Legislature(1995 - 1996)
04/15/1996 01:30 PM Senate JUD
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 341 TAX APPEALS/ASSESSMENT/LEVY/COLLECTION
CHAIRMAN TAYLOR announced that although HB 341 is scheduled on
today's calendar, it is not his intent to move the bill out of
committee at this time. The committee will take up amendments
later in the meeting, and a committee substitute will be drafted
for consideration on April 19.
HB 341 TAX APPEALS/ASSESSMENT/LEVY/COLLECTION
REPRESENTATIVE JOE GREEN, sponsor of the measure, informed
committee members he and department officials met over the weekend
and prepared a proposed amendment to resolve one of the three
issues of contention. Headway was made on the other two issues,
but no resolution was reached. He planned to offer amendments on
the other two issues as well.
REPRESENTATIVE GREEN explained proposed amendment #1 separates the
appeal from the taxing authority by establishing an administrative
law judge through a nomination procedure. The Alaska Judicial
Council would nominate at least two names for the chief
administrative law judge for the governor to choose from.
Subsequent administrative law judges would be chosen in the same
manner. The last two to three pages of the amendment are technical
to change from the board concept to the administrative law judge
concept. Although he and other legislators prefer to maintain
control through legislative approval of the nominees, in the
interest of cooperation he agreed to this method as it accomplishes
the purpose of keeping the appeal body away from the taxing
authority.
REPRESENTATIVE GREEN discussed amendment #2 which deals with the
judicial bypass issue. The department does not concur with this
amendment. Amendment #2 allows the taxpayer to go from the
informal review straight to Superior Court if the taxpayer prepays
the total amount due. Failure to deposit those funds would dismiss
the taxpayer's appeal. Interest that accrues on the deposited
funds would be added to the principal and awarded to the winning
party. If the judicial decision determines a fractional
settlement, both parties would receive an award proportional to the
decision. Using that method, the taxpayer would receive the same
amount of interest he/she would have had the prepayment not been
required.
Number 437
SENATOR GREEN asked for an example of an amount of a prepayment.
REPRESENTATIVE GREEN responded it could be millions of dollars, and
possibly as high as hundreds of millions. He pointed out this
procedure does not only apply to oil companies but to all
taxpayers.
REPRESENTATIVE GREEN clarified that the amendments labeled "Z.5,
Z.6 and Z.7" are amendments 1, 2, and 3. Amendment #3 addresses
the transition issue and gives any taxpayer who filed an appeal,
before the act takes effect, 45 days to either prepay the disputed
tax amount and go to court, or have a formal appeal within the
department. A party currently undergoing a formal appeal would
still have the right to go to trial, but not have a de novo trial.
Section 18 was added to the bill at the recommendation of the
Division of Legal Services and does not change the intent of the
transition provision.
Number 387
CHAIRMAN TAYLOR returned.
BOB BRIGGS, Assistant Attorney General, stated the Department of
Law supports amendment #1. With regard to amendment #2, he
believed it would be unwise for the committee to contemplate a
payment provision that allows a taxpayer to essentially save money
by filing an appeal. If the interest rate for monies deposited in
the registry of the court is lower than the interest rate provided
under AS 43.05.225, it would be to the taxpayer's advantage to file
an appeal.
CHAIRMAN TAYLOR asked why that would occur. MR. BRIGGS answered
the amendment does not specify what interest rate the money
deposited in the registry of the court will earn. Assuming that
interest rate is lower than the interest rate accruing to a
taxpayer under AS 43.05.225 the taxpayer could simply file an
appeal and save money.
SENATOR MILLER asked if the taxpayer has to prepay the tax on
appeal at present. MR. BRIGGS answered no. SENATOR MILLER noted
amendment #2 would require the taxpayer to pay the tax upfront to
the court. He questioned how that would benefit the taxpayer since
that money could not be used for other purposes.
MR. BRIGGS explained under the current system, if a taxpayer does
not pay a delinquency, the interest accrues on that delinquency
under a rate defined by statute, which is a minimum of 11 percent.
Under amendment #2 there is no interest rate specified therefore it
is possible for a taxpayer to gain a benefit from depositing the
money in the registry of the court and pursuing an appeal.
Number 357
SENATOR MILLER discussed the opposite scenario in which the
taxpayer goes to court and has lost the ability to invest the money
deposited with the court registry. If that taxpayer appeals
through the administrative law judge, no money has to be prepaid,
therefore the taxpayer is free to invest it in a project that may
be earning 20 percent.
MR. BRIGGS noted he is not speaking against the concept of
prepayment, which is a policy matter the Department of Revenue
should address, but he expressed concern that amendment #2 could
encourage frivolous appeals.
CHAIRMAN TAYLOR commented the current version of the bill allows
the taxpayer to continue to play in the administrative process, or
opt out and go to Superior Court. He asked Mr. Briggs if the
taxpayer should be allowed to opt out for free. MR. BRIGGS
repeated he was not speaking against the concept of prepayment,
just the method used in amendment #2, however the Department of Law
is opposed to the concept of a separate direct appeal track to
Superior Court.
MR. BRIGGS addressed amendment #3 regarding the transitional
provision. There are 31 cases at the formal appeal stage. The
total amount of money at stake in those cases is $1.224 billion.
