Legislature(1995 - 1996)
10/24/1995 09:12 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
WORK SESSION ON HB 341
October 24, 1995
9:12 a.m.
MEMBERS PRESENT
Representative Joe Green, Co-Chairman
Representative Scott Ogan, Vice Chairman
Representative Pete Kott
Via Teleconference:
Representative Bill Williams, Co-Chairman
Representative Alan Austerman
MEMBERS ABSENT
Representative Ramona Barnes
Representative John Davies
Representative Eileen MacLean
Representative Irene Nicholia
COMMITTEE CALENDAR
* HB 341: "An Act establishing a tax court to consider and
determine certain taxes and penalties due and collateral
matters, and amending provisions relating to taxpayer
challenges to the assessment, levy, and collection of
taxes by the state; and providing for an effective date."
HEARD AND HELD
(* First public hearing)
WITNESS REGISTER
JEFF LOGAN
Legislative Assistant
House Resources Committee
State Capitol, Room 24
Juneau, AK 99811
Telephone: (907) 465-4931
POSITION STATEMENT: Provided sectional analysis HB 341.
STEVE MAHONEY
Tax Committee Representative
Alaska Oil & Gas Association
700 G Street
Anchorage, AK 99501
Telephone: (907) 265-6527
POSITION STATEMENT: AOGA supports reform.
BERNIE SMITH
Tesoro Alaska Petroleum
P. O. Box 3369
Kenai, AK 99611
Telephone: (907) 776-8191
POSITION STATEMENT: Supports HB 341
DEBORAH VOGT
Deputy Commissioner
Department of Revenue
P. O. Box 110400
Juneau, AK 99811-0400
Telephone: (907) 465-2300
POSITION STATEMENT: Department to introduce legislation.
CHRIS CHRISTENSEN
Staff Counsel
Alaska Court System
303 K Street
Anchorage, AK 99501
Telephone: (907) 264-8228
POSITION STATEMENT: The supreme court opposes the creation of a
limited jurisdiction specialty court.
KEVIN A. TABLER
Land Manager
UNOCAL
P. O. Box 196247
Anchorage, AK 99519
Telephone: (907) 263-7600
POSITION STATEMENT: Supports HB 341
HAK DICKENSON
General Tax Counsel
Marathon Oil Company
5555 San Felipe
Houston, TX 77056
Telephone: (713) 296-2023
POSITION STATEMENT: Supports HB 341
PREVIOUS ACTION
HB 341
SHORT TITLE: ALASKA TAX COURT
SPONSOR(S): REPRESENTATIVE(S) GREEN
JRN-DATE JRN-PG ACTION
05/09/95 2042 (H) READ THE FIRST TIME - REFERRAL(S)
05/09/95 2042 (H) RES, JUD, FINANCE
10/24/95 (H) RES AT 09:00 AM ANCHORAGE LIO
ACTION NARRATIVE
TAPE 95-71, SIDE A
Number 040
HB 341 - ALASKA TAX COURT
CHAIRMAN JOE GREEN opens the meeting and discusses a special
session called by former Governor Walter Hickel to consider former
Senate Bill 377 relating to oil industry taxes. After the special
session, CHAIRMAN GREEN states that he felt the state of Alaska
does not treat its taxpayers fairly; not because of what the state
asks them to pay but rather that the system seems divergent in view
and when assessed and contested, the state assumes the role of
prosecutor, judge and expediter. One agency, he said, assesses the
tax and then, if appealed, the process requires that that same
agency decides if the assessment is fair or unfair. If the
taxpayer continues to appeal the assessment through the
Administration on to the court, the judge and the court then decide
the case on a brief written by the agency. HB 341, he states, was
introduced as an option to the present system. As prime sponsor of
HB 341, CHAIRMAN GREEN, says he hopes to end up with legislation
that is workable, fair, and if not more precise, legislation that
both the state and industry can gain from.
Number 208
JEFF LOGAN, staff to Repesentative Green, provides a sectional
analysis of HB 341:
SECTION 1. establishes a tax court as a one-judge trial court.
Section 22.12.020 allows the tax court to hear all cases involving
AS 43.19, the multi-state tax compact; AS 43.20, the Alaska net
income tax act; AS 43.21, the oil and gas corporate income tax; AS
43.55, the oil and gas production tax; AS 43.65, the mining license
tax; and AS 43.75, the fisheries tax. (2) allows claims resulting
from all the above laws to be heard in the small claims division
(established further in bill). (3) allows the court to decide
whether a proposed tax regulation is valid and gives the tax court
the same powers of the superior court in these matters.
Section 22.12.030 establishes that the venue where cases will be
heard will be set by the supreme court.
Section 22.12.040 sets out the reasons why the venue can be
changed.
Section 22.12.050 establishes when the tax court will be open for
business.
Section 22.12.060 states that the court can adjourn itself and call
itself back into session. Adjournment does not prevent the court
from sitting in at any time.
Section 22.12.070 establishes how official court documents will be
processed.
Section 22.12.080 establishes qualifications for tax court judges
and prohibits a person who has in the past four years been employed
by the departments of law and revenue from serving as a tax court
judge.
