Legislature(1997 - 1998)
03/30/1998 03:20 PM House L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
March 30, 1998
3:20 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative John Cowdery, Vice Chairman
Representative Jerry Sanders
Representative Joe Ryan
Representative Tom Brice
Representative Gene Kubina
MEMBERS ABSENT
Representative Bill Hudson
OTHER HOUSE MEMBERS PRESENT
Representative Vic Kohring
COMMITTEE CALENDAR
HOUSE BILL NO. 400
"An Act combining parts of the Department of Commerce and Economic
Development and parts of the Department of Community and Regional
Affairs by transferring some of their duties to a new Department of
Commerce and Rural Development; transferring some of the duties of
the Department of Commerce and Economic Development and the
Department of Community and Regional Affairs to other existing
agencies; eliminating the Department of Commerce and Economic
Development and the Department of Community and Regional Affairs;
relating to the Department of Commerce and Rural Development;
adjusting the membership of certain multi-member bodies to reflect
the transfer of duties among departments and the elimination of
departments; and providing for an effective date."
- MOVED CSHB 400(L&C) OUT OF COMMITTEE
* HOUSE BILL NO. 472
"An Act relating to apportionment of business income."
- MOVED HB 472 OUT OF COMMITTEE
(* First public hearing)
PREVIOUS ACTION
BILL: HB 400
SHORT TITLE: DEPT OF COMMUNITY & ECONOMIC DEVELOPMENT
SPONSOR(S): REPRESENTATIVES(S) KOHRING, Austerman, Barnes,
Cowdery,
Hodgins, Kelly, Mulder, Ogan, Ryan, Therriault, Vezey
Jrn-Date Jrn-Page Action
02/12/98 2307 (H) READ THE FIRST TIME - REFERRAL(S)
02/12/98 2308 (H) L&C, FINANCE
02/23/98 (H) L&C AT 3:15 PM CAPITOL 17
02/23/98 (H) MINUTE(L&C)
02/25/98 (H) L&C AT 3:15 PM CAPITOL 17
02/25/98 (H) MINUTE(L&C)
02/27/98 (H) L&C AT 3:15 PM CAPITOL 17
02/27/98 (H) MINUTE(L&C)
03/06/98 (H) L&C AT 3:15 PM CAPITOL 17
03/06/98 (H) MINUTE(L&C)
03/20/98 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/21/98 (H) L&C AT 1:00 PM CAPITOL 17
03/21/98 (H) MINUTE(L&C)
03/25/98 (H) L&C AT 3:15 PM CAPITOL 17
03/25/98 (H) MINUTE(L&C)
03/27/98 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/27/98 (H) L&C AT 3:15 PM CAPITOL 17
BILL: HB 472
SHORT TITLE: APPORTIONMENT OF BUSINESS INCOME
SPONSOR(S): LABOR & COMMERCE BY REQUEST
Jrn-Date Jrn-Page Action
03/20/98 2682 (H) READ THE FIRST TIME - REFERRAL(S)
03/20/98 2682 (H) L&C, FINANCE
03/30/98 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
JEFF BUSH, Deputy Commissioner
Department of Commerce and Economic Development
P.O. Box 110800
Juneau, Alaska 99811-0800
Telephone: (907) 465-2500
POSITION STATEMENT: Presented revised fiscal note to proposed
CS, Version F, for HB 400.
JOE KYLE, Executive Director
Alaska Steamship Association
234 Gold Street
Juneau, Alaska 99801
Telephone: (907) 586-3107
POSITION STATEMENT: Testified in support of HB 472.
SHERMAN ERNOUF, Special Assistant
to Mayor Rick Mystrom
Municipality of Anchorage
632 West Sixth Avenue, Suite 840
Anchorage, Alaska 99501
Telephone: (907) 343-4044
POSITION STATEMENT: Testified in support of HB 472.
ERNIE HALL, Chairman
Board of Directors
Anchorage Economic Development Corporation
144 East Potter Drive
Anchorage, Alaska 99518
Telephone: (907) 562-2257
POSITION STATEMENT: Testified in support of HB 472.
ROSEMARY HAGEVIG, Executive Board Member
Southeast Conference
P.O. Box 240423
Douglas, Alaska 99824
Telephone: (907) 364-2154
POSITION STATEMENT: Testified in support of HB 472.
CHARLOTTE MacCAY, Vice President
Council of Alaska Producers
1133 West 15th Avenue
Anchorage, Alaska 99501
Telephone: (907) 272-2117
POSITION STATEMENT: Testified in support of HB 472.
PAM LA BOLLE, President
Alaska State Chamber of Commerce
217 Second Street, Suite 174
Juneau, Alaska 99801
Telephone: (907) 586-2323
POSITION STATEMENT: Testified in support of HB 472.
GREG CHAMPION, General Manager
Sheraton Anchorage Hotel and
Inter-Alaska Hotels, Incorporated
401 East Sixth Avenue
Anchorage, Alaska 99501
Telephone: (907) 276-8700
POSITION STATEMENT: Testified in support of HB 472.
BOB STILES, President
DRven Corporation
711 H street, Suite 600
Anchorage, Alaska 99501
Telephone: (907) 276-6868
POSITION STATEMENT: Testified in support of HB 472.
TINA LINDGREN, Executive Director
Alaska Visitors Association
3201 "C" Street, Suite 403
Anchorage, Alaska 99503
Telephone: (907) 561-5733
POSITION STATEMENT: Testified in support of HB 472.
RICK LAUBER, Lobbyist
for Pacific Seafood Processors Association
321 Highland Drive
Juneau, Alaska 99801
Telephone: (907) 586-6366
POSITION STATEMENT: Testified in support of HB 472.
BILL ELANDER, President and
Chief Executive Officer
Anchorage Convention and Visitors Bureau
524 West Fourth Avenue
Anchorage, Alaska 99501
Telephone: (907) 276-4118
POSITION STATEMENT: Testified in support of HB 472.
BOB SOUTHALL, General Manager
Anchorage Hilton Hotel;
President, Alaska Hotel Motel Association
500 West Third Avenue
Anchorage, Alaska 99501
Telephone: (907) 265-7118
POSITION STATEMENT: Testified in support of HB 472.
DEBORAH VOGT, Deputy Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
Telephone: (907) 465-2300
POSITION STATEMENT: Testified on HB 472.
SUSAN BURKE, Attorney for the
Northwest Cruise Ship Association
424 North Franklin Street
Juneau, Alaska 99801
Telephone: (907) 586-2777
POSITION STATEMENT: Testified on HB 472.
ACTION NARRATIVE
TAPE 98-40, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:20 p.m. Members present
at the call to order were Representatives Rokeberg, Cowdery,
Sanders, Ryan and Kubina. Representative Brice arrived at
approximately 3:25 p.m.
HB 400 - DEPT OF COMMUNITY & ECONOMIC DEVELOPMENT
Number 0035
CHAIRMAN ROKEBERG announced the committee's first order of business
was HB 400, "An Act combining parts of the Department of Commerce
and Economic Development and parts of the Department of Community
and Regional Affairs by transferring some of their duties to a new
Department of Commerce and Rural Development; transferring some of
the duties of the Department of Commerce and Economic Development
and the Department of Community and Regional Affairs to other
existing agencies; eliminating the Department of Commerce and
Economic Development and the Department of Community and Regional
Affairs; relating to the Department of Commerce and Rural
Development; adjusting the membership of certain multi-member
bodies to reflect the transfer of duties among departments and the
elimination of departments; and providing for an effective date."
