01/25/2008 08:30 AM House FISHERIES
| Audio | Topic |
|---|---|
| Start | |
| HB321 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 321 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON FISHERIES
January 25, 2008
8:39 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Kyle Johansen
Representative Gabrielle LeDoux
Representative Peggy Wilson
Representative Bryce Edgmon
Representative Lindsey Holmes
MEMBERS ABSENT
Representative Craig Johnson
COMMITTEE CALENDAR
HOUSE BILL NO. 321
"An Act relating to the salmon product development tax credit;
providing for an effective date by amending an effective date in
sec. 7, ch. 57, SLA 2003, as amended by sec. 4, ch. 3, SLA 2006;
and providing for an effective date."
- MOVED CSHB 321(FSH) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 321
SHORT TITLE: SALMON PRODUCT DEVELOPMENT TAX CREDIT
SPONSOR(s): REPRESENTATIVE(s) THOMAS
01/16/08 (H) READ THE FIRST TIME - REFERRALS
01/16/08 (H) FSH, FIN
01/25/08 (H) FSH AT 8:30 AM BARNES 124
WITNESS REGISTER
IAN FISK, Staff
Representative Bill Thomas
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 321 on behalf of the sponsor,
Representative Thomas.
TIM COTTONGIM, Fish Group Manager
Juneau Office
Tax Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 321, answered
questions.
MARY MCDOWELL, Vice President
Pacific Seafood Processors Association (PSPA)
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 321.
MARK PALMER, President
Ocean Beauty Seafoods, Inc.
Seattle, Washington
POSITION STATEMENT: Characterized HB 321 as a real incentive
for companies to invest in a seasonal operation.
TOM SUNDERLAND, Marketing Director
Ocean Beauty Seafoods, Inc.
Seattle, Washington
POSITION STATEMENT: Testified that the tax credit in HB 321
helps with the decision to make an investment.
TIM BLOTT, Manager
Cook Inlet Processing Plant
Ocean Beauty, Inc.
Kodiak, Alaska
POSITION STATEMENT: During hearing of HB 321, testified as to
the impact of the tax credit at the Cook Inlet Processing Plant.
JULIE DECKER, Representative
Wrangell Seafoods, Inc.
Wrangell, Alaska
POSITION STATEMENT: During hearing of HB 321, urged the
committee to extend the tax credit.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House Special Committee on
Fisheries meeting to order at 8:39:16 AM. Representatives
Seaton, Johansen, LeDoux, and Edgmon were present at the call to
order. Representatives Holmes and Wilson arrived as the meeting
was in progress.
HB 321-SALMON PRODUCT DEVELOPMENT TAX CREDIT
8:39:42 AM
CHAIR SEATON announced that the first order of business would be
HOUSE BILL NO. 321 "An Act relating to the salmon product
development tax credit; providing for an effective date by
amending an effective date in sec. 7, ch. 57, SLA 2003, as
amended by sec. 4, ch. 3, SLA 2006; and providing for an
effective date."
8:41:36 AM
IAN FISK, Staff, Representative Bill Thomas, Alaska State
Legislature, offered to provide the committee with a brief
summary of HB 321.
REPRESENTATIVE EDGMON moved to adopt CSHB 321, Version 25-
LS1285\M, Kane, 1/23/08, as the working document. There being
no objection, Version M was before the committee.
MR. FISK explained that the salmon product development tax
credit is basically an incentive to add value to Alaska salmon
in Alaska. The credit will expire on December 31, 2008, and
thus this legislation would extend that credit to December 31,
2011. The credit applies to the fisheries business tax, which
is a tax levied on the ex-vessel value of fisheries resources at
the point of first sale. The point of sale is usually when the
fish is transferred from a fishing vessel and purchased by a
processor. The program allows a claim of up to 50 percent of
the cost of qualified investments in new property. He noted
that there are several restrictions, including that the property
must be new, used predominantly for salmon, and used for value-
added salmon.