Section 22.12.090 directs the governor to fill a vacancy within 45
days of receiving nominations from the judicial council. (b)
establishes that a vacancy occurs upon death or resignation or
ninety days after an election if a judge is not retained by the
voters.
Section 22.12.100 requires the tax court judge to take the oath of
office.
Section 22.12.110 states that the tax court judge is subject to
approval or rejection by the voters and that the judicial council
must conduct an evaluation of the judge before the election and
make the results of that evaluation public.
Section 22.12.120 allows the tax court judge to be impeached by the
legislature for malfeasance or misfeasance and how the impeachment
will be conducted.
Section 22.12.130 restricts the tax court judge from practicing law
or engaging in any activity for compensation if that conduct would
interfere with his/her duties. (b) disqualifies the judge from the
bench if they file for public office except as a delegate for a
constitutional convention.
Section 22.12.140 establishes the same salary for the tax court
judge as for the superior court which is a range 28E, a monthly
salary of $7,667.00. (b) requires judges to certify that they do
not have decisions more than six months outstanding before they are
paid. The court system already imposes this rule on itself. (c)
allows for geographic cost-of-living adjustments.
Article 2. Section 22.12.200 provides that the supreme court may
adopt rules for taking an appeal to the tax court.
Section 22.12.210 establishes that taxpayers can be tried de novo.
(b) states that only those issues raised in the Department of
Revenue administrative proceedings can be raised in court.
However, if the court determines that other matters are important
to the case it can be remanded back to the department.
Section 22.12.220 establishes the burden of proof to be either
preponderance of the evidence, which is the usual civil trial
burden of proof.
Section 22.12.230 establishes hearings before the tax court as
public hearings and allows for confidential information to be
protected.
Section 22.12.240 requires the tax court to issue decisions in
writing.
Section 22.12.250 allows the court to appoint a panel of masters
(three individuals) to collect and analyze technical information
and prepare decisions subject to the judge's adoption.
Section 22.12.260 allows the court to publish tax court decisions.
Article 3. Section 22.12.300 establishes a small claims division
within the tax court.
Section 22.12.310 sets $15,000 as the threshold under which a small
claim may be filed.
Section 22.12.320 establishes the procedure for filing a small
claim.
Section 22.12.330 requires the clerk of the tax court to notify the
Department of Revenue when a small claim has been filed.
Section 22.12.340 allows the taxpayer to dismiss a small claims
case anytime before a judgement is entered; a dismissal is with
prejudiced and cannot be brought up again.
Section 22.12.350 establishes that small claims hearings are
informal hearings. The court may hear testimony and receive
evidence and a party may appear before the court or be represented.
Section 22.12.360 states that a small claim judgement is conclusion
but is not a judicial precedent for other judicial matters.
Number 418
MR. LOGAN continues with sectional analysis of HB 341.
SECTION 2. AS 15.15.030(10) describes the ballot for the retention
election of a tax court judge.
SECTION 3. AS 15.35.092 states that the tax court judge will stand
for retention at first general election at his or her third year in
office. If approved, the judge will stand before the voters every
six years thereafter.
Section 15.35.094 prescribes that the tax court judge shall file a
declaration of candidacy by August 1 of the year of his election.
Section 15.35.096 sets the thirty dollar filing fee.
Section 15.35.098 directs the director of elections to place the
name of a properly qualified tax court judge on the ballot for
election.
SECTION 4. AS 15.58.050 states that the judicial council shall
file with the lieutenant governor's office by August 7 of the year
in which the general election is to be held with a statement
including information on the tax court judge.
SECTION 5. AS 15.58.060(a) establishes the $150.00 filing fee for
the tax court candidates to pay if they want to put something about
themselves in the voters pamphlet.
SECTION 6. AS 22.05.010(a) asks the tax court for a list of courts
to which an appeal as a matter of right may be taken.
SECTION 7. AS 22.05.010(e) grants the right to appeal a Department
of Revenue decision to the tax court.
SECTION 8. AS 22.05.100 states that if a tax court judge is not
retained by the voters, he/she cannot be appointed to fill a
judicial vacancy for four years thereafter.
SECTION 9. AS 22.07.060 does the same as section 8.
SECTION 10. AS 22.10.020(d) superior court grants to the tax court
jurisdiction in all tax matters and appeals from the Department of
Revenue.
SECTION 11. AS 22.10.150 is the same as sections 8 and 9.
SECTION 12. AS 22.15.195 is the same as section 11.
SECTION 13. AS 22.20.010 adds definition of the term "judicial
office."
SECTION 14. AS 22.20.022(a) allows the chief justice to reassign a
case if a party or party's attorney feel they cannot get a fair
trial.
SECTION 15. AS 22.20.040 exempts from small claims proceedings the
requirement that the U.S. government and corporations be
represented by attorneys.
SECTION 16. AS 22.20.110 states that the commissioner of public
safety shall serve all process issued by the tax court as it does
with the other courts currently.
SECTION 17. AS 22.25.010(g) adds tax court judge and definition of
judge for the purposes of the judicial retirement system and of the
standards of judicial conduct.
SECTION 18. AS 22.30.080(2) same as section 17.
SECTION 19. AS 43.05.240(d) sets out the procedure to appeal a tax
decision by the Department of Revenue and what action the court
will take upon reaching a decision.