Number 0060
REPRESENTATIVE JOHN COWDERY made a motion to adopt the proposed
committee substitute for HB 400, labeled 0-LS1375\F, Lauterbach,
dated 3/23/98.
Number 0090
CHAIRMAN ROKEBERG asked if there were any objections. Hearing
none, Version F was before the committee.
REPRESENTATIVE COWDERY explained Version F as chairman of the
subcommittee on HB 400, stating the subcommittee had met with the
bill sponsor and addressed a number of the committee's concerns.
He noted a primary concern was the $1.6 million fiscal note
attached to the original bill version by the Department of Commerce
and Economic Development (DCED). After the subcommittee's
discussions with the Administration and DCED regarding the staff
relocations necessary under the bill, the bill sponsor worked with
Representative Cowdery's office to develop what they believe is "a
more realistic financial view of the merger." Representative
Cowdery said the subcommittee's findings are expressed in the
fiscal notes before the committee; it concluded the total cost of
the necessary relocations would be $200,000 or less.
Representative Cowdery said he believes the long-term savings of up
to $1 million per year offered by the merger clearly justifies the
$200,000 overhead. Representative Cowdery stated the subcommittee
believes Version F, the proposed committee substitute, is ready to
be moved to the next committee of referral.
Number 0203
REPRESENTATIVE GENE KUBINA confirmed the fiscal note approved by
Representative Kohring is the fiscal note the committee is dealing
with.
Number 0220
[IT APPEARS CHAIRMAN ROKEBERG CALLED A BRIEF AT EASE AT THIS POINT
FROM TAPED TESTIMONY BUT THIS WAS NOT INDICATED IN THE TAPE LOG
NOTES]
CHAIRMAN ROKEBERG indicated the fiscal note Representative Kubina
referred to was before the committee, noting HB 400 had a further
referral to the House Finance Standing Committee.
REPRESENTATIVE KUBINA said he would like to see the department's
fiscal note, noting he did not have a copy.
CHAIRMAN ROKEBERG requested Representative Kubina be provided a
copy of the original departmental fiscal note.
Number 0269
CHAIRMAN ROKEBERG called a brief at ease at 3:23 p.m. The
committee came back to order at 3:24 p.m. [NOTE: THE TAPE WAS
RESTARTED SLIGHTLY AFTER THE COMMITTEE CAME BACK TO ORDER]
CHAIRMAN ROKEBERG stated "... had a fiscal note from the
department. Mr. Bush, you signed up to testify. Would you like to
explain this fiscal note, please?"
Number 0270
JEFF BUSH, Deputy Commissioner, Department of Commerce and Economic
Development, came forward to testify. He said the department had
updated the fiscal note based on the work draft of the proposed
committee substitute which had been provided to the department.
Mr. Bush said the changes were fairly minor, and some were based on
technical changes. A significant change in the proposed committee
substitute is that "international trade" would go to the Office of
the Governor, rather remaining in the new department. Mr. Bush
said that reflects a slight savings because the four people doing
international trade would not have to be relocated with the new
department, they would remain with the governor's office, going to
the Bank of America building [5 West Seventh Avenue in Anchorage,
to be renamed the Robert B. Atwood Building]. He stated DCED has
also provided worksheets attached to the fiscal note, pages 6 and
7, answering some of the earlier questions about how the moving
costs were calculated. Mr. Bush indicated the calculation by the
Department of Administration of the $6,100 per person moving cost
had been explained in a letter already provided to the committee.
He said page 7 of the fiscal note showed how the $125,000 data
processing costs for the transfer were calculated. He noted the
$22,500 cost for the new child care office and $23,500 for the new
Job Training Partnership Office (JTPO). Mr. Bush explained the two
bottom sections showed the two options of switching the Department
of Community and Regional Affairs (DCRA) to DCED's computer system
DCED (DCED Option 1, $74,220) or vice versa (DCED Option 2,
$77,500). He indicated these were relatively rough estimates and
noted the total data processing expenses would be approximately
$125,000. Mr. Bush noted one less administrative service staff
person would be moved due to an error in the original calculations,
and he indicated the rest of the changes were fairly small and of
that nature.
Number 0484
CHAIRMAN ROKEBERG recommended that the committee move both fiscal
notes, asking if there were any questions for Mr. Bush. Hearing
none, Chairman Rokeberg stated the public hearing was closed and
asked if there was any discussion among the committee members. He
commented, "I'd like to -- (indisc.) fiscal notes." Noting the
subcommittee's work and discussions in this area, Chairman Rokeberg
said he considered the $1.6 million moving costs, 260 positions, to
be absolutely contrary to the understanding of the committee and
the instructions from the subcommittee on the bill. He stated he
would say the sponsor's fiscal note has greater credibility than
the department's fiscal note because the subcommittee's work
indicates there is a minimal need for any physical relocation of
office premises, the nature of the department's fiscal note.
Chairman Rokeberg commented he thought that would stand up and
indicated the House Finance Standing Committee could address it
with appropriate intent language. He said he didn't think these
movements were necessary, noting much of the moving would take
place over a period of years as lease expirations naturally
occurred. He said the subcommittee testimony tapes were available
as part of the public record [House Labor and Commerce Standing
Committee subcommittee on HB 400 met March 21, 1998]. Chairman
Rokeberg stated he would like a motion on HB 400.
Number 0617
REPRESENTATIVE COWDERY made a motion to move the proposed committee
substitute for HB 400, Version F, labeled 0-LS1375\F, Lauterbach,
dated 3/23/98, to the next committee of referral with the
accompanying two fiscal notes and individual recommendations.
CHAIRMAN ROKEBERG asked if there were any objections.
REPRESENTATIVE TOM BRICE objected to the motion. He stated all HB
400 does is make small government into big, noting that was the
reason for his objection.
CHAIRMAN ROKEBERG asked if there were further comments.
Number 0688
CHAIRMAN ROKEBERG called a brief at ease at 3:29 p.m. The
committee came back to order at 3:30 p.m.
REPRESENTATIVE KUBINA stated he would not object to moving a bill
with fiscal implications to the House Finance Standing Committee,
indicating the issue might as well be decided in that committee.
CHAIRMAN ROKEBERG asked Representative Brice if he wanted to
maintain his objection.
REPRESENTATIVE BRICE answered in the affirmative.
A roll call vote was taken. Representatives Rokeberg, Cowdery,
Sanders, Ryan and Kubina voted in favor of moving the proposed
committee substitute. Representative Brice voted against it.
Representative Hudson was absent. Therefore, CSHB 400(L&C) moved
from the House Labor and Commerce Standing Committee by a vote of
5-1.
HB 472 - APPORTIONMENT OF BUSINESS INCOME
Number 0783
CHAIRMAN ROKEBERG announced the committee's next item of business
was HB 472, "An Act relating to apportionment of business income."
Chairman Rokeberg commented that there were a number of people who
wished to testify, noting he would present a brief outline of this
legislation's importance. Chairman Rokeberg said HB 472 introduced
as a committee bill at the request of a number of the affected
industries in Alaska. He said it results from an Alaska Supreme
Court ruling in February 20, 1998 ["1995" stated on tape] case of
the State of Alaska v. OSG Bulk Ships, Inc. The ruling was that
Alaska Corporate Net Income Tax Act (ANITA) applies to the income
of foreign-flagged ships and aircraft bringing goods and passengers
to Alaska. Chairman Rokeberg said he believed this tax would have
a very chilling effect on the business activity and international
trade of Alaska, stating, "It exposes the myth that we are open for
business." He indicated that if they allowed the taxation ability
granted by this court decision to stand, it would have a very
negative effect on Alaska's commerce. He referred to the court's
finding regarding the legislature's adoption by reference of the
Internal Revenue Code (IRC), noting the statute said that Sections
1 through 1399 were adopted by reference unless otherwise excepted
to or modified by the statute. He noted the court looked at
legislative history on one of three issues but he could see
basically no substantive history in the record, although he said
they are still doing some research.