MR. FISK reminded the committee that this credit was implemented
in 2003 when there was a severely depressed salmon market, which
was mainly due to the influx of farmed salmon. He opined that
this credit is a critical part of helping the industry retool
and modernize. For example, less product is going into the
older tall cans and more are left in fillets. Furthermore,
there has been an increased diversity of products, which is
important with customer acceptance of salmon. He highlighted
other important trends, as follows: increase in the average
value; increase in state revenues from the fisheries business
tax, and an increase of permit values for salmon. Therefore,
the sponsor strongly believes the credit should be renewed for
an additional three years, he related.
MR. FISK then turned to Version M and directed the committee's
attention to the new language on page 2, lines 11-15, which
includes conveyors as a type of eligible equipment. This new
language will allow [the credit to be used for] conveyors that
meet the other qualifications for equipment and specifically
used in the act of producing salmon value-added products. The
Department of Revenue (DOR) wanted to be sure there is no
confusion, and thus requested the inclusion of language
specifying that conveyors not used specifically in the act of
producing value-added salmon are ineligible. Mr. Fisk then
pointed out that Version M in Section 3 on page 2 inserts a new
subsection such that a processor can obtain a preliminary
determination of eligibility from DOR when that processor
considers the purchase of new equipment.
8:46:59 AM
CHAIR SEATON related his understanding that the change related
to conveyors is meant to be a change going forward not a
retroactive change.
MR. FISK answered that is his understanding. In further
response to Chair Seaton, Mr. Fisk confirmed that the sponsor's
intent is for this change related to conveyors to be in place
from this point forward.
REPRESENTATIVE JOHANSEN inquired as to the reasoning behind the
preliminary determination of eligibility, and asked if there
have been problems.
MR. FISK, recalling conversations with those in the industry,
related that it has occasionally been an issue and thus the
preliminary determination of eligibility is a logical
clarification.
8:48:36 AM
CHAIR SEATON highlighted that the committee packet includes
information regarding the salmon product development tax from
the Tax Division. He directed attention to the second page in
which the salmon product development expenditure categories
relate that the fillet line is a non-qualified expenditure. He
inquired as to the sponsor's view of that.
MR. FISK related that the sponsor would consider that the fillet
line should be a qualified expenditure.
8:50:05 AM
TIM COTTONGIM, Fish Group Manager, Juneau Office, Tax Division,
Department of Revenue (DOR), pointed out that the first page of
his document titled "Salmon Product Development Tax Credits"
reflects the total number of companies that have claimed the
credit through 2006. The document also specifies the total
development expenditures as well as the total development
credits, which amount to approximately 50 percent of that amount
being claimed on the fisheries business tax return. He pointed
out that the numbers related to the credits denied at audit are
tentative numbers as there are some ongoing audits. The second
page titled "Salmon Product Development Expenditure Categories"
relates the Tax Division's interpretation of existing statute as
related to qualified expenditures versus non-qualified
expenditures. With regard to the filleting line, the sponsors
discussed the intent for the credit to be used to encourage new
investments and new value-added salmon products. He related his
understanding from the original language that the credit was for
equipment that performed the functions of processing, packaging,
and product finishing. The renewal of the credit in 2006 was
referred to as a need to modernize the industry. Therefore, the
division considered only the equipment performing the
processing, packaging, and product finishing functions as
qualifying for the credit. Mr. Cottongim explained that when
the division refers to a filleting line it refers to non-
machines; it refers to a conveyor belt or table of some sort
where individuals are hand filleting. As mentioned earlier, the
filleting line would be a non-qualified expenditure whereas a
filleting machine would be a qualified expenditure. He then
directed attention to the page titled "Salmon Product
Development Tax Credits Denied", which relates general reasons
why the credit was denied.
MR. COTTONGIM turned his attention to Version M, specifically
related to conveyors. He stated his appreciation for Chair
Seaton's clarification that this will simply be a change going
forward. However, he expressed concern with regard to the lack
of specificity as it would likely result in some confusion by
taxpayers. Therefore, expressed the division's willingness to
work with the committee to make the language more specific as to
the meaning of conveyors as used in the legislation.
REPRESENTATIVE JOHANSEN inquired as to the process used to
determine whether an expenditure is qualified or non-qualified.