SECTION 20. AS 43.05.240 establishes the threshold for or defines
the final decision by the Department of Revenue for the purposes of
an appeal to the tax court.
SECTION 21. AS 43.05.
Section 43.05.242 requires a taxpayer who appeals a Department of
Revenue ruling to pay the undisputed portion of the levy plus any
penalty and interest and then to provide satisfactory evidence to
the tax court that the taxpayer is able to pay the balance.
Section 43.05.244 allows the taxpayer or the Department of Revenue
to credit any overpayment made by the taxpayer against the
taxpayers tax liability for the current or subsequent years. Any
amount not refunded within three years shall be paid to the
taxpayer with interest.
SECTION 22. AS 44.62.300 allows an interested person to get an
opinion from the tax court as to the validity of the tax
regulation.
SECTION 23. TRANSITION sets out that a revenue ruling appealed to
the superior court shall be heard by the tax court if the appeal
has not yet been filed with the supreme court. (b) allows the tax
court to hear new evidence that was not presented during the
revenue administrative hearing. (c) allows a party whose case is
has been referred to the tax court to request that the case be
heard by a panel of masters.
SECTION 24. Effective date clause.
Number 585
MR. LOGAN concludes the sectional analysis. CHAIRMAN GREEN asks
members if they have questions of staff.
Via teleconference from Kodiak, REPRESENTATIVE ALAN AUSTERMAN asks
clarification regarding the repeal of a decision made by the
Department of Revenue under this bill, does that appeal go the
superior court first or does it go straight to the tax court?
MR. LOGAN responds that the appeal would go to the newly created
tax court.
CHAIRMAN GREEN comments that one of the reasons was the amount of
time used in the current process of step-wise procedure when in
most cases, if worthy of an argument, the case would end up in tax
court anyway. This is a way to circumvent lost time; six months or
more is often required to work its way through the process.
Number 647
CHAIRMAN GREEN introduces STEVE MAHONEY, Alaska Oil and Gas
Association. MR. MAHONEY reads his statement into the record:
Good Morning, Mr. Chairman and Members of the Resources
Committee. My name is STEVE MAHONEY. As the authorized
representative of the Tax Committee of the Alaska Oil and
Gas Association. I am here today to testify on behalf of
AOGA regarding House Bill 341, which proposes to
establish a special tax court at the Superior Court level
within the Alaska Court System. AOGA is a trade
association whose 18 member companies account for the
majority of oil and gas exploration, production,
transportation, refining and marketing activities in
Alaska. We are grateful for this opportunity to offer
our comments.
HB 341, presents some very critical issues. To
summarize, AOGA believes strongly that the present system
of tax audits and appeals is flawed in two major ways,
which I will describe in a moment. AOGA is not prepared
at this time to take a position on the bill, nor to
recommend specific amendments. But we do support reform
and will continue to work on a definitive solution, and
would like to set the stage with the following
background.
Two major flaws in the present system are, first, that it
does not allow for tax appeals to be decided by a truly
impartial decision-maker, and second, that the burden of
proof is not fairly allocated between the taxpayer and
the Department of Revenue.
In order to explain to the Committee exactly what these
problems are and why they are problems, let me begin with
a brief review of how the present system works in terms
of who does what, and when. As I do so, I would like to
invite you to follow along by looking at the diagram
illustrating the process, which appears on the page
attached at the end of my written testimony. What I'm
going to do is start at the top of that diagram and work
my way down through the items in bold print.
The process begins when the taxpayer files a tax return
and pays the taxes due according to that return. This
means, in the case of production taxes, that we will file
a tax return at the end of next month for the oil and gas
we produce this month. For the corporate state income
tax, which is reported on an annual basis, we file our
tax return for a given year in mid-October of the
following year. In other words, we will file our income
tax return for 1995 in October of 1996.
Number 728
The filing of the tax return starts the clock running for
the Department of Revenue (DOR) to audit the return. The
statute of limitations gives DOR three years from the
filing of the return in which to complete the audit and
make claims for additional tax, if any, which the auditor
contends is owed. This three-year period may be extended
by mutual agreement of DOR and the taxpayer for however
long and as many times as they may agree upon. For oil
and gas taxpayers, DOR ordinarily audits two or three
years' worth of tax return at a time. Usually the audit
is not completed within three years from the filing of
the earliest of the returns being audited, and DOR asks
the taxpayer for one or more extensions for each audit.
We taxpayers have cooperated by agreeing to at least one
extension, and usually several.
Upon the completion of DOR's initial audit, the auditors
almost always send a bill for more tax to the taxpayer.
The technical name for such a bill is "assessment." Very
often the assessment or tax bill is issued to the
taxpayer just before the extended limitations period
expires.
When a taxpayer receives a bill for more tax, it can
choose to do one of three things; it can pay the bill, it
can file an appeal of part or all of the bill and ask for
an informal conference with DOR, or it can file an appeal
on part or all of the bill and ask for a formal hearing
before a DOR hearing officer. The taxpayer must make its
choice within 60 days of receiving the bill for more tax.
Within this same 60-day period the taxpayer must pay any
undisputed portion of the bill.
