Legislature(2007 - 2008)HOUSE FINANCE 519
10/29/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
October 29, 2007
1:31 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Anna Fairclough
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
MEMBERS ABSENT
Representative Scott Kawasaki
OTHER LEGISLATORS PRESENT
Representative John Coghill
Representative Nancy Dahlstrom
Representative Max Gruenberg
Representative Kyle Johansen
Representative Mike Kelly
Representative Bob Lynn
Representative Woodie Salmon
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/24/07 (H) Heard & Held
10/24/07 (H) MINUTE(O&G)
10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/25/07 (H) Heard & Held
10/25/07 (H) MINUTE(O&G)
10/26/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/26/07 (H) Heard & Held
10/26/07 (H) MINUTE(O&G)
10/27/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/27/07 (H) Heard & Held
10/27/07 (H) MINUTE(O&G)
10/28/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
WITNESS REGISTER
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided a sectional analysis of CSHB
2001(O&G).
JERRY BURNETT, Legislative Liaison;
Director, Administrative Services Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 2001, offered
additional information.
MARCIA DAVIS, Deputy Commissioner
Office of the Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions and outlined the
differences between HB 2001 as introduced and CSHB 2001(O&G).
STEVE PORTER, Consultant
for the Legislative Budget and Audit Committee
Alaska State Legislature
Tehachapi, California
POSITION STATEMENT: During hearing of HB 2001, answered
questions and provided information.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:31:05 PM. Representatives
Gatto, Johnson, Fairclough, Wilson, Seaton, Roses, Guttenberg,
and Edgmon were present at the call to order. Also present were
Representatives Coghill, Dahlstrom, Gruenberg, Johansen, Kelly,
Lynn, and Salmon.
HB2001-OIL & GAS TAX AMENDMENTS
1:31:42 PM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 2001, "An Act relating to the production tax
on oil and gas and to conservation surcharges on oil; relating
to the issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and the
sharing between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date."
1:32:53 PM
CO-CHAIR JOHNSON moved to adopt CSHB 2001(O&G), Version L, as
the working document. There being no objection, it was so
ordered.
1:33:30 PM
CO-CHAIR GATTO announced that Mr. Bullock would explain the
changes incorporated in CSHB 2001(O&G).
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency, Alaska
State Legislature, began by clarifying that he is not present to
advocate any particular position on the legislation. As
drafted, the legislation is enforceable if it were enacted in
its current form. Mr. Bullock opined that it's helpful to step
back and review how the petroleum production profits tax (PPT)
works. The tax is on the production of oil and gas, which is an
activity that is subject to tax under AS 43.55. Within that
statute there is the tax rate, which is proposed to be increased
from 22.5 percent to 25 percent in Alaska's Clear and Equitable
Share (ACES) [HB 2001]. Furthermore, there's a progressive
aspect to the PPT, which is based on the taxable value, the
gross value minus the allowable lease expenditures. A new
approach to progressivity is included in CSHB 2001(O&G), which
is based on the gross value at the point of production. He then
explained that one must also review what is taxable. What is
taxable under PPT remains under ACES [HB 2001], the gross value
at the point of production minus the allowable lease
expenditures, except for the way in which the new progressivity
tax would work. After the determination of the gross value
minus lease expenditures, the tax value for PPT purposes is
determined and then the tax rate applies to that, which
continues to be 22.5 percent.
1:35:56 PM
CO-CHAIR GATTO inquired as to where that barrel of oil is at the
point of production.
MR. BULLOCK specified that in the case of the North Slope, the
point of production is on the North Slope, Pump Station 1 or
thereabouts. He explained that value is derived by looking at
the sale price of the oil at the ultimate point of sale and then
the tanker costs back to Valdez are subtracted as is the
pipeline tariff. Therefore, the gross value at the point of
production values the oil at the sale price minus the cost to
get it there. The aforementioned was the basis of the tax prior
to the enactment of the PPT and is the basis for the new
progressivity tax proposed in HB 2001.