He further inquired as to how often this occurs and how it's
coordinated with the processors.
8:56:14 AM
MR. COTTONGIM, in response to Representative Johansen, explained
that the division inspects processing equipment, it determines
how the equipment is used, requests information about the amount
of products produced as well as for which types of species the
equipment is used. The division checks the manufacture date on
the equipment in order to confirm it is new and compare it to
invoices and shipping documents to confirm that it was first
placed in service in Alaska. The division, he related,
determines whether it's a qualified or non-qualified expenditure
based on whether the equipment isn't performing a processing,
packaging, or product finishing function. In further response
to Representative Johansen, Mr. Cottongim said that the
determination of what [expenditures] are qualified or non-
qualified is reviewed on a case-by-case basis in each audit.
The division recognizes that each company has unique equipment
and processing. Therefore, the division hasn't really attempted
to fit a particular item into a compartment and leave it there.
The list provided is a running list, he noted.
8:58:30 AM
REPRESENTATIVE EDGMON inquired as to what Mr. Cottongim would
suggest to make the language related to conveyors more concise.
MR. COTTONGIM clarified that the division's concern is in regard
to what is meant by the language "in the act of producing" on
page 2, line 15. "Whether or not you consider the act of
producing and where that starts and where that ends." For
example, totes are an item that folks have wanted to claim as a
credit. The reasoning was that the totes are necessary to move
the fish to the processing lines, and thus totes are important
in the act of producing the value-added salmon product.
CHAIR SEATON recalled his time sitting on the Joint Legislative
Salmon Task Force which referred to value-added as the product
and doing something to the fish in order to achieve a value-
added processing, not merely eliminating people in the process.
He opined that the [goal] is to achieve quality, diversity in
the product line, and more employment in Alaska, although the
law seems to indicate that [value-added] only counts if people
are eliminated. The credit is trying to stimulate behavior in
which a company invests in equipment that changes the product
from an unfinished product to a finished product or changes the
product. In fact, he opined that a company that develops a
value-added product would ultimately employ more Alaskans over a
longer period of time. The aforementioned, he further opined,
is the most desirable end in value-added processing. "It's not
just for a company, it's the effect of taking that round product
and further processing it in Alaska, for Alaskans in Alaskan
communities," he commented.
CHAIR SEATON then pointed out the photos included in the
committee packet. These photos are of a fillet line in a plant
in Kasilof. He drew the committee's attention to the photos of
the conveyor belt upon which the fillets can be cut. As the
photos illustrate, the conveyor belt is used in conjunction with
hydraulic stools that adjust to the various heights of the
employees. Although this provides a value-added product, this
setup would be denied as a conveyor belt due to the
interpretation of conveyor belt. Therefore, the language in HB
321 attempts to clarify that even when people are used with
equipment specifically designed for the value-added processing
if it's integral to the value-added process, it's a qualified
expenditure.
9:05:11 AM
MR. COTTONGIM related that the fillet line, conveyor system
language Chair Seaton spoke of would be helpful to the
department.
REPRESENTATIVE JOHANSEN commented that lawmakers are frustrated
when the department has broad leeway with regard to the
interpretation of statute and writing regulations. In this
case, Representative Johansen opined that if the department is
going to review [the expenditures] on a case-by-case basis, the
existing language is fine.
REPRESENTATIVE EDGMON stated that the terms "specifically" and
"in the act of producing" seem to provide the division with the
aforementioned leeway. He asked if it would be simpler to say
"conveyors used to produce value-added salmon product".
9:08:36 AM
CHAIR SEATON interjected that the intent of the legislation [is
to qualify the expenditure] for something that is integral to
the value-added product processing, such as conveyors with
specialized cutting belts.
CHAIR SEATON noted that the committee packet includes letters of
support from Wrangell Seafoods, Alaska General Seafoods, Icicle
Seafoods, Peter Pan Seafoods Inc., Alaska Glacier Seafoods Inc,
and Inlet Fish Producers, Inc.
REPRESENTATIVE JOHANSEN asked if Version M was drafted on behalf
of the sponsor's request.