Number 770
If the taxpayer pays the bill, the DOR auditors cannot
make any further claims for more tax after the expiration
of the statute of limitations. Since the statute is so
often on the verge of expiring when the tax bill is
issued, choosing to pay the bill without contesting it
effectively means that no further claims for additional
taxes will be made for the tax periods covered by the
bill.
On the other hand, if the taxpayer appeals part or all of
the assessment, then DOR continues to issue new claims
for additional taxes at any time before the appeal gets
into court.
The original idea of the informal conference was to allow
a taxpayer the opportunity to sit down with DOR auditors
and their supervisors and informally discuss those
matters which the taxpayer believes are due to simple
mistakes or misunderstandings. This option particularly
makes sense when both sides are operating in good faith
because it allows obvious or simple errors to be
corrected without getting into the much more expensive
procedures of the formal hearing. The informal
conference is conducted by a conference officer, who is
usually a DOR employee in the "classified" service -
that is, he or she has civil service protection as well
as union protection and is not accountable, in terms of
getting fired, for lapses or errors in judgment.
After the informal conference with the taxpayer, the
conference officer issues a written conference decision
making any corrections which he or she deems warranted in
light of the information presented during the conference.
There is no time limit on DOR either for holding an
informal conference after one is requested, nor for
issuing a conference decision after the conference is
held.
Number 808
If the taxpayer disagrees with part or all of the
informal conference decision, it may appeal the disputed
portion(s) and must pay any undisputed portion of
additional taxes which the conference officer finds to be
owed. The taxpayer has 30 days from the time of the
conference decision in which to file its appeal and
request a formal hearing and bypass the informal
conference as its third option when a tax bill is issued,
and it does so by requesting the formal hearing within 60
days of getting the bill.
The formal hearing by a hearing officer who is in the
"partially exempt" service - that is, he or she serves
at the pleasure of his or her immediate supervisor and
the commissioner.
The procedures for a formal hearing resemble those for a
trial. Both sides get to have legal "discovery" - that
is, each side can ask the other about the evidence it has
regarding the case. Both parties can also file various
motions before and after a trial. The actual hearing
itself is transcribed or recorded, and that as well as
the testimony and evidence submitted at the hearing, plus
all the briefs et cetera, becomes part of the formal
record of the appeal.
The hearing officer acts as a judge in the sense that he or
she rules on the meaning of the applicable statutes and
regulations. The hearing officer acts as a jury in the sense
of deciding which version of the facts is accurate when the
two sides disagree about what actually happened. After the
hearing the hearing officer writes a formal hearing decision,
making findings of fact as part of his or her role as a jury,
and making conclusions of law in the role as a judge.
The hearing officer submits his or her written decision
to the commissioner or the commissioner's designee (often
the deputy commissioner or the chief hearing officer) for
review and approval. The commissioner may direct the
hearing officer to rewrite part or all of the decision,
and in the past commissioners have often done so,
sometimes going so far as to edit and rewrite the
decision for the hearing officer. Despite the
commissioner's potential involvement in drafting the
hearing decision, the DOR won't disclose what the
involvement actually is. This secretive nature of the
process is especially troubling to taxpayers and colors
perceptions about the fairness of the system.
Once the hearing officer's decision meets the
commissioner's approval, it is issued to the taxpayer and
becomes final. As with the informal conference, there is
no time limit on the department for holding a formal
hearing after it has been requested, nor is there one for
issuing the formal decision after the hearing is held.
The taxpayer has 30 days from the issuance of the formal
hearing decision in which to pay any uncontested portions
of it and to appeal the rest to court.
Now this is the "direct route" for the tax audit and
appeals process as shown in the diagram attached to my
written testimony. But it is DOR's position that the
auditors may issue new claims for additional taxes at any
time while the appeal over the original tax bill is still
pending before the department. Each time they issue a
new tax bill, the taxpayer has to start at "step 1" of
the appeals process for that new bill, no matter how far
along in the process the original tax bill may be. It is
entirely possible that the same tax period will be
audited and re-audited several times while the original
appeal is pending, and indeed this has often been the
experience of taxpayers.
Number 888
So this is Alaska's present system of tax audits and
appeals. While cumbersome, time-consuming and expensive,
the real problems are, as I mentioned at the outset, the
lack of an impartial party to hear and decide tax
disputes and an inappropriate allocation of the burden of
proof between the Department of Revenue and the taxpayer.
To some extent these two problems overlap one another.
As you probably gathered from my description of the
present process, the hearing officer plays a key role in
that process. The formal hearing is the counterpart of
the trial in an ordinary lawsuit. The hearing officer
not only controls the schedule for the formal hearing,
but he or she also rules on the various motions that the
parties may file, controls which evidence will be
admitted and which excluded, and, of course, acts as
judge and jury in writing the hearing decision.
On appeal to the courts, the hearing officer's factual
findings in the hearing decision are given great
deference. To overturn such a finding, the taxpayer must
show that it is "not supported by"...substantial evidence
in light of the whole record "in the appeal." This does
not mean that most of the evidence has to support the
hearing officer's findings, only that there is some
credible evidence -some evidence of substance- which
supports them. In other words, where there is a dispute
about what actually happened and both sides introduce
credible but conflicting evidence about the events, the
hearing officer can choose which witness or witnesses to
believe and that choice will be upheld by the courts
because it is supported by "substantial" evidence.