1:36:56 PM
MR. BULLOCK continued by explaining that one must determine the
taxable amount and then apply the tax rate, which is the gross
tax liability. Against that amount of revenue, there can be
credits; different investment expenditures will be recognized as
a credit and they have to be authorized lease expenditures.
This legislation doesn't make many changes to the credit
provisions. The taxpayer then files a return to the Department
of Revenue (DOR), which then begins its audit process to verify
the information. This legislation includes additional tools to
help DOR determine the proper amount of tax. At the same time,
some of that information may be helpful to the department
regarding whether any changes in the tax should be recommended.
1:38:03 PM
JERRY BURNETT, Legislative Liaison; Director, Administrative
Services Division, Department of Revenue (DOR), highlighted that
all of these barrels are reduced by the royalty percentage that
the state takes or the federal landholder takes. Therefore,
it's the gross value of the taxable oil, not all of the oil at
the point of production.
MR. BULLOCK commented that royalty is interesting to compare to
the tax because it is generally taken free of the cost of
production. Royalty is a contractual obligation as opposed to a
tax obligation. He pointed out that the state has some
experience with net profit share leases in which the state
received royalty as a percentage of what was left after the
costs were deducted. There have only been a few such leases, he
noted.
1:39:12 PM
MR. BULLOCK then turned to the particulars of [CSHB 2001(O&G],
which offers a new progressive tax based on the gross value at
the point of production. The current progressivity, which is
based on a dollar amount and the production tax value of oil and
gas, is repealed in Section 38. The new progressivity is in
Section 18 on page 13 where it adds a new subsection to AS
43.55.011. Under [CSHB 2001(O&G], progressivity is based on the
gross value at the point of production of the taxable oil and
gas. The tax, he explained, has a nominal tax rate of .225,
which is then multiplied by the total gross value at the point
of production of the taxable oil and gas. Then the value of the
taxable production is divided by the volume of production, which
is effectively the gross value at the point of production per
British thermal unit (BTU) equivalent barrel.
1:41:21 PM
MR. BULLOCK, in response to Co-Chair Gatto, specified that the
tax is calculated on a monthly basis. Therefore, if the gross
value at the point of production for the month averages more
than $50 per BTU equivalent barrel, then this tax is triggered
and calculated for that month. Ultimately, for the year it's
added together and becomes part of the tax liability for the
year.
1:42:08 PM
REPRESENTATIVE SEATON asked if the tax is a monthly tax or an
annual tax.
MR. BURNETT explained that the tax is [calculated] on an annual
basis, while the progressivity addition to the tax is calculated
on a monthly basis under CSHB 2001(O&G). The tax is payable in
monthly installments, but there is an annual true-up on the
amount of total tax for each producer.
MR. BULLOCK said that it's important to note that the trigger is
$50 and the calculation is against the full value at the point
of production of all the taxable oil and gas. Therefore, the
$50 is only a factor in the following two instances: "First of
all, whether for that month, you do the calculation at all. If
it's less than $50, you don't do it for that month. And also as
a basis for determining what that multiplier is that multiplies
the .225 times the gross value at the point of production for
the tax for oil and gas." Mr. Bullock then pointed out that
Sections 14, 16, 17, 19, and 20 are conforming amendments making
reference to the new subsection (o) and to delete references to
the former progressivity tax in AS 43.55.011(g).
1:44:05 PM
REPRESENTATIVE ROSES surmised that Mr. Bullock said that on the
progressivity factor, the .225 is multiplied times the gross
value. However, he also recalled that Mr. Bullock said that the
.225 is multiplied times the value of the oil.
MR. BULLOCK replied no, and clarified that it's [.225]
multiplied by the total gross value at the point of production
of all the oil and gas.
1:44:42 PM
REPRESENTATIVE ROSES referred to page 13 [subsection (o) in CSHB
2001(O&G)], and opined that it speaks to the difference between
the quotient and the $50. Therefore, it appears to be
subtracting $50. He requested an explanation of the language.