CHAIR SEATON relayed that the sponsor's staff indicated that to
be the case.
9:10:38 AM
MARY MCDOWELL, Vice President, Pacific Seafood Processors
Association (PSPA), informed the committee that PSPA is a trade
association that has been in existence since 1914 to represent
Alaska seafood processing companies. Peter Pan Seafoods Inc.,
Alaska General Seafoods, and North Pacific Seafoods, all members
of PSPA, are salmon processors that have made use of the tax
credit program to develop and expand new and value-added salmon
products, to help Alaska's salmon products keep pace with
evolving consumer demands, and keep Alaska's fisheries
competitive in world markets. The legislature constructed this
tax credit very tightly in order to specifically meet certain
goals. However, there remains much more to do to maintain the
momentum and ensure that Alaska's products are holding their
place in the world market. Currently, the skyrocketing cost of
energy is a large impediment for companies trying to make
investments [to achieve value-added products]. For the most
part processors operate in rural Alaska, where energy costs and
needs are the highest. Those energy costs are eroding much of
the profit margins that could otherwise go into this activity.
Therefore, this tax credit bridges that gap so that the
companies can make the investment and value to every pound of
processed salmon.
MS. MCDOWELL acknowledged that the legislature is grappling with
how to best use and invest the increased revenues the state has
at this time. She opined that the extension of the salmon tax
credit is the type of investment the state should make with
those increased revenues. Ms. McDowell emphasized that HB 321
promotes economic diversification, preparing for the future,
ensuring that Alaska's products are competitive worldwide, all
while making the best possible use of the state's natural
resources. She characterized this investment as one that would
provide high returns for the state in the future. In conclusion
Ms. McDowell related support for HB 321 and its quick passage.
CHAIR SEATON asked if the PSPA generally agrees that value-added
product is desired "or only if it's mechanically done."
MS. MCDOWELL said that although she hasn't had that specific
[discussion] with PSPA members, everyone would fully agrees that
adding value is the intent whether people or machines are used
to do so. She remarked that the idea of employing more people
in the industry has a benefit to the state.
9:17:13 AM
MARK PALMER, President, Ocean Beauty Seafoods, Inc., informed
the committee that Ocean Beauty Seafoods, Inc. (Ocean Beauty) is
an Alaskan corporation with seven processing plants in Alaska
operating from Southeast Alaska through Bristol Bay. The core
product of the company is salmon. Recently, 50 percent of the
company has been acquired by the Bristol Bay Economic
Development Corporation (BBEDC), and therefore the company is a
partner with the community development quota (CDQ) group. With
regard to adding value, particularly in relation to salmon,
there are many competing interests regarding where that can be
achieved. "It's a big decision for a company to make to invest
in a value-added product line; it's very much the tip of the
iceberg when you make a decision to invest in value-added
product in Alaska," he related. In fact, this summer Ocean
Beauty will put a fillet line in its Naknek facility, the cost
of which will be over $2.5 million. The cost is for the
equipment as well as the 45 more employees required to operate
the fillet line. Furthermore, additional space in bunkhouses
and mess halls will have to be constructed. Most of the
facilities are in remote locations where the company generates
its own power at the site. Therefore, extra power has to be
generated when new equipment is installed. All of the
aforementioned, he pointed out, fall outside the scope of this
legislation. This legislation, however, is a real incentive for
companies to invest in a seasonal operation.
MR. PALMER noted that although the intent with HB 321 is to add
value to the salmon and benefit harvesters, it has impacted the
type of folks companies employ and the training provided. The
[credit] has worked wonderfully, but Ocean Beauty still has
facilities that haven't directly benefitted from this [credit].
This legislation expedites many of the plans Ocean Beauty would
like to do. Mr. Palmer opined that Ocean Beauty has had a
positive impact on the market with regard to new products, such
as with prepared frozen foods and smoked products. The
aforementioned has made a difference as the industry was really
struggling five years ago when pink salmon was an albatross.
Although the last two years have been big pink salmon years,
there has been no carry-over can pack and the value has tripled
to the harvester.
