Legislature(1993 - 1994)
04/21/1994 02:00 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting g to order at 2:00 p.m. He brought SB 185 (LIMITATIONS PERIOD FOR TAX ASSESSMENTS) before the committee and requested Josh Fink, committee aide, to explain some issues that Attorney General Bothelo recommended the committee may want to look at. JOSH FINK directed attention to a legal opinion from Jack Chenoweth, Legal Counsel, Division of Legal Services, on the retroactive application of the proposed amendments to limitations periods for assessments and collections of certain taxes due the state. In his memo Mr. Chenoweth states, "A state may retroactively amend or repeal time limitations that are set out in its tax codes. While I cannot be certain of it, there is, in my judgment, a high likelihood that the courts would not find retroactive application of the proposed modifications of the limitations statutes, as proposed by sec. 4 of Senate Bill 185, to be unconstitutional." Mr. Fink also directed attention to a memo from George Harrison, Director of the Legislative Research Agency, relating to a research request on resolution of oil taxation disputes in other states. Questions asked of those oil producing states were: (1) What statutes of limitation apply to actions by the state to recover back taxes; (2) May the state increase its assessment of the amount due from the taxpayer after an administrative proceedings is underway; and (3) How long does it take to resolve disputes. According to Mr. Harrison's memo, the three states contacted were North Dakota, Wyoming and Texas. Essentially, these three states use the same process to resolve disputes as Alaska. There is an initial informal effort on the department and the taxpayer to settle the matter; if informal conferences fail to reach agreement, the taxpayer may go to a formal administrative hearing; failing that, the taxpayer may turn to the court system. Likewise, the three states showed little variation on matters of statute of limitations, revision of assessments, and length of the appeals process. Mr. Fink noted that on the statute of limitations, North Dakota has a statute on assessment of six years, but that will soon go to three years as a result of a "taxpayers bill of rights" recently adopted. In Wyoming it is five years. In Texas it is four years. None of the states operate under any other limitation, such as a maximum limitation on the time the state has to collect an assessment from the date it was originally filed. Mr. Fink said on the question of increasing an assessment during an appeal, none of the tax departments in the three states are prohibited from increasing an assessment against a taxpayer while an appeal process was underway. On the question of the length of time to resolve disputes, Mr. Harrison said they found that in North Dakota a corporate income tax case that began in 1980 was settled in July 1993. The average length of time in North Dakota is five to six years. In Texas, it is not unusual for a case to take 10 years to be settled, but their normal length of time is five to six years, however, Texas noted they have one severance tax case that has been ongoing for 19 years. Number 096 ATTORNEY GENERAL BRUCE BOTELHO, Department of Law, said that in recognition of concerns express by industry, specifically, the lack of certainty and finality in the process of tax assessments and appeals, Governor Hickel has proposed a committee substitute. Attorney General Botelho stated the proposed committee substitute would reaffirm for the past the consistent interpretation of the state with regard to how both the statute of limitations for assessments and for collection would operate. It would, however, provide that effective for tax periods after December 31, 1993, a five-year statute of limitations on assessments which would serve as an absolute bar to further assessments by the Department of Revenue. That way the taxpayer can know with certainty that no assessments beyond that date would be issued by the department. On the other hand, it adequately protects the state in the sense that current staffing and expertise in the department leads them to feel very comfortable that the work can be accomplished within that five-year period. Number 150 SENATOR RIEGER asked the Attorney General to elaborate how absolute is an absolute bar in the context of differences of opinion versus intentional concealment. ATTORNEY GENERAL BOTELHO answered that there are probably three circumstances where making reference to an absolute bar would, in fact, not be the case. One is if the department were to discover that there had been some fraud in the filing. That operates in any taxing structure to basically remove a bar. A second circumstance would be if the taxpayer willingly agreed to extend the statute of limitations. That is a practice universally, and it has happened in the Alaska tax structure. The third circumstance is where there has been some major adjustment in a federal tax return under agreements between the state and the federal government. That may, in fact, result in a revised return. This would prevent, prospectively, the Department of Revenue, after five years, from adding an additional issue for consideration having discovered it after the statute had run. Number 204 SENATOR KELLY asked if a statute of limitations has ever been extended because of an allegation of fraud. ATTORNEY GENERAL BOTELHO responded that he is not aware of any circumstance where that has been the case. Number 220 JOHN PILKINTON, Director, Oil and Gas Audit Division, Department of Revenue, urged passage of SB 185 out of committee with overwhelming endorsements, as well as passage by both bodies of the Legislature this session. Mr. Pilkinton said the personnel of the Oil and Gas Audit Division has done an outstanding a job for the citizens of Alaska. The