Number 0940
CHAIRMAN ROKEBERG said he believed the legislature meant what it
did, it adopted the IRC "by the number," noting he would call it
"black letter law." He stated that economic development, job
creation and the economic health of the state would be very
severely impacted without the passage of HB 472 and he expected to
hear that in the testimony. Chairman Rokeberg said he was very
concerned about this important issue and he looked forward to
hearing the Administrations's testimony and possible position.
Because of the tax on foreign-owned, foreign-flagged vessels and
aircraft, this would particularly impact the export of all natural
resources from the state. It also could affect the air carriers
and passengers coming into the state, particularly into Anchorage
International Airport. Without this particular Internal Revenue
Code ["Service" stated on tape] Alaska could potentially face
retaliation against what is called a "sub-national taxing entity"
because of the treaties in place between the United States (US) and
foreign governments, particularly Japan. He commented that Alaska
would be the only state in the union with this ability to tax these
foreign businesses. He noted the large number of businesses and
groups with concerns who supported HB 472, noting letters provided
to the committee members. He commented on the rapid response to
this issue. He also drew the committee's attention to letters in
the bill packet regarding similar taxes in New York and New Jersey
which were withdrawn in the face of federal opposition. He also
noted a very exhaustive report and critical analysis by Dr. David
Reaume of Alaska Economics, Incorporated, on the Alaska tax and
foreign-flagged ships and aircraft. He noted copies of the court
case and copies of the federal law had also been provided.
The sponsor statement reads:
This bill originated at the request of the industries
effected by the recent Alaska Supreme Court ruling, State
of Alaska vs OSG BULK ships, Inc., dated February 20,
1998, that the Alaska Corporation Net Income Tax
("ANITA") applies to the income of foreign flagged ships
and aircraft bringing goods and passengers to and from
Alaska.
This new tax burden will have a chilling effect on
commercial development, international trade and job
creation in this state. It will slam the door on the
myth that "Alaska is open for Business". If the
Department of Revenue implements this new tax, Alaska
would be the only state to have such a tax.
The court held that the exemption from taxation granted
in 26 U.S.C. Section 883 "is impliedly excepted to [or
modified] by the ANITA". The Legislature adopted Section
883 when it enacted AS 43.20.021(a) "Sections 26 U.S.C.
1-1399 and 6001-7872 (Internal Revenue code), as amended,
are adopted by reference...", (See the bill.). The Court
found otherwise.
The issue for the Legislature and the Administration can
be posited as: Should the public policy of the State of
Alaska be to tax the net income of foreign flagged/owned
ships, aircraft, railroad rolling stock and communication
satellites contrary to the tax law of the United States
and its agreements with foreign governments engaged in
commerce in our state?
A strong indication that the Legislature intended to
adopt Section 883 without exception is evident by the
rejection of legislation sought by the Department of
Revenue in 1991-1992. This legislation specifically
stated that Section 883 was not adopted in Alaska tax
law.
Commerce of the state of Alaska will be severely impacted
without passage of HB 472. The following business
sectors would be directly taxed; subject to foreign
retaliation or secondarily effected: international air
cargo, air couriers, and airlines; fishers and seafood
processors; mining and coal companies; cruiseship lines
and tourism; timber and wood products; manufacturing
firms; and oil and LNG [liquefied natural gas] exports.
The imposition of a new business tax, for an as yet
unknown amount, will have a detrimental effect on the
business and employment of Alaskans.
Number 1190
REPRESENTATIVE JOE RYAN asked if this was not the same thing that
happened with Barclays Bank PLC and the state of California where
they were taxing a proportional share of income that the bank made
in California which was against a reciprocal tax agreement Great
Britain had with the US.
CHAIRMAN ROKEBERG stated he was not familiar with that case and
noted perhaps one of the witnesses could answer more appropriately.
Number 1310
JOE KYLE, Executive Director, Alaska Steamship Association (ASA),
came forward to testify support of HB 472. He noted the
association is comprised of a broad-based group of marine
transportation companies operating in Alaska and their agents. He
said these companies move timber, mining, fisheries and petroleum
products, as well as cruise ship passengers, between Alaska and
overseas ports. He referred to the February 20, 1998 supreme court
ruling previously mentioned which stated that an exemption from
corporate income tax for foreign international air and sea carriers
existing at the federal level in IRC Section 883 no longer applies
in Alaska. He discussed the case in some depth, indicating income
earned overseas is exempted from state taxes. In reversing the
ruling the justice said this would be inconsistent with Alaska's
apportionment system. Mr Kyle noted the other 49 states use a
"sourcing" methodology. He said the ASA's membership would be
severely affected by this new tax, noting they have already seen a
41 percent decline in the number of waterborne carriers whom their
members are affiliated with calling in Alaska ports over the past
several years. He thinks most of this decline has come from
reduced ship calls in the timber and fishing industries. He said
with the current economic crisis in Asia, Asian shipping companies
are barely surviving and the markets they service are extremely
depressed. He indicated he thought international shipping
companies would probably raise their Alaskan freight rates because
of this tax, noting this would make Alaskan products, especially
fish and timber, less competitive in already depressed markets. He
indicated associated industries such as longshoring and port
services would also be negatively affected, and he noted the
possibility of retaliatory action against domestic carriers
operating overseas. He mentioned the three other states
(California, New Jersey and New York) which rescinded actions to
impose similar taxes.
REPRESENTATIVE COWDERY confirmed with Mr. Kyle that Japan did not
tax Alaskan liquefied natural gas (LNG).
MR. KYLE said the tax in question would be on an American carrier
operating in Japan, Federal Express Corporation for example, noting
he thinks LNG is shipped to Japan on foreign carriers.
REPRESENTATIVE KUBINA commented that Alaskan oil is shipped on
American vessels, and another question would be whether Alaska
Airlines flights to the former Soviet Union are being taxed.
Number 1550
MR. KYLE said he understands that there is something of an
international protocol in effect where all the countries have
agreed not to let local jurisdictions tax internationally-operating
carriers. He said that is the fear of this type of tax, that if a
local, in this case state, tax is enacted on a foreign carrier
operating in that jurisdiction then it would invite a reciprocal
tax in the other country on US-owned companies operating in that
country, in that local jurisdiction.
REPRESENTATIVE KUBINA asked if the Department of Revenue (DOR) had
put something out which said it intends to do this, or is if was
this an attempt to "nip it in the bud" because of the court case.
MR. KYLE said they were primarily reacting to the Alaska Supreme
Court case, indicating they expect the DOR to apply this new
taxation ability as broadly as it can.
CHAIRMAN ROKEBERG noted the committee looked forward to DOR's
response. He said there has been a legal request for a rehearing,
noting he thinks that means there has been a stay.
REPRESENTATIVE KUBINA indicated he would like to hear if any Alaska
businesses were being attacked.
CHAIRMAN ROKEBERG noted it was his understanding the OSG Bulk
Ships, Incorporated, had foreign-flagged vessels participating in
the Valdez trade as a only temporary measure, indicating it was the
nature of the ownership of the vessel itself. He said the Jones
(ph) Act mitigated against the use of the Valdez trade to the other
49 states and the export waiver requirement was on American-
bottomed ships also. He noted he believed American vessels are
taxed by the US government, not the other countries they visit, and
that is the nature of the IRC Section 883 exemption.
