02/25/2014 01:30 PM Senate TRANSPORTATION

              SB 178-PASSENGER VEHICLE RENTAL TAX                                                                           
                                                                                                                                
2:27:36 PM                                                                                                                    
CHAIR EGAN announced SB 178 to be up for consideration.                                                                         
                                                                                                                                
2:27:49 PM                                                                                                                    
BRITTANY HUTCHISON,  staff to Senator  Click Bishop,  Alaska State                                                              
Legislature,  Juneau,  Alaska, sponsor  of  SB 178,  presented  SB
.  She explained  that  the passenger  vehicle  rental tax  was                                                              
passed in  2003 and  was intended to  raise revenue  from tourists                                                              
using  rental cars  on the state's  road systems.  The tax  wasn't                                                              
supposed to  affect Alaskans  in most cases,  but that is  not the                                                              
case. Back in 2004  the bill was amended to exempt  taxi cabs from                                                              
the tax,  and it was  stated then  that it was  not the  intent of                                                              
the original  bill to negatively  impact small businesses,  but it                                                              
does.                                                                                                                           
                                                                                                                                
She  explained  that in  2013,  the  Department of  Revenue  (DOR)                                                              
began an  attempt to collect the  rental vehicle tax  from Alaskan                                                              
businesses that may  not even be involved in  the tourist industry                                                              
or  rent  to  tourists.  And  instead   of  announcing  their  new                                                              
position  and applying  it prospectively,  the department  applied                                                              
the  tax   retroactively   back  to  2004.   Though  it   required                                                              
businesses to  pay a 10 percent  rental vehicle tax on  all leases                                                              
for the past nine  years, those taxes had not been  collected from                                                              
the clients  and that could  possibly bankrupt some  small Alaskan                                                              
businesses. A list of those businesses was in their packets.                                                                    
                                                                                                                                
MS. HUTCHISON  said that SB 178  amends the rental vehicle  tax to                                                              
make  it  clear   that  the  tax  should  not   apply  to  Alaskan                                                              
businesses  that are  making long  term rentals  to other  Alaskan                                                              
businesses.  Specifically,  section   1  reduces  the  lease  term                                                              
exemption  from 90  to 30  days and  section 2  reduces the  gross                                                              
vehicle  weight  from 8,500  to  6,500  lbs.  The second  part  of                                                              
section   2  clarifies  that   this  exemption   applies   to  the                                                              
transportation  of  any  goods  whether  commercial  or  personal.                                                              
Section 4 makes these changes retroactive to 2004.                                                                              
                                                                                                                                
She  said  these  changes  reflect  the  original  intent  of  the                                                              
legislature  that the  vehicle rental  tax applies  to short  term                                                              
rentals  to tourists  and  not to  Alaskan  businesses renting  to                                                              
other Alaskan businesses.  This bill is needed because  the DOR is                                                              
trying  to  collect  nine  years  of  back  taxes,  interest,  and                                                              
penalties from Alaskan  businesses that were never  intended to be                                                              
taxed in the first place.                                                                                                       
                                                                                                                                
2:31:02 PM                                                                                                                    
SENATOR DYSON  said he  was startled that  the tax is  retroactive                                                              
for such  a long  time and  was surprised  they could  pass  a law                                                              
that incurs such a liability for companies.                                                                                     
                                                                                                                                
SENATOR FRENCH said  he thought there was a  misunderstanding, but                                                              
he knew what  had happened: they  passed a law in 2003  that began                                                              
taxing rental  cars. It's been in  place ever since that  time and                                                              
now some  companies have  found themselves in  a tax  dispute with                                                              
the DOR. This would  pass an exemption that would  reach back that                                                              
far because of  the misunderstanding and dispute.  He sponsored an                                                              
exemption  due to  the same  kind of  thing addressed  on page  2,                                                              
lines 18-19,  (h) where the  tax was falling  on a  small seasonal                                                              
group of  people and more was  being spent on collection  than was                                                              
actually being collected.                                                                                                       
                                                                                                                                
2:33:18 PM                                                                                                                    
SENATOR FAIRCLOUGH  said  the fiscal note  was quite  interesting,                                                              
because it  went forward in time,  and she wondered what  it would                                                              
look like  in reverse. Would it  take 10 people to  implement this                                                              
bill?                                                                                                                           
                                                                                                                                