REPRESENTATIVE WILSON related her understanding that it's often
difficult to fill the conveyor jobs with Alaskans. She then
inquired as to how many of Ocean Beauty's [conveyor positions]
are filled by Alaskans.
MR. PALMER informed the committee that Department of Labor &
Workforce Development data specifies that of the major
[companies in the industry], Ocean Beauty had the highest
percentage of Alaska hire. He noted that Ocean Beauty lists
over 300 jobs with the department, which was able to fill a
large percentage of those.
9:22:36 AM
REPRESENTATIVE JOHANSEN said it's important to recognize the
impact of the construction and creation of facilities, which
reach beyond the fishing industry as electricians and carpenters
are hired.
MR. PALMER confirmed that [Ocean Beauty] does hire many
contractors for support.
REPRESENTATIVE LEDOUX asked if any of the new equipment is
creating new jobs.
MR. PALMER explained that this past summer Ocean Beauty was
awarded a step grant from DLWD and flew two technicians from
Germany to conduct training for resident Alaskan employees.
Therefore, there are at least four new jobs in Kodiak as a
result of the aforementioned. He then related that the
locations where certain equipment has been installed has
required the training and hiring of staff to perform the
maintenance. He noted that the aforementioned are good paying
jobs that require skills that translate well to other fisheries
around the state beyond salmon.
REPRESENTATIVE LEDOUX recalled that the technicians mentioned
earlier earn $100,000 annually. She asked if regular processors
can be trained to perform that work.
MR. PALMER answered that for the most the work force comes from
machinists for which there is an apprenticeship program.
9:25:46 AM
TOM SUNDERLAND, Marketing Director, Ocean Beauty Seafoods, Inc.,
explained that he is responsible for reviewing the market and
what Ocean Beauty manufactures in order to determine how the two
align. For many years the salmon industry in Alaska was well
aligned. However, it's always changing. In fact, there have
been many changes over the past 5-10 years. Mr. Sunderland
related that his job is to be prepared in advance of these
[changes] and determine the direction the company should take.
He explained that innovation in industrial manufacturing almost
always means more money is necessary due to the need for
equipment, labor, or both. As the market changes, [companies]
are forced to innovate and thus spend money. The salmon
business, in particular, is a seasonal business and thus there
the difficult question regarding how much investment makes sense
arises. Over the past 15 years, many companies have struggled
and failed. He highlighted that the market for pink salmon is
doing extremely well. The growth in the pink salmon value has
been coincidental with this tax credit. However, much of Ocean
Beauty's ability to make a product that the market responds to
is the result of the investment; the tax credit helps with the
decision to make the investment.
9:29:32 AM
MR. SUNDERLAND related that [with the tax credit] Ocean Beauty
can take the necessary steps to innovate. That innovation
requires jobs with high pay and transferable skills. Mr.
Sunderland then showed the committee various new products of
Ocean Beauty, which he opined couldn't have existed before. The
tax credit has helped the company's ability to be ahead of the
market in regard to what consumers are demanding. He opined
that although the market conditions for salmon are better, the
industry is still quite fragile. Therefore, it's reason to
continue the tax credit, he remarked. Moreover, the tax credit
does generate an excellent return on the investment for the
state.
9:33:03 AM
REPRESENTATIVE LEDOUX inquired as to how much Ocean Beauty has
invested in this new equipment in order to produce the product
he showed the committee. She also inquired as to how much the
company would've invested had the tax credit not been available.
MR. SUNDERLAND deferred to Mr. Palmer with regard to the exact
number of dollars. However, he said that without these tax
credits and the ability to install equipment and thus change the
method of cutting fish, the product would simply not exist.
REPRESENTATIVE LEDOUX questioned why Ocean Beauty wouldn't,
without the credit, have installed the equipment since the
market is calling for the product.
MR. SUNDERLAND answered that the company wouldn't have had the
ability to do it because the company wouldn't have the ability
to fill the orders to treat the fish in a certain manner without
having the equipment in place. The difficulty for the company
is if the market demands something that the company can't
afford. If the company can't afford to purchase and install the
equipment, the company can't meet the market demands. In the
past 10-15 years that's been the case in the salmon business.