REPRESENTATIVE RYAN mentioned the economic crisis in the Pacific
Rim, commenting that the devalued Asian currencies make Alaska
products even more expensive. He indicated the cost of Alaskan
products would increase, becoming even less competitive, if
retaliatory taxes were imposed.
Number 1707
SHERMAN ERNOUF, Special Assistant to Mayor Rick Mystrom,
Municipality of Anchorage, testified next via teleconference from
Anchorage on behalf of Mayor Mystrom in support of HB 472. He
referred to Mayor Mystrom's letter, noting they are fully
supportive of HB 472. He said the mayor continues to be very
concerned about economic development in Anchorage, and there is
concern that economic development at the Port of Anchorage and
Anchorage International Airport could both be stifled without HB
472.
REPRESENTATIVE KUBINA asked if the Municipality of Anchorage was
willing to take any other position on ways to close state's fiscal
gap such as income taxes, permanent fund, et cetera, so that
municipality's revenue sharing would not be cut any more.
MR. ERNOUF replied he did not think attacking foreign carriers was
the way to do that, noting he was not really currently equipped to
answer the question about the permanent fund.
Number 1790
ERNIE HALL, Chairman, Board of Directors, Anchorage Economic
Development Corporation (AEDC), testified next via teleconference
from Anchorage in support of HB 472. He discussed the recent court
decision briefly. He said the Alaska corporate income tax would be
applied to past, present and future net operating income. He said
the state of Alaska depends on trade (including the export of oil
and gas, seafood, timber and air cargo) and tourism as its
"principle economic engine." He indicated the AEDC believed the
negative impacts on Alaska's trade would be in far excess of any
direct revenue obtained.
CHAIRMAN ROKEBERG asked how AEDC was funded.
MR. HALL replied that the AEDC revenues came from the municipality
and private individuals. He said in excess of 50 percent came from
private funding, and the state provided approximately $50,000
through the ARDOR Program out of AEDC's $1 million annual budget.
Number 1881
ROSEMARY HAGEVIG, Executive Board Member, Southeast Conference,
came forward to testify next in Juneau in support of HB 472. She
explained that Southeast Conference is the regional economic and
community development organization for Southeast Alaska and they
follow all issues relating to timber, mining and tourism as these
are the mainstays of the regions economy. She said the members of
the region's mayors and cruise ship industry representatives have
been meeting for some time to look for solutions to mutual
problems. She said they realized there was not a lot of data on
the ratio of income to the municipalities as opposed to the
expenses so a study was commissioned from Southeast Conference.
She cited this February 1998 McDowell Group, Incorporated, report,
"Cruise Industry Impacts on Local Governments in Southeast Alaska,"
she noted Southeast Alaskan municipalities collect approximately
$10 million in annual revenues from the industry while incurring
approximately $3 million in costs. Ms. Hagevig commented that this
does not include the total economic impact to the region, only the
cost/revenue ratio by local governments and their relationship with
the cruise ship industry.
Number 1987
MS. HAGEVIG mentioned the City and Borough of Juneau has done more
comprehensive studies in previous years. She stated that the
Southeast Conference opposed imposition of the considered tax
because of the potential for adverse economic impact on Southeast
Alaska's communities and people, noting the cost of a tax would be
passed on to Alaskan shippers using foreign-flagged ships and
aircraft, making them less competitive. She also indicated
potential reciprocal taxes could make the US less competitive in
the global market. Ms. Hagevig indicated the tax would adversely
affect economic development in Southeast Alaska communities by
being applied proportionately to the length of time a cruise ship
is in port and the number of ports of call. She said the
conference is also concerned that the cruise ships would decrease
the number of ports of call and time in port in response. She
indicated the City and Borough of Sitka has experienced a
noticeable reduction in revenue because of variation in cruise ship
scheduling.
REPRESENTATIVE KUBINA asked if the conference had taken a position
on how the state of Alaska should increase its revenues to pay its
bills.
MS. HAGEVIG said she did not think the Southeast Conference had a
specific position on that issue. She indicated, however, that
municipalities would look to state government for any decreased
municipal revenues to pay for needed services, noting more and more
responsibilities being passed to the local government level by the
state.
Number 2215
CHARLOTTE MacCAY, Vice President, Council of Alaska Producers, came
forward to testify next in support of HB 472. She stated the
council is a membership of the large mine interests for the state
of Alaska. She indicated that the supreme court ruling would hurt
Alaska's position in competitive world markets. She mentioned the
state's limited road system and the resulting difficulties mining
companies in Alaska face already makes it difficult for mining
companies to produce their products at competitive rates. She
indicated the tax would cause higher freight costs which would be
passed on to producers and the council felt the ruling was not in
agreement with the legislature's original intent.
CHAIRMAN ROKEBERG asked her what types of vessels were used in the
export of Alaskan minerals by active Alaska mines, mentioning the
Red Dog (ph) and Greens Creek mines, and asking her to comment on
the Faro (ph) mine in Skagway.
MS. MacCAY replied she was not familiar with the Faro (ph) mine's
shipping, but she said the Red Dog (ph) is currently "lightering"
offshore so the ships don't actually come within the three-mile
limit, so she is not sure how that would affect this tax. She
noted the ships are all foreign-bottomed, and approximately half of
the ore was exported to British Columbia and the rest went between
Europe and Asia, depending on the year's market. She said they
expect to bring the ships into the dock and then would be within
the tax structure.
CHAIRMAN ROKEBERG asked her about the flags of the ships they used
now and contemplated using in the future.
MS. MacCAY said they vary and indicated did not have the details
with her.
CHAIRMAN ROKEBERG asked about the effect of the ruling on other
council members' use of shipping that might be affected by this
legislation.
MS. MacCAY indicated the entire industry was concerned and
companies were questioning whether they want to even consider doing
business in the state if that is going to be a problem.
CHAIRMAN ROKEBERG asked if she could check on Skagway, mentioning
a very large Alaska Industrial and Export Authority (AIDEA) loan
and the closure of Faro (ph) mine. He noted he wanted to know what
type of bottoms had been used.
MS. MacCAY indicated she would provide the committee with a quick
summary.
Number 2349
PAM LA BOLLE, President, Alaska State Chamber of Commerce, came
forward to testify next in support of HB 472. She stated the
chamber represents nearly 700 members who employ approximately
70,000 people. She said the chamber speaks in support of HB 472,
noting it did not support any new tax that is not part of an
overall long-range plan reviewed and supported by business. Ms. La
Bolle referred to the new tax allowed by the ruling as "ad hoc. "
Noting low oil prices and the need for economic diversification,
she said the tax could have a chilling effect on business interests
because it impacts so many present and potential industries across
the board. She mentioned a proposed tax incentive bill for
investors building an LNG pipeline, and she said allowing this new
tax decreed by the courts provides a disincentive for new and
existing businesses. Mentioning that the tax has not been
established by legislative policy. Ms. La Bolle commented that the
DOR had tried and failed to gain support for the tax with a
previous legislature; the tax was not seen as being beneficial to
economic development or in the state's best interest and she said
it should not be allowed to stand by the court's "view of an
implication." Ms. La Bolle stated that the new tax would increase
transportation costs for Alaskans and directly and adversely affect
many of the chambers members. She noted other members would be
affected indirectly.
REPRESENTATIVE KUBINA thanked Ms. La Bolle for not just saying "no"
to just anything, noting he agreed with her statement about the
necessity for an overall long-range plan for businesses.
