. It also requires that consent to that stipulation not
be unreasonably withheld, but again it does not specify who will
determine "unreasonable." Everyone recognizes that there are
problems with that language that need to be addressed. The
Department of Revenue would prefer to go back to the original,
simple language requiring new cases to use the new system, and
existing cases to use the existing system, unless the parties agree
to change forum.
Number 358
CHAIRMAN TAYLOR informed Ms. Vogt he had prepared a new transition
provision to take into account some of those concerns. It reads as
follows:
Sec. 17. TRANSITIONAL PROVISIONS. The remedies and
procedures provided by this act apply to all revenue tax
appeals in which a request for formal hearing has been filed
with the Department of Revenue on or before the effective date
of this Act. A taxpayer who has filed a request for formal
hearing on or before the effective date of this act may elect
within 45 days from the enactment of this act to use the
remedies and procedures existing prior to the enactment of
this act.
He explained the amendment would allow the taxpayer to stay within
the system, or to opt out.
MS. VOGT asked for more time to review the amendment. CHAIRMAN
TAYLOR commented on the time constraints imposed on the committee,
and the several amendments proposed to this legislation.
SENATOR ADAMS asked whether the Governor will veto this legislation
if it passes as is. MS. VOGT indicated the department will
strongly ask the Governor to veto the bill. She believed the
Governor has discussed his concerns with oil and gas industry
representatives. SENATOR ADAMS asked which concerns are most
critical. MS. VOGT responded all three provisions that have been
discussed today.
Number 310
CHAIRMAN TAYLOR noted his concern with the selection of the hearing
officer is that the judicial council system works well for judges,
but due to the magnitude and complexity of tax cases, it may not
fit well within the current judiciary as it has not been trying
these cases. He expressed frustration that this bill would
continue to allow an Administration to continue to utilize a
bureaucracy within it for an appeal process. At some point in time
one has to leave that system and go into the court system anyhow,
although it may take years. Over the last couple of years, he co-
sponsored legislation to ex-post facto rollback the statute of
limitations on tax cases because someone had forgotten to get an
oil company to sign off and waive rights, a bizarre piece of
legislation at best. He apologized for helping to sponsor it, but
it was an attempt to resolve some of these large tax issues. If an
appointment process is established that is very much controlled by
the Administration, it is difficult to believe that politics would
not invade and infect that system. In just the last year, this
Administration has dismissed the Babbitt case, forfeiting Alaska's
rights under its Constitution to the federal government on the
drafting of subsistence regulations. The Administration has
dismissed the Venetie case, creating 226 tribal entities that will
be devastating regarding custody cases, the Native child welfare
act, and commercial transactions. The settlement of the Tyson case
has raised a lot of eyebrows. In addition the Senate has been
contemplating hiring a special investigator to review a settlement
by this Administration with one of the labor unions. Billions of
dollars of tax cases have been outstanding for years that various
governors have chosen to settle. He asked Ms. Vogt whether she was
aware of any Governor dismissing or settling a tax case for 15
cents on the dollar.
Number 255
SENATOR ADAMS noted the previous Republican Administration was
wrong in filing the Babbitt and Venetie cases which is why this
Governor had to dismiss them.
CHAIRMAN TAYLOR responded he understood the Governor may have made
those decisions based on law, however the Attorney General informed
the legislature those decisions were not based on law, they were
based on other reasons.
SENATOR ADAMS stated whoever has the gold makes the rules and the
Attorney General at that point was working for another governor.
CHAIRMAN TAYLOR agreed that is the problem, and pointed out it
often will depend upon who does have control. Setting up a
selection process that is dominated by the executive branch or the
legislative branch is cause for concern. Merely utilizing the
judicial council to screen applicants may help, but requiring
nomination by the Governor and confirmation by the legislature
seems burdensome.
MS. VOGT believed there are provisions in HB 341 that address some
of those concerns. The judicial council is a constitutional
council made up of seven members and would solicit public comment
on pending applicants. The names would then be submitted to the
Governor for selection. The administrative law judge would then be
appointed for a two year term and after the two years would be
reviewed again by the judicial council with the same opportunity
for public input. The second term would be for four years, and the
administrative law judge could not be fired for anything except
cause. Those two conditions were included in the bill to address
the concerns articulated by Chairman Taylor.
CHAIRMAN TAYLOR stated while the administrative law judge has the
case on formal appeal, the process is closed. MS. VOGT noted the
Department of Revenue would be delighted if the process was made
open to the public. The bill originally had such language making
the appeal process open to the public, but that was removed after
taxpayers raised strong objection.
Number 191
CHAIRMAN TAYLOR commented that everyone would know what the amount
in question was if the case was filed in court and there is a
prepayment provision. Then if a governor decided to dismiss a
case, and the public was aware of the disputed amount, the
Administration would be called upon to explain the settlement.
There is a lot of frustration about the lengthy amount of time
these cases take, and the bill should at least quicken the process.
SENATOR GREEN questioned whether the bill provides for the
legislature to see the public input on nominees provided to the
judicial council. MS. VOGT stated the fact that a candidate is up
for review would be published, but she did not know how much would
be disclosed to the public. For judicial appointments, a bar poll
ranks judicial applicants and the results of the poll are
published, but individual comments are kept confidential.
Number 154
SENATOR GREEN pointed out her concern that a candidate could be
deemed inappropriate for retention by a member of the public, and
the legislature would never know. She questioned whether a judge
needs to be reconfirmed once seated, or reappointed. MS. VOGT
replied that is correct, but that issue is addressed in the
amendment being proposed by AOGA. She added if the judicial
council recommended a person not be reappointed, that fact would be
public. CHAIRMAN TAYLOR commented it would be public but not
binding.
CHAIRMAN TAYLOR indicated that Senator Adams has suggested the bill
be scheduled for Monday to give the interested parties an
opportunity to present a compromise. The matters will be brought
up for a vote by the committee at that time. He suggested
addressing the prepayment requirement, the transition provision,
and appointment provisions including a legislative role.
MS. VOGT pointed out the fiscal impact of getting into the
constitutional confirmation issue will be much larger.
There being no other comments on HB 341, the committee held the
bill until Monday.
| Document Name | Date/Time | Subjects |
|---|