Those cases are in various stages of the formal hearing process; in
some a notice of appeal has been filed; in some there has been
motion practice and discovery; in other cases there has been a
formal hearing and the taxpayers are awaiting decisions. A few
cases will go to a formal hearing process within the next month.
The state has invested resources in those cases, attorney time and
other resources: those resources would be wasted if the taxpayers
were allowed to bypass the formal hearing and go to court. He
preferred the approach in HB 427 which provides that existing rules
apply to pending cases at the formal appeal stage, unless the
taxpayer and Departments of Revenue and Law reach an agreement as
to how the new procedures should apply to those cases.
CHAIRMAN TAYLOR asked Mr. Briggs if he knew of any cases worth $50
or $60 million that the state has taken to judgment and settled,
and if so whether the state received interest. MR. BRIGGS replied
he was unsure, but thought only one case has gone to a formal
hearing. In that case the taxpayer and Departments of Revenue and
Law resolved the situation.
CHAIRMAN TAYLOR clarified his concern is that if cases are settled
within the Department of Revenue no one will know how much the
state lost in interest and penalties since those are usually the
first things given up as the parties work towards a settlement.
MR. BRIGGS felt the idea of prepayment is a good one if the direct
to court option is allowed. CHAIRMAN TAYLOR stated he wants to
place a hurdle to the taxpayer from getting a free ticket to the
court system but believes having to prepay the full amount to be a
penalty.
MR. BRIGGS believed the state would be getting the benefit of a tax
delinquency based on the presumption the tax assessment is valid.
There will be a lot of delay if taxpayers are allowed to take a tax
case directly to a Superior Court judge because the judge will not
have the benefit of the administrative record. As a practical
matter, that will slow the case down and take longer to resolve
than if the case is first heard by an administrative tribunal and
then appealed on the record to a Superior Court judge.
SENATOR MILLER asked what the delinquency rates are charged by the
Department of Revenue. MR. BRIGGS answered those rates are set by
AS 43.05.225, and have an 11 percent floor. SENATOR MILLER said
that statute is referred to in (B). MR. BRIGGS deferred to Ms.
Vogt to answer that question.
DEBORAH VOGT, Deputy Commissioner of the Department of Revenue,
discussed the proposed amendments. She reiterated the parties have
agreed that amendment #1 is the preferred alternative to the
existing provisions regarding method of appointment. Regarding
amendment #2, she believed a prepayment requirement is a great
improvement. In her interpretation of paragraph (B), interest
under AS 43.05.225 is tolled, and the interest that accrues on the
escrow account substitutes for that interest. The interest rate
under AS 43.05.225 is five percent above the federal rate with an
11 percent floor. That rate applies to any amount refunded by the
state resulting from an overpayment, as well as to any amount owed
by the taxpayer. Amendment #2 does not set out investment
standards and she presumed the court system would use a
conservative strategy for a liquid account. In response to an
earlier comment made by Chairman Taylor, she noted the Department
of Revenue is prohibited from forgiving interest in settlements.
Issues are negotiated, the parties agree to an amount each issue is
worth, and the statutory interest is applied to that amount. She
repeated that a prepayment provision is an improvement but the
state might get substantially less using an escrow account rather
than the statutory interest rate.
Regarding amendment #3, MS. VOGT shared Mr. Briggs' concerns. The
cases currently before the hearing officer include fisheries
business tax, mining license tax, corporate income tax, a few oil
and gas cases, but most of those cases do not involve any of the
parties that have negotiated this legislation. They are primarily
small taxpayers owing small amounts. There are a couple of big
cases which amount to over $1 billion. Amendment #3 would permit
a person who has gone through a hearing and lost, to have a hearing
before the new hearing officer, or to go to court. The department
prefers the language that makes the cutoff date the effective date
of the act; appeals after that use the new system, existing cases
stay within the department unless both parties agree to use the new
system. At this time there is only one taxpayer concerned about
the transition provision.
Number 164
CHAIRMAN TAYLOR stated the $1 billion currently in dispute has
taken years to accumulate. This bill will only have prospective
effect and then only to those taxpayers who have high enough
amounts in dispute they want to go to court. MS. VOGT could not
speak to particular cases because of confidentiality requirements,
but noted the retroactive provision is not of concern to the
biggest taxpayer. She repeated there is one problem, and the
department is trying to resolve the situation without drafting a
provision which allows taxpayers to take a second or third bite.
CHAIRMAN TAYLOR asked if there was objection to amendment #1.
There being no objection, the amendment was adopted.
CHAIRMAN TAYLOR asked if there was objection to the adoption of
amendment #2. SENATOR ADAMS objected. The motion carried with
Senators Green, Miller, and Taylor voting "yea," and Senator Adams
voting "nay."
CHAIRMAN TAYLOR asked if there was objection to the adoption of
amendment #3. SENATOR ADAMS objected. Amendment #3 was adopted
with Senators Miller, Green and Taylor voting "yea," and Senator
Adams voting "nay."
CHAIRMAN TAYLOR announced that he planned to hold the bill until
Friday to give the sponsor and Department of Revenue more time to
work on the disputed issues.
SENATOR ADAMS asked Ms. Vogt if the Governor will veto HB 341 with
amendments #2 and #3. MS. VOGT replied it is her understanding the
Governor will veto a bill that allows the taxpayer to avoid the new
administrative process and go straight to court.
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