Number 2349
MS. LA BOLLE said, "Mr. Chairman, if I may ..." [TESTIMONY
INTERRUPTED BY TAPE CHANGE]
TAPE 98-40, SIDE B
Number 0001
MS. LA BOLLE continued, "... the greatest benefit to the state is
a positive environment for economic development because the
stronger our economy, the more business there is in the state is in
the state, the more taxes that will be coming in."
Number 0031
GREG CHAMPION, General Manager; Sheraton Anchorage Hotel and Inter-
Alaska Hotels, Incorporated, testified next via teleconference from
Anchorage in support of HB 472. He stated Inter-Alaska Hotels,
Incorporated, is a sister company to Hanjin International
Corporation, which is a foreign corporation and the parent company
to Korean Airlines. He noted his company has been doing business
in Alaska since 1988 and has been involved a variety of different
businesses including real property ownership, cargo and passenger
flights, in-flight catering, laundry and linen cooperative, and the
Sheraton Anchorage Hotel. He said their Anchorage operation
accounts for over 350 full-time Alaskan employees. He discussed
some history of their business operation and Anchorage
International Airport about ten years to approximately 1987. Mr.
Champion noted Alaska lost almost every foreign carrier when air
space over the former Soviet Union opened, and he indicated Alaska
might lose more foreign carriers because of increasing taxes and
landing fees. He noted all twelve of the foreign carriers have
other options besides stopping in Anchorage which is only a
technical stop, mentioning other possible locations. Mr. Champion
indicated the cost of doing business has caused companies to stay
in Alaska, noting his company is looking to expand its Alaskan
business looking to the year 2000 and beyond, as long as Anchorage
remains competitive economically. He said Alaska would be unique
if it enacted this tax, Alaska could be viewed as unfavorable place
to do business by foreign countries, and he also mentioned the
possibility of retaliatory taxes. He indicated he felt this would
be a devastating blow to the economic growth Alaska has experience
in the last couple of years and would have a drastic impact on all
business in the state including tourism, natural resources and
business development.
CHAIRMAN ROKEBERG asked him if the US government and the Republic
of Korea have treaty agreements which reciprocally exempt the
taxation of aircraft.
MR. CHAMPION answered in the affirmative.
CHAIRMAN ROKEBERG asked if he could obtain a written copy for a
committee. He also asked if Mr. Champion thought Korea Airlines,
with its significant Anchorage investments, would change its
Anchorage business plan and strategy if the tax was enacted.
MR. CHAMPION indicated his company would probably change locations
if it would save money over the long term, noting air
transportation was the core business. He provided his phone number
to the committee: (907) 343-3143.
Number 0254
BOB STILES, President, DRven Corporation, testified next via
teleconference from Anchorage. He stated his corporation is
involved in the development and marketing of Alaska's coal
resources. He noted he was an Alaskan corporate income tax payer.
He said that, with the exception of North Slope oil, all seaborne
Alaskan exports to foreign destinations move in foreign-flagged
vessels owned by non-US corporations. He indicated that without
the restoration of the IRC Section 883 exemption the worldwide net
income of the non-US corporate owners of these foreign-flagged
vessels would be subject to taxation under ANITA. He indicated
Alaska would be unique in imposing such a tax. While the federal
government cannot dictate state taxation policies, he said such a
new tax would violate federal trade treaties with Alaska's most
important trading partner, Japan. He indicated the possibility of
retaliatory taxes existed. He said the Alaska consumer of imported
goods and the Alaska producer of exported goods would pay for this
new tax in higher freight rates. He indicated additional
collection costs could nullify any new revenues and adversely
impact existing or developing resource export agreements. He
questions whether, in enacting or modifying ANITA, it was ever the
legislature's intent to attempt to impose a corporate income tax on
foreign owners of foreign-flagged vessels and foreign-registered
aircraft. He said he believes the court had no idea of the
potential consequences of its opinion, however, it was in effect
setting policy rather than implementing law. He spoke in strong
support for HB 472, indicating Alaska's reputation would be damaged
and its economy negatively impacted by imposition of the this tax.
Mr. Stiles indicated the legislature needed to take decisive action
to minimize damage to Alaska's reputation as a business location,
referring to comments about Internet publicity on this issue by an
assistant commissioner of the DOR.
CHAIRMAN ROKEBERG asked about the types of vessels Usibelli Coal
Mine used to export its product.
MR. STILES answered that it used all foreign-flagged vessels.
Number 0430
TINA LINDGREN, Executive Director, Alaska Visitors Association
(AVA), testified next via teleconference from Anchorage in support
of HB 472. She noted the AVA's membership collectively employs
25,000 Alaskans. She said that HB 472 clarifies that IRC Section
883 has not been modified, noting she did not think she could
improve on previous testimony. She indicated the tax would have
negative effects on Alaska's ability to compete globally, and she
noted that even small losses, like the loss of single air carrier
or a cruise ship port of call, would have statewide ramifications,
and she briefly discussed this.
CHAIRMAN ROKEBERG noted he hoped the AVA would make this a top
agenda item at the AVA's upcoming Juneau convention.
Number 0560
RICK LAUBER, Lobbyist for Pacific Seafood Processors Association,
came forward to testify next in Juneau in support of HB 472. He
said any tax on transporters of their products would be an indirect
tax on their products and a direct "pass-through" to his group. He
noted that commercial fishermen and seafood processors are already
heavily taxed, noting the state government's fishery business tax,
the "raw fish tax," of from 3 to 6 percent. He mentioned the local
governments' sales taxes on seafood products of up to 3 percent; he
also mentioned the seafood marketing tax, the "salmon tax," and the
salmon fisheries enhancement tax, the marine fuel tax, et cetera.
He said the industry is already in competition with other protein
products, with farmed salmon receiving the most attention and has
significantly eroded the industry's markets. He indicated this new
tax would negatively affect the industry's competitiveness and
contribute to its decline in domestic and world markets. Mr.
Lauber stated this tax could encourage more at-sea factory trawlers
to transport their product directly to foreign ports, avoiding both
the Alaska landing tax and the new tax, which would not only
disadvantage Alaskan fishermen and processors competitively, but
also could cause the state to lose significant revenue. He
indicated this could also negatively impact current or potential
markets for value-added products, mentioning the Anchorage cold
storage facility. He indicated the seafood industry was already in
weak situation and this was an especially bad time for a new tax.
CHAIRMAN ROKEBERG noted Mr. Lauber mentioned an impact to state
revenue as it relates to the Alaska landing tax and asked him to
explain.
MR. LAUBER provided some background information. He said the
shore-based processors pay a business license tax which is a
percentage ranging from 3 to 6 percent on the processor's exvessel
purchases, and is usually called the "raw fish tax." A few years
ago the legislature enacted a landing tax which imposes a 3.3
percent tax on processed fisheries products landed in the state.
He indicated there are a number of at-sea processors who have taken
their product directly to foreign ports and are able to avoid the
tax by not delivering their product to Alaskan ports, although
there are disadvantages including loss of fishing time. He
indicated any increases to transportation fees to move product out
of Alaska to foreign ports on foreign trampers could increase the
amount of at-sea processors fishing in the 200-mile limit
delivering their product directly to foreign ports, noting the
state would lose that landing tax revenue. There was some
discussion about this fishing system and reference to US Senator
Ted Stevens.