To simply manufacture the product and to change the processes
comes at a large initial cost. Furthermore, amortizing the cost
over a short fishery is difficult to justify. This legislation
provides a much better chance at a payoff.
9:36:12 AM
TIM BLOTT, Manager, Cook Inlet Processing Plant, Ocean Beauty,
Inc., informed the committee that he has been plant manager at
the Cook Inlet Processing Plant for six years now. He recalled
that when he first arrived, the plant was a traditional salmon
packer. In the last three to four years, the plant has
progressively expanded production such that the plant began
doing fillets with high-tech pin bone removal equipment. Last
year, the plant began producing skinless, boneless, canned
salmon. This year, the plant will produce skinless, boneless,
vacuum-packed salmon. The aforementioned is what the tax credit
has allowed. With regard to whether the aforementioned would've
been done without the tax credit, he opined that it probably
would have since it's market driven. The tax credit, however,
has allowed the companies to get into the market faster. He
then recalled questions regarding labor, and related that the
plant still produces traditional canned salmon, it merely has
added new lines that also require a labor force. Therefore, the
labor force has expanded. The equipment for the new lines is
highly technical and step grants have been received in order
train staff. Furthermore, there is an ongoing apprentice
program from which the staff from the machinists train [on the
new equipment] and processing staff train to go into the
machinist ranks. Kodiak is fortunate in that [the plant] has
100 percent local hire. To the question of the conveyors, Mr.
Blott informed the committee that the conveyor is used only for
salmon.
CHAIR SEATON surmised that the tax credit has allowed faster
change in behavior than the industry would have otherwise.
MR. BLOTT noted his agreement.
9:40:30 AM
MR. BLOTT, in response to Representative Edgmon, speculated that
the conveyor belt language was included to specifically address
the conveyor currently used in the Cook Inlet Processing Plant.
He confirmed that the conveyor belt is used only for value-added
salmon products.
9:41:29 AM
JULIE DECKER, Representative, Wrangell Seafoods, Inc., informed
the committee that Wrangell Seafoods, Inc. is a smaller
processor for which this tax credit can be even more important,
in terms of the ability to make these investments. She related
that the vast majority of Wrangell Seafoods, Inc. revenue is
from salmon. In 2007, Wrangell Seafoods, Inc. invested in a
complete overhaul of its plant in order to update and expand its
equipment to produce value-added product in conjunction with
Wrangell's new cold storage facility. Ms. Decker urged the
committee to extend the tax credit as there is still much room
to grow for the processors in Alaska.
CHAIR SEATON noted that the committee packet includes Ms.
Decker's letter.
9:43:26 AM
CHAIR SEATON, upon determining that no one else wished to
testify, closed public testimony.
9:43:44 AM
CHAIR SEATON noted that the committee hasn't received any
adverse comments on HB 321. He then asked if Mr. Cottongim
needs any further clarification with regard to the intent of the
language related to conveyors.
MR. COTTONGIM responded that he doesn't need further
clarification. He remarked that any remaining gray areas could
be addressed in regulation after working with Chair Seaton's
office.
9:45:38 AM
CHAIR SEATON turned the committee's attention to the
predetermination language, and asked if the documentation and
drawings submitted prior to an investment is problematic to Mr.
Cottongim.
MR. COTTONGIM answered, "I don't think so." He said that the
details could be worked out when the procedures and regulations
are created. He noted that it would take approximately 120 days
to get regulations in place, but upon the effective date of the
legislation some procedures could be created for use until the
regulations are in place.
9:47:46 AM
REPRESENTATIVE EDGMON related his support for moving the
legislation out of committee.
9:47:54 AM
REPRESENTATIVE JOHANSEN moved to report CSHB 321, Version 25-
LS1285\M, Kane, 1/23/08, out of committee with individual
recommendations and the accompanying fiscal notes. There being
no objection, CSHB 321(FSH) was reported from the House Special
Committee on Fisheries.
9:48:36 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Fisheries meeting was adjourned at 9:48:44
AM.
| Document Name | Date/Time | Subjects |
|---|