audits of the oil and gas tax and royalties of the state are a complex gargantuan task done with some of the largest companies in the world. The clarifications proposed in SB 185 are reasonable and equitable to the companies and to the Alaskan citizens. The six-year collection statute is the least talked about portion of the bill; it is simplest to understand, yet with the largest exposure to the state. The existing law says six years from date of assessment the tax must be collected by levy or by a proceeding in court. The proposed clarification in wording provides for the later of six years after assessment or six years after final administrative or judicial appeal. Thus far, only one tax payer has actually raised that as an issue. He said the department believes that taxpayers exercise their full rights to all levels of protest without premature levies and collection actions by the division. The proposed three-year clarification allows the division to increase or decrease an unpaid assessment that was previously issued within the three-year statute. He said the division needs to be able to adjust its original assessment as new information becomes available. The alternative language in the committee substitute would still provide the retroactive feature, but would put a cap on the future of five years to make any assessment. Number 277 RONALD BITZER, Senior Appeals Officer, Oil and Gas Audit Division, Department or Revenue, using a chart prepared by the department, presented an overview on the audit and appeals process. He then responded to several questions from the committee. Number 036 SENATOR KELLY asked to what level have any of the tax cases have been appealed. MR. BITZER answered that a separate accounting case was appealed from the Alaska Supreme to the U.S. Supreme Court. He added that the state won in that case. Number 312 SENATOR SALO asked which choice is made more often regarding the taxpayer going to an informal conference or a formal hearing. MR. BITZER answered that the generally the taxpayer has chosen the informal conference, but there have been a few instances in which the taxpayer has directly gone to a formal hearing. MR. PILKINTON added that a third thing they have done is they have signed agreements with taxpayers whereby they start the informal conference process, and at any time the taxpayer felt uncomfortable with that process, they could immediately go to the formal process. Number 322 SENATOR LEMAN asked if in the process it is possible for the taxpayer to pay the assessment and appeal, and would that bar the state from doing further assessments. MR. BITZER responded in the affirmative, adding that the position that has been stated in the past is the taxpayer could pay the assessment and file a claim for refund. The claim for refund would then put a cap on the amount that is at stake. He added that option is still available. Number 381 SENATOR KELLY asked if any taxpayer has ever refused to extend an agreement that the department has requested. MR. BITZER answered that in the early years the taxpayers would automatically extend the statute of limitations. In most recent years, they have had taxpayers who have refused to extend the statute of limitations, which, he said, does cause problems when going through a three-year cycle. In 1979 Phillips Petroleum refused auditor's access to the documents and litigation ensued. The case was resolved in the Superior Court in September of 1989 in the state's favor, which granted the auditors the rights to review the company's records and conduct audits. Number 522 SENATOR RIEGER asked how many tax returns per taxpayer they receive each year. MR. PILKINTON related that from 1990 to 1992, they had 11,257 filings for approximately 19 producers. In addition, there were 3,709 amended filings by the producers. SENATOR KELLY asked how large a staff the division has working in this area, and MR. PILKINTON responded there are 21 people in the appeals section dealing with these cases. TAPE 94-31, SIDE B Number 020 MR. PILKINTON, using charts, summarized some key statistics he felt would be useful to the committee in their consideration of the legislation, and those were: income tax and production taxes paid; tax dollars collected; number of audits issued by year; number of assessments issued; number of taxpayers with cases in court; number of taxpayers with open cases; and state auditors and appeals staff that have worked in collecting the taxes. He also pointed out that one line that was not on the charts was that of 35 audits issued, one case is still in court and two cases are still open, thus, 32 cases have been settled by the state. Number 035 SENATOR SALO noted that in reviewing information from other states relating to their collection of taxes, it appears that the length of time that it takes to resolve a tax dispute is directly proportional to the size of that case, and she asked if that was true in Alaska as well. MR. PILKINTON acknowledged that was correct. Number 042 PAUL SULLIVAN, General Tax Counsel, Exxon Company, U.S.A., testified in opposition to SB 185, as well as the Administration's proposed committee substitute. The following are excerpts from that testimony: "Retroactive tax legislation is wrong. Taxpayers have a right to rely on existing laws to conduct their business and to be protected from stale claims. They also have right to timely and uniform administration of the tax laws on assessment practices and to procedural fairness. SB 185 will violate these rights and will change the "agreed upon terms" Governor Hickel refers to when he talks about the mutually beneficial partnership between the oil industry and the state." "By putting current taxpayers in jeopardy of increased tax claims for years long since passed, this legislation sends a hostile message not only to current taxpayers, but to all potential