Number 923
It is essential to Due Process to have an impartial
person deciding which witnesses to believe, because which
version of the facts is believed often determines the
outcome of the case. Let me give an example that will be
more familiar to most people than some arcane tax issue.
Suppose there is a traffic accident at an intersection
with a traffic signal. Each driver insists he had a
green light, and they testify to that effect at trial.
Suppose "Driver A" also has a witness who says that, even
though he was 50 yards away from the corner, he saw that
the light was green for "A" when "A" drove into the
intersection. Suppose that "Driver B" not only testifies
that he had the green light, but he also brings in two
witnesses who were standing right on the corner and agree
that "B" had the green light. Both versions can't be
accurate, so which one do you believe? Obviously, its
going to make a difference which version you believe,
since your decision will determine who wins and who
loses. Now suppose you are the jury and you decide, for
whatever reason, to believe "A" and his single witness.
If the courts apply the same standard to your verdict as
a jury as they do in reviewing the findings of a DOR
hearing officer, they will uphold your decision because
there is evidence of substance supporting it even though
"B" submitted more evidence by eyewitnesses who were both
better located to see what happened. In other words, "B"
had more evidence and better evidence, but the verdict
against him will stand.
If we take this example and apply it to a tax appeal
before a DOR hearing officer, a disputed fact issue is a
bit like having the question to be this: Did the
taxpayer have the green light, or did the commissioner?
The commissioner is ultimately responsible by law for
collecting the taxes and pressing the state's claims for
any unpaid taxes, and thus he or she has an interest in
upholding the claims that he or she believes have merit.
But in an impartial system, it would be the hearing
officer, not the commissioner, who decides who "had the
green light" on a disputed factual issue -DOR or the
taxpayer. In Alaska, however, the hearing officer is an
"at will" employee working for the commissioner. If a
hearing officer rules against the department too often or
on too big an issue, he or she can get into trouble and
might even get fired. So there is a constant and not too
subtle pressure on a hearing officer to believe DOR's
witnesses and disbelieve those of the taxpayer. This is
not impartiality.
Actually, though, the situation is worse than that. The
commissioner can participate directly in the writing of
the hearing decision, even though he or she was never
present at the hearing, because the hearing decision
cannot become final without the commissioner's approval.
This means that a commissioner can instruct the hearing
officer to rewrite critical parts of the decision so as
to better support the auditor's tax claims, or may even
rewrite those parts for the hearing officer, as
commissioner's have done in the past. In other words,
the person with the greatest power to determine what the
outcome is in an appeal over a disputed tax claim -
namely, the Commissioner of Revenue- is the very person
who has ultimate responsibility for making the claim in
the first place. The head prosecutor is therefore able
to act as judge and jury in tax appeals.
Other states avoid this type of abuse in various ways.
Those that use the same extremely high standard of
deference to the hearing officer's finding as Alaska
does, also have hearing officers with the greatest degree
of independence from their tax commissioners. Other
states let the tax commissioner have more control over
the hearing officers, but their courts make an
independent decision about which witnesses to believe.
Such independent judicial review is often through a so-
called "trial de novo," which is legalese for a "new
trial" that is held by the court. Under either of these
approaches taxpayers receive the impartial trier-of-fact
which they are guaranteed under Due Process principles.
Because this issue of a lack of an impartial tax tribunal
in the Alaska system, there is an unfair and
inappropriate allocation of the burdens of proof between
DOR and the taxpayer. To a small degree this has already
been discussed, in discussing what the taxpayer has to
show to the courts in order to overturn an adverse
finding by the hearing officer. But there is another
important aspect to the burden-of-proof issue.
Number 1013
The longer the time that passes before a tax claim is
made, the harder it is to find evidence to prove or
disprove the claim. Memories of witnesses fade,
documents get harder to find, and perceptions of the
world can and frequently do change with hindsight. Yet
the department does not have to prove its tax claims, no
matter how long after the fact they are first raised.
They are, in the words of AS 43.05.245:
"presumed sufficient for all legal purposes. However,
nothing prevents a taxpayer from presenting evidence or
other information on an appeal under AS 43.05.240 in
order to rebut the presumed sufficiency (of the
department's claims")
This statute means that the taxpayer always has the
burden of "presenting evidence or other information" to
show that the auditors are mistaken. This burden still
exists even if so much time has passed that all the
evidence no longer exists.
This is unfair. One way to fix this would be to shift
the burden of proof to DOR for unduly late claims. This
would restore fairness to those situations where the
passage of time is so great that there is no evidence
left one way or the other regarding the claim.
There is also a complementary approach for making
progress in these areas. This is in providing taxpayers
with greater clarity about exactly what their tax
obligations are. The clearer the rules are, the more
likely it is that the correct amount of tax will be paid
in the first place. This means that the audit issues
will be much smaller that they have been in terms of the
dollars at stake. Under Alaska's oil and gas tax rules
in the past, enormous sums of money were riding on the
outcome of the appeals for only a relative handful of
taxpayers. Any tax appeals system works better when
smaller amounts are riding on the outcome of the appeals,
and probably even the present system would have worked
better if the stakes in each oil and gas case hadn't been
so high.