2:34:01 PM                                                                                                                    
MATT  FONDER,  Director,  Tax  Division,   Department  of  Revenue                                                              
(DOR), said the  reason for the high number of  employees was that                                                              
the  department would  have to  try to  go back  and identify  and                                                              
refund taxes  to people who rented  cars that may fall  within one                                                              
of the exemptions during the last 10 years.                                                                                     
                                                                                                                                
SENATOR  FAIRCLOUGH  said  she  was  concerned  that  the  90  day                                                              
exemption and trying  to find people who rented  was creating this                                                              
pay back  issue. People come  to Alaska  and rent motor  homes and                                                              
the state  has been trying to  collect from those people  who were                                                              
causing deterioration  on its  highways. The  intent was  to leave                                                              
commercial vehicle rentals out.                                                                                                 
                                                                                                                                
MS. HUTCHISON  said the intent behind  changing 90 days  to 30 was                                                              
because  most tourists  don't rent  for  over 30  days and  anyone                                                              
over  that  would be  an  Alaskan  businesses and,  therefore,  be                                                              
exempt.                                                                                                                         
                                                                                                                                
SENATOR FAIRCLOUGH  asked what  part of the  bill was  causing the                                                              
big fiscal note, an estimated $1,293,000, in 2015.                                                                              
                                                                                                                                
MR. FONDER  answered that  was actually  for staff  to set  up the                                                              
refund program  and identify taxpayers  who may have paid  the tax                                                              
that  would  fall  under  one of  the  new  exclusions  and  their                                                              
refund. The  fiscal note  also talks  about a potential  reduction                                                              
of $800,000  in revenue to the state  each year if this  bill were                                                              
to pass.                                                                                                                        
                                                                                                                                
SENATOR FAIRCLOUGH said  there should be a better way  to do this.                                                              
She  asked if  DOR had  been collecting  $800,000 from  commercial                                                              
rentals that hadn't been challenged until now.                                                                                  
                                                                                                                                
2:38:12 PM                                                                                                                    
JOHANNA  BALES,  Deputy  Director,  Tax  Division,  Department  of                                                              
Revenue (DOR),  explained that the  fiscal note represents  all of                                                              
the  bill's provisions.  It  would exempt  anything  over 30  days                                                              
(right  now it's  anything  over 90  days)  from taxable  rentals;                                                              
another provision  exempts  any vehicle weighing  more than  6,500                                                              
lbs. used to transport personal or commercial property.                                                                         
                                                                                                                                
To  prepare  this   fiscal  note,  she  looked   at  records  from                                                              
companies the  department had audited  to get an estimate  of what                                                              
type of  activity they  had. She estimated  no more  than $800,000                                                              
each  year and  applied that  going back  for 10  years and  going                                                              
forward  as lost  revenue. They  would  have to  evaluate all  the                                                              
rental contracts  from the last  10 years to determine  which ones                                                              
would  have been exempt  had this  language been  in effect  since                                                              
2004  forward. They  would  work  with the  about  110 rental  car                                                              
companies  that   have  remitted  the  taxes  to   get  copies  of                                                              
contracts and  send out public notices.  Because a lot  of renters                                                              
are  from  out of  state,  the  department  would be  required  to                                                              
refund  taxes paid  if their  rental  car contracts  meet the  new                                                              
exemption criteria.                                                                                                             
                                                                                                                                
2:40:20 PM                                                                                                                    
SENATOR  FAIRCLOUGH  said  she had  a  hard  time with  hiring  10                                                              
employees to  go back through records  to 2004 and she  also found                                                              
it  challenging  that   they  have  what  appears  to   be  a  new                                                              
interpretation at  the department.  When did the  challenges start                                                              
coming to DOR?                                                                                                                  
                                                                                                                                
MS. BALES  answered it would  be up to  the sponsor to  decide how                                                              
to handle this,  but this is not a new interpretation  of statutes                                                              
that  have been  on the  books since  2004.  It had  just come  to                                                              
their  attention  that  some  companies  were  conducting  vehicle                                                              
rentals  that met  the criteria  to  collect and  remit tax  that,                                                              
because  the department  looks  for  companies that  say  "vehicle                                                              
rental company"  on their  business licenses,  weren't picked  up.                                                              
Companies  that do heavy  equipment leasing  aren't recognized  as                                                              
having  vehicle rentals  that  met this  criterion.  She said  the                                                              
department conducts  compliance projects  to see if  any taxpayers                                                              
need to be educated and need to come back into compliance.                                                                      
                                                                                                                                