MR. BULLOCK said to forget the $51 for a minute and suggested
looking at all the oil and gas that is taxable and was produced
in a month, which has a value. He said that one could start
with the value per barrel and multiply it by production and
that's the number you would get. Mr. Bullock explained:
Back to your $51, if the BTU equivalent was $51, then
it'd be the quantity times the $51. So whatever the
total gross value at the point of production, the
total of all the oil and gas that's taxable that was
produced that month, you take that value and you
multiply it by .225. ... so you get a number that's
... .225 times gross value at the point of production,
... it's a small fraction .... The next thing you do
is you ... figure out something similar to your $51.
You figure out how that ... total gross value at the
point of production relates to a per barrel basis.
And so, you divide that big number, that value of
everything that's taxable that was produced, and you
divide it by the quantity that was produced so you get
an amount, so many dollars per BTU equivalent barrel.
So, ... say that it comes out to $70, and you subtract
the $70 from the $50, there's language in here that
says you don't subtract the dollars to dollars because
you'd then be multiplying dollars by dollars .... So,
you take the $20 and ... you multiply, effectively,
that $20 times the .225 so you come up with a new
fraction that's then applied to the total gross value
of the taxable oil and gas. And then that's the
amount of the progressive tax. So, as the tax
increases, that .225 is going to be a higher and
higher number as the value of the taxable oil and gas
rises above $50. And there's limits in here, too, ...
that says ... whatever it is it's not going to exceed
25 percent. ... in the assurance provision in here,
we say that it won't be below zero. Already, you
wouldn't calculate the tax under this section, if the
value is $50 or less because there's no tax. It also
says you don't calculate it if it's lower, there's no
credit that's generated by low gross value at the
point of production for that month. So, you have a
rate that applied to all the value and then it's
multiplied by another number that's based on the
difference between the actual gross value at the point
of production for that month at $50.
1:48:10 PM
MR. BULLOCK, in further response to Representative Roses,
explained that .225 is multiplied times the gross value at the
point of production times 20, in the case of 70. He specified:
So, it's .225 times x times y, and y is the difference
between the per barrel gross value at the point of
production and $50.
MR. BULLOCK stated that it's a progressive tax based on the
gross value at the point of production. The tax increased as
the gross value at the point of production. Therefore, the rate
under ACES is different than under the current law, and it's
also applied to a larger number under ACES because the current
progressivity is just applicable to the production tax value,
which is gross value minus the lease expenditures.
1:50:18 PM
REPRESENTATIVE GUTTENBERG asked if the progressivity calculation
is standard or are there other ways in which to do the
calculation that arrive at a similar place.
MR. BULLOCK confirmed that this is just one option in which the
tax increases by the difference between the value of the oil and
gas produced compared to $50.
REPRESENTATIVE GUTTENBERG asked if, in the end, [other methods]
arrive at the same place.
MR. BULLOCK answered that it depends. In further response to
Representative Guttenberg, Mr. Bullock noted that in the past
there have been different tax rates that were applicable to
different ranges. Under the former law, there were different
tax breaks; 12.5 percent of the gross value at the point of
production for the first five years and then it increased to 15
[percent]. There are a number of options and it comes down to
the policy decision as to what the legislature wants to
encourage through credits or tax reductions and what is
determined to be the fairest measure of what the tax should be.
1:52:27 PM
MR. BURNETT pointed out that the method [in CSHB 2001(O&G)] is a
different method than what was in the original bill [HB 2001].
The method proposed provides a smooth function and the same
progressivity for all taxpayers regardless of the taxpayers'
costs and circumstances whereas the net progressivity provides a
different tax rate for each taxpayer, depending upon their
costs. He mentioned that a tax table in which there are
different rates at different prices could be used.
1:53:14 PM
REPRESENTATIVE GUTTENBERG recalled that early on in the House
Special Committee on Oil and Gas hearings there was a
calculation [that resulted] in more than one tangent on a
progressivity chart. Without changing the number could a
tangent line be achieved by changing the calculation, he asked.