AOGA is hopeful about making progress to improve the
clarity of the tax rules. As many of you may recall from
previous state studies, uncertainty in the fiscal rules
is a significant disadvantage that Alaska has in the
worldwide competition to attract dollars for new capital
investments here.
AOGA is exploring ways to improve the present system.
Some of them may be through new tax regulations. Some
may require legislation. Clearly, we would prefer to
come back to you with a consensus about any
legislation that may be needed. But until we
complete our exploration of these possibilities, we
are simply unable to recommend whether any changes
to HB 341 are desirable, and if so, what those
changes might be.
We hope, Mr. Chairman, that you and the committee will
understand our situation. We are grateful for the
support that has been shown by the fact that HB 341 has
been introduced, and by the fact that this committee
considers these matters important enough to take them up
at this hearing. We are counting on your continued
support and on the good faith of everyone interested in
these issues. Working together, we can achieve a clear
and sufficient system of taxation that no longer works to
impede and discourage investment in Alaska. And that
will be to the benefit of us all -and an achievement in
which we can all take pride and satisfaction.
Number 1080
CHAIRMAN GREEN asks members if they have questions of MR. MAHONEY.
REPRESENTATIVE AUSTERMAN refers to AOGA's chart entitled Alaska's
Present Tax Audit and Appeals Process and asks whether the system
will change because the system is still required to get to tax
court.
MR. MAHONEY responds that the system of formal and informal
hearings would be different in relation to (our) ability to go into
a tax court de novo. Our facts would be brought to light to an
impartial hearing officer, which would be the tax court judge.
Number 1113
REPRESENTATIVE AUSTERMAN asks further clarification regarding the
appeals process asking if the bill still allows for the informal
conference.
MR. MAHONEY replies that the informal conference is an option.
There are many issues with taxpayers that are resolved in informal
conference and we resolve some issues and not resolve others and go
further in the process if we choose. If we resolve those issues we
would pay the tax due and any interest on top of that and then just
move forward with any issues that are unresolved.
Number 1165
REPRESENTATIVE OGAN asks why there is almost always additional
assessment after a taxpayer pays his bill and it is audited? Is
there some major ambiguity on the clarity of the tax regulations?
He continues, asking the author of the bill if the bill is trying
to fix the symptom of the problem rather than addressing a lack of
clear tax policy?
CHAIRMAN GREEN says that HB 341 does not address trying to rewrite
Department of Revenue regulations. He gives an example saying that
if there is any credibility in my disputing your tax, I am going to
take it to the highest possible decision maker. That process of
making the final decision is what HB 341 addresses. Is this a fair
review or is it a stacked deck against those who appeal their
taxes?
TAPE 95-71, SIDE B
Number 000
MR. MAHONEY discusses audit periods that may have additional
assessments. He continues, saying there are numerous items, issues
and areas that there can be disagreement on. The taxes in Alaska
are self-assessed taxes. The taxpayer reads the statute and
regulations and makes a determination as to what they say and files
its taxes accordingly. Any two people reading the length of
documents that we have and the plethora of regulations that we have
will likely come out with different ideas of what they say and
that's basically what occurs in most of the assessments.
Number 066
MR. MAHONEY continues, saying there have been strides recently in
clarifying regulations with the department. There are ongoing
discussions with the Administration as we speak and over the past
about the systems as they are and the regulations as they read. We
are working towards clarity on those issues. The major issue that
we see is that if an auditor comes up and says you owe more taxes;
the reasons that that assessment has been issued, the facts
underlying why the assessment was issued, and why the disagreement
occurs: all the burden shifts to the taxpayer. That's what this
bill is trying to clarify.
Number 147
BERNIE SMITH, Tesoro Alaska Petroleum Company, testifies in support
of HB 341 agreeing with testimony of the AOGA. He feels a taxpayer
should be entitled to an independent and impartial review of any
tax dispute. In Alaska, he says, this does not always happen for
just disputes arising from any tax administrated by the Department
of Revenue or any ad valorem tax. Our concern is more than a just
a desire to have a tax court; we want an even and fair playing
field in Alaska tax matters. HB 341 is also concerned with some of
the same issues.
MR. SMITH says the current system infringes on the taxpayers due
process rights by requiring them to present their case to the Board
of Equalization. He continues the discussion elaborating on policy
and procedures of the Board of Equalization saying the board is a
political body required by law to decide what evidence is allowed
into record. The board also has arbitration rules that may effect
the trial record. MR. SMITH gives an example: the Kenai board
allows a taxpayer only thirty minutes to present their case, he
says. This kind of time limitation restricts the effects of the
taxpayers due process rights, and taxpayers must have enough time
to present their case, he states.
Number 280
DEBORAH VOGT, Deputy Commissioner, Department of Revenue, expresses
her appreciation for the opportunity to address the department's
dispute resolution system. MS. VOGT relates that assertions made
by earlier speakers were not new to the department or even the past
three Administrations. She informs the committee that the
department recognizes that there may be reasons to change the
system currently being used. She said certainly one of the largest
reasons is the taxpayers perception. There is a perception that
the dispute resolution process is unfairly biased against the
taxpayer and that perception is not going to go away. The other
reason that we might want to think about changing the system is
that it is difficult for the department. The current
Administration, she informs the committee, is committed to
exploring alternatives for changing the system.