Number 0990
BILL ELANDER, President and Chief Executive Officer, Anchorage
Convention and Visitors Bureau (ACVB), testified next via
teleconference from Anchorage in support of HB 472. He indicated
he agreed with previous testimony and referred to his March 24
letter and a letter from the Cook Inlet Book Company, Incorporated,
an ACVB member. He noted the ACVB has over 1,375 business members.
He drew on his experience working with government and foreign
delegations and he indicated Alaska's openness to business has
resulted in the entry of foreign businesses. He mentioned the
Alyeska Resort and the Korean Airlines as examples, discussing the
Jones (ph) Act and Korean passengers deplaning in Anchorage. He
commented the "milestone" of plans by Northwest Airlines for round-
trip passenger service from Tokyo, Japan to Anchorage beginning
June 17, indicating there were great future opportunities, and that
there would be negative ramifications for Alaska if it did not
compete effectively in the growing global economy.
CHAIRMAN ROKEBERG indicated Northwest Airlines has been an
important of the Anchorage International Airport development over
the years, noting he had been on the first Boeing 377 Stratocruiser
flight by Northwest Airlines between Anchorage and Seattle in 1950.
Number 1262
BOB SOUTHALL, President, Alaska Hotel Motel Association, testified
next via teleconference from Anchorage in support of HB 472. He
stated the association was very much in favor of this legislation.
Mr. Southall noted he was the general manager of Anchorage Hilton
Hotel. He mentioned on previous testimony, and he commented on
technology changes in inbound air travel, primarily the Boeing 747,
and also the previously mentioned opening of airspace over the
former Soviet Union. He noted these economic choices seriously
affected Anchorage's hotel business immediately, noting the
Anchorage Hilton Hotel is the state's biggest hotel. He indicated
numerous organizations have been working together to recoup those
losses for the past ten years. He stated they believe this tax
would make them start over in their attempts. He also mentioned
that the hotel business is a global economy. He asked the
committee to pass HB 472 so that they could continue their job of
improving the economics through both the airport and conventions.
Number 1421
DEBORAH VOGT, Deputy Commissioner, Department of Revenue, came
forward to testify in Juneau. She stated the Knowles
Administration has not yet developed a complete position on this
legislation; she noted the Administration is reviewing information
and does not feel it has enough information on the tax effects of
HB 472 to take a position. She noted, however, the Governor has
said a position will be developed as HB 472 passes through this
body. Ms. Vogt noted, as previous witnesses have testified, the
bill would reverse the February 1998 Alaska Supreme Court decision
in the case of State of Alaska, Department of Revenue v. OSG Bulk
Ships, Inc. She commented that decision is not final as the
taxpayers have moved for a rehearing and the court has not yet
decided that motion. The decision holds that the income from
foreign-owned ships and aircraft is not exempt from Alaska's
corporate income tax; it finds that the section of the IRC is not
incorporated into Alaska's tax. She said, to understand the
decision, it was necessary to gain an understanding of the way
Alaska's corporate income tax works and its relationship with the
federal tax. Alaska taxes by apportionment and when any sort of
business or industry does business in more than one tax
jurisdiction, the jurisdiction has to find a way to divide the way
between the taxing jurisdiction and all other areas of the world.
She noted a corporate income tax applies only when an industry
makes a profit and one method or another for dividing the income
has to be enacted. There are two basic approaches: separate
accounting and formula apportionment. She indicated the US
government has chosen separate accounting and Alaska has chosen
formula apportionment. She used the analogy of a restaurant check:
each person's separate costs can be totaled individually or the
bill can be divided equally, which she said is formula
apportionment. Alaska uses a three-factor formula to divide the
"pie" of an entity's income everywhere; it uses the factors of
payroll, property and sales, and it has a slightly modified formula
for the apportionment of oil industry income.
CHAIRMAN ROKEBERG referred to the two memorandums which had been
included in the bill packet, noting she might want to refer to
these. He commented they were the OSG Bulk Ships, Incorporated
case outline and the Alaska corporate income tax selected
principles.
Number 1628
MS. VOGT noted the second sheet is sort of a glossary of terms used
in Alaska's corporate income tax. She stated the transportation
carriers, as previously heard, are apportioned by "a days in port"
or "a ground time formula" which looks at the industry's income
everywhere and divides it among the various location in which it
does business by comparing the days in port everywhere to the days
in port in Alaska. She said the airline formula comes down to "a
departures in Alaska versus departures everywhere."
CHAIRMAN ROKEBERG asked if the days in port were part of the multi-
state tax compact (MTC).
MS. VOGT replied that she was not sure if the MTC has the "days in
port" formula but she knows it has the "ground time for airlines"
formula.
CHAIRMAN ROKEBERG indicated his reading leads him to believe that
is a part of the MTC, and he said part of the court's opinion
referred to that section as part of its rationale for its decision,
commenting it seemed to "boot-strap" off the MTC.
Number 1708
MS. VOGT noted that Alaska is a member of the MTC and has adopted
the Uniform Division of Income for Tax Purposes Act (UDITPA), which
is what the court referred to as the MTC. She said the next issue
which has to be dealt with on the income is the "pie" that is
divided, the taxpayer's overall income. She stated for many years
the legislature had taken the legislation taxed on worldwide income
and so the "pie" of the taxpayer's income divided up by the formula
would be its income everywhere in the world. In 1991, Alaska
followed many other states in adopting the "water's edge" method of
taxation for all industries in Alaska except for the oil industry,
which remains on the worldwide unitary business system. Both of
these systems look to not only the income of the taxpaying
corporation, the corporation doing business in Alaska; but also all
of its affiliates, and applies what is called the "unitary
principle." The unitary principle defines what part of the
corporate family the tax will examine in determining "everywhere
income." Generally, a business engaged in the same type of work
everywhere will be found to be unitary, noting the example of an
international shipping company which might incorporate each of its
ships separately but is in the business of international shipping:
that will be a unitary business. Before 1991, she indicated that
industry would have been taxed by looking at the "pie" worldwide,
and all of the ships, no matter where they went, would be included
in the unitary approach. Since 1991, only those corporations, and
in this example, those ships, that have significant contact with
the US would be included in that "pie." Any corporation that
actually does business in Alaska would be included, and then any of
its affiliates that do at least 20 percent of their business in the
US. She addressed Representative Ryan's previous comment about
Barclays Bank PLC decision, which she said was a decision
litigating the validity of the worldwide unitary approach, noting
she mentioned Alaska has since backed off from the worldwide system
in favor of the "water's edge." For example, the OSG Bulk Ships,
Incorporated, case itself would not have even arisen today because
the ships doing business in Alaska were American-bottomed ships and
the affiliates that were included in the apportionable "pie" in
that a case included some foreign ships that had no business in the
US.
Number 1930
MS. VOGT noted those ships would now be excluded, so that taxpayer
would not be before them. She said the US uses a separate
accounting approach for "sourcing" income, and she says it does
exactly that: it sources income to the specific location in which
it is earned. What the court said was that Alaska's apportionment
method which uses the formula to avoid double taxation was
inconsistent with the federal approach that adopts special rules
like the 883 [IRC Section 883] for the purpose of avoiding double
taxation. She said Alaska's corporate income tax generates just
above $300 million in annual income, and $270 million of that comes
from the oil and natural gas industry, noting it is easy to
separate out because of the difference in formulas. She said that
leaves about $50 million for all other taxpayers in the US. She
stated DOR has not undertaken any compliance effort, noting it has
been the DOR's position that IRC Section 883 does not apply in
Alaska, and the department assessed OSG Bulk Shipping,
Incorporated, in 1987. Since that case has been proceeding though
the system, DOR has not actively sought compliance from other
taxpayers but those taxpayers who come in front of the DOR for
other reasons, noting, "... for whatever reasons that an Alaska
taxpayer might have affiliates that would come under 883, we have
assessed or we have asked the companies for waivers of the statute
of limitation, so there are some taxes out there that ... will be
affected by the decision."