As far  as the  fiscal note,  she explained  that those  positions                                                              
would be  needed for  the retroactivity provision  of the  bill to                                                              
make sure that  all the consumers  who paid the tax to  the rental                                                              
car companies  would be  refunded, which is  what this  bill would                                                              
require. However,  without the retroactivity provision  they would                                                              
have a zero fiscal note in terms of needing new people.                                                                         
                                                                                                                                
2:43:07 PM                                                                                                                    
SENATOR FAIRCLOUGH  said she  looked forward  to working  with the                                                              
sponsor to  solve this  problem. She remembered  she had  voted in                                                              
favor of  this bill,  and her  understanding was  that it  was for                                                              
folks  coming  in  at  the  Anchorage   International  Airport  or                                                              
otherwise and  renting a motor home  from someone or a  vehicle to                                                              
explore  Alaska. It  was never the  intent of  the legislature  to                                                              
pick  up commercial  rentals  or long  term  leases for  equipment                                                              
that's moving to and from and being used by Alaskans.                                                                           
                                                                                                                                
CHAIR EGAN  agreed, but added that  the problem is that  there are                                                              
at  least  14  businesses  that   are  by  affected  by  this  tax                                                              
provision but none of them is a car rental agency.                                                                              
                                                                                                                                
SENATOR BISHOP said  the intent of the bill is to  get back to the                                                              
original intent  of 2004, which  is taxing rental cars  and summer                                                              
tourism and  not taxing  Alaskan businesses  doing mining  and oil                                                              
patch  work  and  operating  on unimproved  roads  with  no  state                                                              
support or maintenance.                                                                                                         
                                                                                                                                
2:45:41 PM                                                                                                                    
RYAN   PETERKIN,  President,   Maytech   Alaska,  Kenai,   Alaska,                                                              
supported  SB 178.  He  is a  fourth  generation  Alaskan and  his                                                              
business  is  in  Kenai and  Prudhoe  Bay.  They  rent  industrial                                                              
equipment, but  to satisfy their  clientele, pickup  trucks became                                                              
a byproduct  of their  business. They employ  75 Alaskans  with an                                                              
average salary of $70,000 per year totaling about $6 million.                                                                   
                                                                                                                                
He first learned  about the tax on  November 6 when he  got a call                                                              
from   his  Prudhoe   Bay  operation   saying   that  a   criminal                                                              
investigator  and an  armed enforcement  officer  had arrived  and                                                              
said  they were  in violation  and  that there  would be  criminal                                                              
charges  if they didn't  comply  and to contact  Jonathan  Page in                                                              
the Anchorage  office. They  got in  touch with  him the  next day                                                              
and explained their line of business.                                                                                           
                                                                                                                                
MR. PETERKIN  said they talked and  came to an  understanding that                                                              
personal property  meant their safety  gear, laptop  computers, et                                                              
cetera. He  said they fully  intend to  comply, but with  a 90-day                                                              
period and  if a client extends  a 6-month contract for  another 6                                                              
months, that  6 last  months is taxable.  Most of their  contracts                                                              
are worked off  master service agreements, and  oil companies have                                                              
multiple year  contracts. All  of their  pickup truck  rentals and                                                              
leases are  in commercial  applications, 90  percent of  which are                                                              
in Prudhoe Bay;  the other 10 percent are in the  Kenai Peninsula,                                                              
and 5  percent of  those are  on the  west side  of Cook Inlet  on                                                              
dirt  roads   and  gravel.  He   said  the  6,500  GVW   would  be                                                              
beneficial,  because  oil companies  went  to  half ton  crew  cab                                                              
pickup trucks  that are more cost  effective and have  less impact                                                              
to the road.                                                                                                                    
                                                                                                                                
2:49:13 PM                                                                                                                    
Paying the back  tax on the pickup trucks would  be devastating to                                                              
his  business,  if  it  didn't  put  them  out  of  business,  Mr.                                                              
Peterkin said.  They would have  to seek financial aid,  for sure.                                                              
Theirs  is  a  growing  business  that is  trying  to  respond  to                                                              
clientele,  and they  just  don't have  those  kinds of  reserves.                                                              
They didn't  collect the  tax nor  did they ever  get a  notice or                                                              
any  other   means  of   communication  except   when  they   were                                                              
blindsided by a  criminal investigator and an  enforcement officer                                                              
that showed up in their Prudhoe Bay facility.                                                                                   
                                                                                                                                
CHAIR EGAN asked if his vehicles were getting larger.                                                                           
                                                                                                                                