MS. VOGT says, early in the present Administration, department
staff contacted every state in the United States to talk to them
about their dispute resolutions systems. She relates that Alaska
is in the distinct minority among states in the way the system
works. But, Alaska is not alone, there are several other states
that use the exact same process and it is a process that has been
upheld over and over by the courts. It is a process used by many
federal agencies and in every court, to her knowledge, that has
addressed the issue of it is appropriate for the same agency to be
reviewing the facts and deciding the case, has upheld the process
as fair.
MS. VOGT continues her testimony -through a departmental contract
with the Department of Law, expert attorney Paul Frankel, Morrison
& Foerster, was retained. Attorney Frankel had consulted with more
than twenty states on their tax resolution procedures and given
advice to those states. The department hired Mr. Frankel to review
Alaska's system, laws and regulations. Mr. Frankel recommends (1)
the system should be independent; (2) the taxpayer should be able
to have its factual determinations made in an evidentiary hearing
before it is required to pay the tax; and (3) the judge(s) in the
system should be tax professionals.
The Department of Revenue has requested permission from the
governor to introduce a bill this session that addresses the
department's dispute resolution system. The main approach, she
says, would be to move the hearing function outside of the
Department of Revenue, but leave it within the executive branch of
government. She adds, not have it be a tax court but a hearing
system similar to what we have except divorced from the department,
and not reviewed by the commissioner and not subject to
commissioner approval.
Number 480
MS. VOGT responds to earlier remarks about the department saying
that the Department of Revenue has made dramatic progress from the
early years and is close to current with the oil industry on
severance and corporate income taxes. Referring to HB 341, she
suggests that a tax court that follows along after the unchanged
procedures to the department is not her idea of streamlining the
process. Other particular elements to HB 341 she feels disturbing
are: (1) the fact that a judge can be preempted; (2) a problematic
part of the legislation is the qualifications of the tax judge; and
(3) it is not a good idea to create a judicial system to resolve
the problem.
Number 720
CHAIRMAN GREEN refers to Deborah Vogt testimony regarding moving
the hearings outside of the Department of Revenue. MS. VOGT
responds that the idea would be to have the evidentiary hearing,
the fact finding hearing, and the de novo proceeding outside the
department.
Number 816
CHAIRMAN GREEN converses with MS. VOGT concerning streamlining
dispute resolutions and fair and efficient procedures for getting
those tax disputes resolved.
Number 868
CHAIRMAN GREEN asks MS. VOGT when the committee can expect to
receive the new legislation from the department. MS. VOGT replies
that the bill will be introduced this session.
Number 898
REPRESENTATIVE SCOTT OGAN says that one of the problems that has
been identified is that oil tankers go to all different locations
and different markets and have different prices. Is there a simple
way to figure this out with an established price index for the day
or the week? MS. VOGT responds that under the regulations, the
department now uses published prices for various markets for west
coast price, the gulf coast price and the mid-continent price. But
you still have the problem of one taxpayer has, for this particular
month, more efficient tankers than others and the transportation
costs is still open to large controversies. The discussion
continues regarding price fluctuations in the marketplace.
Number 1017
REPRESENTATIVE PETE KOTT asks if the Administration has given any
regard to creating an independent entity such as the Department of
Labor Workers' Compensation Board. In the discussion that ensued,
MS. VOGT stressed that tax professionals are the best qualified.
Number 1135
Responding to comments about the proposed legislation from the
chair, MS. VOGT clarifies that what the department is envisioning
is moving the formal hearing function outside the department and
making the informal conference mandatory instead of optional.
TAPE 95-72, SIDE A
Number 0000
MS. VOGT continues her discussion on the proposed departmental
legislation saying she believes that by taking the hearing section
out of the Department of Revenue so that a fresh look was given to
the factual determinations; and then it went on its normal course
of appellate review through the superior court and supreme court,
it would shorten the process.
Number 050
CHRIS CHRISTENSEN, Court Counsel, Alaska Court System, begins his
testimony remarking that as a general rule the supreme court takes
no position on legislation. The only exception is legislation such
as HB 341 which directly effects the internal operation of the
judicial branch. He advises the committee that the supreme court
opposes the creation of a limited jurisdiction specialty court.
This opposition is long-standing and relates to the concept of
specialty courts in general rather that a specific type of court
which is created by HB 341. MR. CHRISTENSEN provides further
background discussing examples of multi-judge specialty courts in
states with large populations such as New York. Alaska does not
have that kind of case load, he said. To give you an example, the
superior court judges here in Anchorage each carry a caseload of
about 800 cases. While there are relatively few tax cases, some of
them might be very big, but they are relatively few. My guess is,
MR. CHRISTENSEN continues, that a tax judge will probably spend a
tremendous amount of his or her time hearing other cases (divorces,
torts, contracts) because there really isn't the tax caseload to
keep such a judge busy. He relates that there are very few judges
in Alaska specializing in tax cases.