investors in Alaska. Those investors would have to ask themselves difficult questions about the business climate and stability they could expect once they've invested their money. Tax stability and certainty are important considerations when companies invest for the long term. Jurisdictions which provide stable business environments will be the ones who most likely will gain those investment dollars." "There seems to be some misconception that oil and gas taxpayers have somehow not paid the taxes they legally owe to the State of Alaska. This is simply not true. Speaking for Exxon alone, we have paid approximately 4 billion dollars in income and oil and gas production taxes to the State of Alaska from 1976 through year-end 1992, and we believe those payments were consistent with our tax liability under law. The entire industry has paid in excess of 18 billion dollars in corporate income and oil and gas production taxes for that same period. The total payments made to the state by the oil industry for that period are significantly higher when you include royalties and other tax payments to the state." "You've heard various claims from the Administration on the amount at stake in time-barred claims if SB 185 isn't enacted, and that the state will not collect legitimate tax dollars owed. The amount the Department of Revenue claims is any number it chooses and it changes its numbers frequently. I would like to point out that many of the tax assessments issued to Exxon have been timely issued and are not barred by the statute of limitations. Nonetheless, Exxon has objected to those assessments on the merits of the audit issues raised and is attempting in good faith to resolve those issues with the Department of Revenue and the Department of Labor." "As I said last year and I will say it again, even if SB 185 were only applied prospectively, which you can clearly do without constitutional challenge, it would still be bad law. It would remove any incentive for the department to resolve tax cases while subjecting taxpayers to new and overreaching powers. The state would thereby lose, the taxpayers would lose, only the bureaucrats would gain. SB 185 is, in fact, a bureaucrat's dream-come-true." "Taxpayers and the state would be unable to close out tax years in a reasonable period. The overburdened judicial system would be further burdened with more legal challenges to the assessments and a constitutional challenge to SB 185's retroactive application. Finally, the department would be empowered to create an unlimited period for tax audits simply by continuing to issue excessively high assessments." "Finally, I'd like to address another misunderstanding that has been perpetuated by the prior testimony of Mr. Cole and others that Texas has provisions in its statute of limitations law which are virtually identical to what is being proposed before you in SB 185. That is just not true. The Texas statutes provide in Section 111.207(b) that when a taxpayer files a protest against an assessment, the statute of limitations is suspended, but only for the amount of the tax at issue, not for other items, not for subsequent assessments. The Texas statutes do not allow for an increase of the assessments during the taxpayer's protest of assessments. Furthermore, it has been our experience in the lower 48 states that once a state has issued an assessment for a particular year, they do not increase that assessment if contested. It is either sustained in total or amended downward. And, most importantly, no state has ever changed their tax laws retroactively as SB 185 would do." Mr. Sullivan also directed attention to a chart titled "Chronology of Alaska Income Tax for 1978, as well as a five-page handout, and he discussed Exxon's experiences with their 1978 tax year. In his concluding comments, Mr. Sullivan pointed out that Exxon has, in every instance where the Department of Revenue has requested an extension, they have given it. Number 450 SENATOR KELLY referred to Mr. Sullivan's statement that once the taxpayer protests or pays and files a refund claim, the department would be free to go on issuing new or revised assessments forever. He asked if that was also true in the new committee substitute. MR. SULLIVAN answered that under the retroactive piece they would be open forever and ever. The five-year comes into play for tax years beginning December 1993. That would be the appropriate statute of limitations unless it is changed retroactively sometime in the future. He questioned what's different between the five- year statute for the future and the three-year statute the state currently has for the past. He concluded nothing is different, other than somebody now is saying they've got a problem with the past, so lets change it. He added that they have no issues involved with the six-year collection statute. Number 475 SENATOR LINCOLN referred to Exxon's 1978 tax case discussed by Mr. Sullivan and she asked why they went through an informal process for nine years before going to a formal hearing. MR. SULLIVAN answered that everybody wants to attempt to resolve things at the lowest level. When going to formal conference, in the State of Alaska you do not get a trial de novo when going into the Superior Court. In other words, the judge does not hear all of the testimony. The record for the Superior Court is set in the formal conference hearing, so the formal conference hearing is much closer to litigation than negotiation. Number 531 There being no further questions from the committee, SENATOR KELLY stated the proposed committee substitute would be circulated to the various interested parties in the industry and SB 185 would be back before the committee at a later date. There being no further business to come before the committee, the meeting was adjourned at 3:30 p.m.
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