MR.  PETERKIN said  all  their vehicles  are  half  ton to  three-                                                              
quarter ton  pickups - some  are one ton -  all are rented  to oil                                                              
and  gas  companies  with  commercial   applications;  none  to  a                                                              
private individual.                                                                                                             
                                                                                                                                
SENATOR EGAN asked if the gross vehicle weight had changed.                                                                     
                                                                                                                                
MR. PETERKIN  answered their GVW  probably ranges from  7,000 lbs.                                                              
to 12,000 lbs.                                                                                                                  
                                                                                                                                
2:51:05 PM                                                                                                                    
JON  COOK,  CFO,  Airport  Equipment   Rentals,  Inc.,  Fairbanks,                                                              
Alaska, supported  SB 178. He said  his company is a  family owned                                                              
business  employing  125  people  with locations  in  Dead  Horse,                                                              
Fairbanks, Delta,  Anchorage, and Kenai.  They are the  John Deere                                                              
construction   equipment  dealer  for   Alaska  and   the  largest                                                              
equipment  rental  company in  Alaska  representing  a variety  of                                                              
manufacturers. As  a customer service they offer  rentals to their                                                              
construction equipment  customers who are primarily  producers and                                                              
Alaska contractors  on the  North Slope. Most  of the  rentals are                                                              
for  several months  and often  years  in duration.  Out of  5,000                                                              
rental  units 150  are trucks;  the  rest is  heavy equipment  and                                                              
other pieces of non-mobile equipment.                                                                                           
                                                                                                                                
He  has familiarity  with  this  tax  and its  entire  legislative                                                              
history. His company  owned the National Car Rental  concession at                                                              
the Fairbanks  Airport through  May 2013, and  many know him  as a                                                              
reformed car  dealer (back to 1994).  He said the  original intent                                                              
of  the  tax  was  meant  to  tax   tourists  to  help  fund  road                                                              
maintenance  and tourism marketing.  Some of  the concerns  he has                                                              
regarding  DOR   and  its  retroactive  reinterpretation   of  the                                                              
statute  is  that  it  is  contrary  to  the  legislative  intent,                                                              
specifically with  regards to long  term rentals of  pickup trucks                                                              
between Alaska businesses and primarily on the North Slope.                                                                     
                                                                                                                                
MR. COOK  said their company has  and continues to pay  the rental                                                              
tax, because  as a national car  rental dealership, they  had been                                                              
aware  of  it.  He  learned  about  the  department  retroactively                                                              
collecting the tax  from his competitors. While he  has the utmost                                                              
respect for  Ms. Bales and the  department - they are  just trying                                                              
to do  their job  and protect the  best interests  of the  state -                                                              
some   of  their   interpretations   of  the   statute  are   very                                                              
concerning.  If this  legislation  is not  passed and  the tax  is                                                              
retroactively  collected, several companies  will have  to declare                                                              
bankruptcy.  He said  the truck  rental business  is a low  margin                                                              
business that  they are not  interested in,  so he wanted  to keep                                                              
these competitors around.                                                                                                       
                                                                                                                                
2:55:11 PM                                                                                                                    
He  wanted  to  discuss  the  90 day  exemption  as  well  as  the                                                              
exemption  for 8,500  GWV that  transport  personal property  that                                                              
does not  have a definition.   Specifically  with regard  to North                                                              
Slope rentals,  AS 43.52.099(2) defines  a passenger vehicle  as a                                                              
motor  vehicle that  is driven on  a highway  or public  right-of-                                                              
way, and the North  Slope road system is neither;  it is a private                                                              
road system. He  was also unclear about why 10  people were needed                                                              
to refund the tax.  He didn't have records that go  back 10 years,                                                              
and he wasn't  interested in spending  the state's time  to try to                                                              
refund taxes to customers.                                                                                                      
                                                                                                                                
2:56:37 PM                                                                                                                    
CHAIR EGAN said he was welcome to come back and testify again                                                                   
and mentioned receiving many letters supporting some form of SB
.                                                                                                                            
                                                                                                                                
2:57:07 PM                                                                                                                    
SENATOR DYSON  asked Senator  Bishop if  the department  was still                                                              
going  after these  enforcement  actions or  should the  committee                                                              
take  some  action  telling  them  to  stop  until  the  issue  is                                                              
resolved.                                                                                                                       
                                                                                                                                
SENATOR BISHOP said he didn't know.                                                                                             
                                                                                                                                
CHAIR EGAN held SB 1`78 in committee.