Number 221
MR. CHRISTENSEN, discusses examples of preempting certain judges
saying if the purpose of creating a one-judge tax court is to have
a specialist. Somebody who is really an expert in tax law and then
having that judge preempted negates the whole purpose of creating
the tax court.
Number 285
KEVIN A. TABLER, Land Manager, UNOCAL, comments that his company
has a significant presence in Alaska having oil and gas operations
in Cook Inlet, an ammonia and urea plant in Kenai and other
interests on the north slope. MR. TABLER states his view of an
independent tax tribunal is a good idea and Union should support
this bill or other bills that offer this type of independent
judicial review for tax matters. Union Oil supports the basic
premise that a judicial tax forum not connected with a Department
of Revenue or a tax commissioner should be available in all states
and not just Alaska.
Number 395
HAK DICKENSON, General Tax Counsel, Marathon Oil Company, testifies
saying that Marathon has been in Alaska for a number of years.
Marathon is one of the first companies to come to Alaska. Along
with UNOCAL, Marathon discovered the Kenai gas fields in 1959. MR.
DICKENSON states he is encouraged that the Department of Revenue is
considering the introduction of a bill that will work toward
resolving some of the process of hearing matters.
MR. DICKENSON reiterates that the perception for the state of
Alaska Department of Revenue, which is real, is that most people do
not think they can get a fair shake here. Taxpayers simply want a
fair hearing on their disputes. At the administrative hearing,
because the system is so tilted in favor of the Department of
Revenue, it is virtually impossible for a taxpayer to win any
meaningful issue. At least any issue that involves any dollar
amount.
MR. DICKENSON emphasizes, "Why is the Alaska system so tilted in
favor of the Department of Revenue?" First, he says, as you have
heard, the tax commissioner is both the auditor and hearing
officers' supervisor. He or she is the judge, jury and prosecutor.
The auditors ultimately report to the commissioner and the hearing
officer also reports to the commissioner. What is missing in the
Alaska system is an effective procedure for checks and balances
between the audit process and the hearing system. In the Alaska
hearing system, the commissioner who is sometimes a lawyer and
sometimes not finally decides whether he will accept a hearing
officer's recommendation, full or partial, or reject the hearing
officer's recommendation all together.
The hearing system in the state of Alaska is substantially flawed,
he exclaims. It appears that Alaska is only one of four states
that does not have either an independent hearing officer or a trial
de novo. "What can the legislature do to correct the system in
Alaska?" "What can the legislature do to level the playing field?"
MR. DICKENSON continues saying that one remedy would be to create
a tax court, which HB 341 call for. The Department of Revenue does
not need to be engaging in any over-zealous actions to collect
taxes nor is it necessary that the hearing procedure be rigged to
lopsidedly favor the tax commissioner.
Number 755
MR. DICKENSON concludes his testimony quoting from the Internal
Revenue Service bulletin which describes their mission: "The
purpose of the Internal Revenue Service is to collect the proper
amount of tax revenue at the least cost; serve the public by
continually improving the quality of our products and services; and
performed in a manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness."
The Internal Revenue bulletin goes on to provide a statement of
principles of the IRS Administration: ..."The function of the
Internal Revenue Service is to administer the Internal Revenue
Code. Tax policy for raising revenue is determined by Congress.
With this in mind, it is the duty of the Internal Revenue Service
to carry out that policy by correctly applying the laws enacted by
Congress. To determine the reasonable meaning of the various code
provisions in light of the Congressional purpose in enacting them.
To perform this work in fair and partial manner with neither a
government nor a taxpayers point-of-view." MR. DICKENSON
encourages the Department of Revenue to adopt similar mission
statements and principles as the IRS.
Number 850
The discussion continues between MR. DICKENSON and MS. VOGT
regarding the proposal for an independent hearing officer within
the executive branch versus the creation of a tax court.
Number 959
REPRESENTATIVE OGAN states that ordinary people placed in a
position of making a judgement do not necessarily have to be
experts on it. The legislature and jury system are good examples,
he says. There are lay jurors that know nothing about a situation.
It might be an equitable system to resolve these conflicts.
Number 977
REPRESENTATIVE KOTT responds to the chair that most of our boards
and commissions do have lay people involved, but they also have
professionals from industry and areas that the board in addressing
on the board. While the lay person perspective is a good approach,
we also have to have somebody more of an expert in that area.
Number 998
MS. VOGT informs the committee that she and Commissioner Condon
have looked at a mission statement for both of the tax divisions.
The IRS mission statement was included in that review along with
mission statements from other states. MR. CHRISTENSEN interjects
that the department's mission statement is very similar to the IRS.
Number 1021
CHAIRMAN GREEN summarizes testimony at the hearing and says maybe
the final decision should be removed from the Department of Revenue
and there must be someway to streamline the whole process so that
we never again allow ourselves to be encumbered. The chairman
states that the committee will take today's input, he encourages
additional input, and revise the bill to the point that it is a
workable bill. If the governor, or the department through the
governor's office comes in with a different bill that does the same
thing, that's fine and I will drop off. My concern is that we do
not let this issue go unresolved just because we want to presume it
will go away.
Number 1065
ADJOURNMENT
The meeting was adjourned at 11:17 a.m.
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