CHAIRMAN ROKEBERG confirmed that DOR has not enforced it.
Number 1991
MS. VOGT replied DOR has not done an active compliance effort,
noting the US has a voluntary taxpaying system. She said the DOR
actively studies industries from time to time, noting that most of
its efforts are spent on auditing.
CHAIRMAN ROKEBERG asked if that was because OSG Bulk Ships,
Incorporated, filed an action.
MS. VOGT said she could not speak to that case.
CHAIRMAN ROKEBERG asked what the rationale was for the DOR's
action.
MS. VOGT said some taxpayers come before DOR for other reasons and
when the IRC Section 883 issue has arisen, DOR has either assessed
it or waived the statute of limitations. She noted DOR has not
made an active compliance effort, indicating they have not gone out
to the world telling businesses they ought be paying tax under IRC
Section 883.
CHAIRMAN ROKEBERG said the waiver of the statute of limitations
says they can't use that as (indisc.) of defense to collect it if
there is a favorable ruling on this case.
MS. VOGT said that is correct. Referring to an earlier question
about whether the department would take any action right now, she
stated DOR did not feel there was any action to take. She said the
legislature sets the tax policy in statute, and the court has just
told them what that law means, and it is the DOR's job to apply the
law.
CHAIRMAN ROKEBERG underscored for the committee that the DOR is
just doing its job here, not creating this problem. He indicated
they expected the DOR to collect taxes.
Number 2292
MS. VOGT said the Alaska Supreme Court ruling and HB 472 impact
areas of revenue the committee has heard a lot about in this
meeting's testimony. Regarding the cruise ship industry, she said
Alaska taxes any shore-based activities, noting IRC Section 883
only goes to the income earned by the ships and the aircraft. To
the extent that the business has other activities in the state,
those are currently taxable. Referring to testimony about
airlines, Alaska taxes those airlines that are in international
commerce which are incorporated in the US or use American aircraft,
and the same goes for shipping. She would point out that it is her
understanding that the LNG tankers currently on the water are
American-owned, noting she thinks they used to be foreign-owned but
have recently been replaced, indicating she was referring to the
Nikiski to Tokyo trade. Therefore, she believes that is currently
a taxable trade. She referred to testimony from the natural
resource extraction industries, noting there was testimony that
those shipping businesses are very marginal at the moment. Ms.
Vogt pointed out that this is corporate income tax, indicating that
if there are no profits, there is no tax.
TAPE 98-41, SIDE A
Number 0001
MS. VOGT restated her previous point about the shipping companies
affiliated with the natural resource industries and the corporate
income tax not being applied until an entity is making money. She
referred to the fiscal note and said the DOR believes the revenue
involved is between $3 and $8 million. She indicated this is a
rough estimate based on an analysis of several of the impacted
industries from public records and some information from current
tax returns. She said, however, the DOR is certainly looking for
additional information and she invited any of the testifying
witnesses to provide the department with any actual numbers. She
indicated that while DOR knows there may be an impact, it has no
idea of the order of magnitude of that impact.
CHAIRMAN ROKEBERG commented that Ms. Vogt had said ANITA was
collecting approximately $300 million and $270 million was from
oil, and $50 million from everything other than oil. He noted the
discrepancy in the numbers relating to the $50 million.
MS. VOGT indicated the actual total was actually approximately $320
million, noting she could provide the exact numbers. The oil and
gas corporate income in FY 1997 collected $269,783,582; the other
corporations paid $49,610,974.
CHAIRMAN ROKEBERG commented, noting the estimated was $3 million to
$8 million, that they could have as much as a 10 percent increase
in non-oil-related "companies."
MS. VOGT agreed it could be around 10 percent of the non-oil and
gas.
Number 0281
REPRESENTATIVE COWDERY asked what was unique about Alaska's tax law
that would justify the court's interpretation.
MS. VOGT said the court held that Alaska's apportionment method of
taxation is theoretically different from the US's method, and
therefore the US tax policy would not be automatically incorporated
into Alaska's law. She indicated in this case the court found that
it was not. She said other states have apportionment and other
states haven't found that, but she said she wasn't aware of a court
case in another state. Most states, as the committee has heard,
either have a piece of legislation incorporating IRC Section 883
into their statutory structure, or have simply taken the position
that the federal provision is incorporated and have not taxed. She
commented that they would be pioneers.
REPRESENTATIVE RYAN noted Ms. Vogt was correct in response to his
reference to Barclays Bank PLC, which was on worldwide income.
However, he referred to the articles in the magazine, The
Economist, where the Prime Minister of Great Britain was "talking
about dumping all of the reciprocal tax (indisc.) with the United
States." Representative Ryan indicated Great Britain was not the
only country considering such actions; he stated, therefore, this
sort of thing can lead to a lot of "nastiness" and he didn't know
if it was necessary that they do these sorts of things.
CHAIRMAN ROKEBERG asked Ms. Vogt if she could tell the committee
when the MTC, that section of law, was adopted in Alaska.
MS. VOGT responded that she believes UDITPA was adopted before
statehood.
CHAIRMAN ROKEBERG referred to AS 43.20.021(a), which HB 472
affects, noting it says in the footnote that this was a 1987
amendment to subsection (a), stating, "First sentence substituted
Sections 26 U.S.C. 1 through 1399 and 601 ... Internal Revenue Code
which substituted for subtitle (indisc.) Chapter 1 of subtitle A of
the 1954 Internal Revenue Code ... et cetera, et cetera, and these
other things." He said he asked her when IRC Section 883 was
adopted into the Alaska Statutes by that sentence.
MS. VOGT replied she was not sure when the federal government
adopted IRC Section 883, but the 1987 amendment he was referring to
simply took out the references to subtitles and so on in IRC, and
cited the actual sections that were incorporated.
CHAIRMAN ROKEBERG indicated he was trying to find out when IRC
Section 883 was or wasn't adopted under the Alaska tax scheme.
Number 0563
MS. VOGT said she couldn't answer that specifically because she
didn't think the legislature has specifically addressed that. She
noted the legislature has incorporated large parts of the code into
the Alaska Statutes and Alaska's court has traditionally looked at
the state's tax policy to decide which of those broadly
incorporated provisions it would find are actually incorporated.
She noted there were a lot in the general incorporation that Alaska
does not follow.
CHAIRMAN ROKEBERG indicated he was trying to determine legislative
history. He commented that there were letters in the bill packet
from federal agencies to other states who had been considering
taxes like this one regarding the reciprocity retaliation and the
national policy of discouraging sub-national taxation of foreign
companies, noting these were treaty obligations between the US
government and other governments. He asked if Alaska wasn't doing
something that was against national policy in terms of
international trade and international relations.
Number 0675
MS. VOGT said that is a policy argument that the legislature will
want to consider. She commented there have been arguments, for
example, that the motor fuel tax applied to international air
carriers would violate those treaties, and United States Supreme
Court has ruled that state taxation is not preempted by those
treaties. She said it was clear that Alaska has the freedom to
adopt its own policies. She indicated the DOR has not heard from
the US state department since the February Alaska Supreme Court
decision, and she is not is not sure what the state department's
current position would be.
CHAIRMAN ROKEBERG indicated he would find out.
REPRESENTATIVE RYAN asked whether the legislature also accepted
various accompanying private letter rulings if the legislature
adopted a section of Internal Revenue Code.
MS. VOGT replied that the Internal Revenue Code regulations are
certainly looked to by the DOR, and letter rulings and
interpretations often become a part of the way Alaska applies its
laws.
CHAIRMAN ROKEBERG said he appreciates the Governor's stance on
listening to what people want without making a preconceived
judgement, noting he understands and appreciates that.
Number 0792
SUSAN BURKE, Attorney for the Northwest Cruise Ship Association,
came forward to testify next in Juneau. She said she represented
the association primarily as a lawyer and came to the hearing to
answer any questions the committee might have. In background, she
stated the association participated in the OSG Bulk Ships,
Incorporated, case as friend of the court, amicus curiae, filing a
brief in support of the position the company was taking in the
case. She did not represent the cruise ship association in that
endeavor; she represented the AVA, which had also filed a brief in
support. She said she did not have much to add in terms of the
policy issues, noting a lot of testimony from a wide array of
business interests had been heard. She indicated this reminded her
of when she was working for the IBM Corporation in 1991 and 1992,
trying to persuade the legislature to adopt the "water's edge"
legislation and prohibit the DOR from continuing to require the
worldwide combination. She noted questions arose then as well.
She said she thought they really need to take a close look when so
many diverse industries tell how important it is to maintain the
"status quo." She indicated that because the DOR has never
actually collected this tax, the state would not lose existing
revenue if this legislation was passed. Ms. Burke commented that
she was not a technical tax lawyer.
CHAIRMAN ROKEBERG asked why the bill's retroactive to 1993
effective date was included and what its effect would be.
MS. BURKE replied that the January 1, 1993 date was there to some
extent because of the statute of limitations. She indicated the
industry has always maintained that it was the legislature's intent
for the IRC Section 883 exemption to apply under ANITA, and it was
simply the DOR's interpretation of that early legislative intent
which differed. She noted there has been dispute for some time,
which the supreme court resolved in favor of DOR. She said, with
the greatest respect for the court, she thinks it is wrong, and she
thinks the legislature to have intended that provision to have
always been in the law. She commented, regarding the effective
date, that she did not know if it had any particular impact but it
ensured there was no "window of time" during which the OSG Bulk
Shipping, Incorporated, decision would have in effect and then no
longer any effect in the future. She said they are simply
maintaining the"status quo," taking it back to a reasonable date.
Number 1080
CHAIRMAN ROKEBERG mentioned HB 12 from 1991 which would have
excluded IRC Section 883 as it related to water vessels only, and
he referred to comments from the House Finance Standing Committee
at that time, by Representative Fran Ulmer. He stated:
"Representative Ulmer stated she would not support the proposed CS
[committee substitute] because the philosophy was inconsistent with
the intent of the bill. She thought that the original bill was
intended to send a message that Alaska has a friendly business
climate for foreign investors. The original bill changed the
worldwide apportionment to the water's edge method, like all other
states. With the adoption of the proposed CS, (and this is for HB
12), Alaska would now be the only state not having the exemption
(referring to the IRC Section 883 exemption) to the federal code."
Chairman Rokeberg said this means that Lieutenant Governor Fran
Ulmer went on record in support of this particular legislation in
1991, and he asked Ms. Burke if she remembered what happened with
HB 12.
MS. BURKE noted she did not remember the exact numbers, but said
the issue came up during the discussions and consideration of the
"water's edge" legislation, noting there was an attempt to amend
that legislation to remove the IRC Section 883 exemption from the
Alaska income tax. She said eventually the issues were split off
and the "water's edge" legislation was allowed to proceed without
that provision. She said, however, there had been a good deal of
discussion in the legislature about that. She indicated a bill
dealing with only the water carriers was introduced which was never
enacted and brought up a great deal of testimony from a number of
legislators throughout the hearing process about what a bad idea it
would be. She indicated the committee had hear similar testimony
this day, stating it is still a bad idea.
CHAIRMAN ROKEBERG asked Ms. Burke if she had researched legislative
histories for tax adoptions in various other forms when she was
doing her amicus curiae brief.
Number 1240
MS. BURKE answered in the affirmative, stating she was unable to
find anything useful because it was too early, commenting that it
has only really been in the last 20 years that the legislature has
kept the kind of records they currently have.
CHAIRMAN ROKEBERG asked Ms. Burke if she thought it was unusual for
there not to be a lot of discussion between Alaskan legislators
when adopting some other federal law by reference, noting Ms. Burke
had observed the legislature for a long time.
MS. BURKE indicated she thought there would be specific provisions
in the statutes if there had been concerns, however she indicated
that argument had probably been made to the Alaska Supreme Court
before it made the ruling. She referred to the rehearing but said
reversals were unusual. She noted that very soon after a ruling is
made, it is possible for the losing party to file a petition for
rehearing asking the court to reconsider the decision. She said it
is unusual for those petitions to be granted, noting the grounds
are very narrow, but it has happened.
CHAIRMAN ROKEBERG asked Ms. Vogt if Ms. Burke's testimony regarding
the effective date was correct or if she wanted to elaborate.
Number 1365
MS. VOGT commented she had noticed that date provision. She said,
normally, if a bill contains a retroactivity provision, it should
have an immediate effective date and HB 472 does not have an
immediate effective date. In terms of retroactive fact, the DOR is
faced, when people have not previously filed tax returns, with the
question of how far back should DOR go, noting the DOR has some
discretion in this area. The court has told DOR what the law is
and the department has no discretion in whether or not to apply the
law. She indicated HB 472's retroactivity provision would
foreclosing DOR from going back. She referred to Ms. Burke's
testimony, indicating she thought the intent would be to prohibit
the enforcement of the provision in past years.
CHAIRMAN ROKEBERG asked Ms. Vogt if she believed the January 1,
1993, date was appropriate.
MS. VOGT indicated she would like to know the Department of Law's
opinion, indicating it is a policy call by the legislature. She
indicated that normally the effective date is January 1 of the
current tax year or the prospective tax year when changes to the
corporate income tax are adopted.
CHAIRMAN ROKEBERG asked why DOR had not collected this tax for some
time, discussing this briefly.
Number 1523
MS. VOGT said she has testified that DOR has not actively sought
compliance with their interpretation of the IRC Section 883
exemption, noting that a few taxes cases where DOR has either
assessments or waivers that would be affected by a retroactive
date.
CHAIRMAN ROKEBERG said he would like to know the number of waivers
and how many the DOR had attempted to enforce.
MS. VOGT indicated she would provide as much information as she
could without breaching taxpayer confidentiality.
CHAIRMAN ROKEBERG referred to his comment about prior rationale and
asked Ms. Vogt if the DOR had a written policy on how this
provision was handled or how those decisions were made.
MS. VOGT said DOR's policies are enacted into regulations so it
does not do the department much good to have internal policies
about tax laws. She noted there is no regulation on IRC Section
883 and she would hesitate to speak for the last ten years. She
said that this controversy working its way up through the courts
has come to her attention during her tenure at DOR. She indicated
it seemed appropriate to wait and see what the court's action would
be. She indicated she guessed she would say it was an "unwritten
policy."
Number 1652
CHAIRMAN ROKEBERG called an at ease at 5:22 p.m. The committee
came back to order at 5:26 p.m.
Number 1664
REPRESENTATIVE COWDERY made a motion to move HB 472 out of
committee with individual recommendations and the accompanying
fiscal note. There being no objections, it was so ordered.
ADJOURNMENT
Number 1690
CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing
Committee meeting at 5:27 p.m.
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