MR. BULLOCK pointed out that the other tax aspect in this bill
[CSHB 2001(O&G)] is a tax cap on new gas production outside of
the Cook Inlet sedimentary basin and no part of which is north
of 68 degrees North latitude. The aforementioned applies only
to production from leases or properties that first produced gas
after the end of this year.
CO-CHAIR GATTO interjected that 68 degrees is the North Slope.
MR. BULLOCK specified that it's the mountain range in the area.
That division line is the same as what's in the PPT.
1:54:10 PM
REPRESENTATIVE GUTTENBERG recalled that CSHB 2001(O&G) includes
a provision that discusses everything south of 64 degrees,
referring to Nenana Basin. "What I'm wondering," he asked, "is
if it's a different number, do you leave a ring around the state
of a gap where there's nothing dealt with?"
MR. BULLOCK reiterated that the reference to 68 degrees is
consistent with the tax law while the 64 degrees addresses a
different subject area that isn't related to the tax. In
further response to Representative Guttenberg, Mr. Bullock
related his belief that the provision in CSHB 2001(O&G) that
addressed the Nenana Basin also used the 68 degrees.
1:55:15 PM
MR. BULLOCK then turned to the expenditures for which there were
some adjustments in AS 43.55.165. There are some changes in
Section 32, AS 43.55.165(a), and Section 33, AS 43.55165(e). He
explained that AS 43.55.165(a) provides guidance for DOR to
identify lease expenditures that may be allowed. He then
pointed out that AS 43.55.165(c) and (d) were repealed. The
repealed sections had to do with what was happening in the unit
and the agreement regarding cost sharing between the operator
and the working interest owners as well as what was being paid
by the working interest owners. Under the new AS 43.55.165(a),
DOR has the discretion to review whatever it wants and consider
it in determining which lease expenditures are authorized. Mr.
Bullock opined that the aforementioned provides more flexibility
to "come up with the best information."
MR. BULLOCK noted that these changes on expenditures in Sections
32 and 33 go back to the beginning of the PPT. Section 33
includes something similar to SB 80 and HB 128, which addresses
costs related to equipment that may not have been properly
maintained and resulted in cost effects. He then highlighted
that Section 33(e) disallows lease expenditures that relate to
breaking the law or violating a lease provision and expenditures
for dismantlement, removal, surrender, and abandonment. Section
33(e)(19) is a new provision that relates to the corrosion
issue. He opined that the aforementioned provision is helpful
from an audit standpoint because it reviews an event as the
basis for reviewing the expenditures. Once that event is
identified, the auditors can review the circumstances of the
need for the repair. If the requirements specified aren't met,
the exercise of due care in operating and maintaining the
facility, then the costs for that repair would be disallowed
under [AS 43.55.165(e)(19)]. However, as was the case with HB
128, one of the difficulties was to identify the standard of
care that's expected from an operator in the field. This bill
[CSHB 2001(O&G)] uses the standard of exercising "due care" in
operating and maintaining the facility.
1:59:09 PM
MR. BULLOCK recalled that there have also been some discussions
regarding negligence. However, negligence [can't be defined]
until the expected behavior is defined. Gross negligence
continues to be disallowed as under current law. As far as
simple negligence, [AS 43.55.165(e)(19)] specifies that if a
company failed to exercise due care that resulted in harm to the
state, in the form of low production or extraordinary costs,
those costs won't be allowed. He characterized it as a policy
decision in this area. Again, anytime a deduction is given for
an expenditure or credit, there's the decision as to whether the
state will share the cost or otherwise reduce the tax liability.
The issue, then, is what standard of care an entity developing
oil in this state is expected to meet. This provision
establishes the standard of due care. As an aside, the recent
settlement with BP is written in the terms of negligent; it may
rise to the level of gross negligence or it may not. Under the
current PPT gross negligence isn't allowed while simple
negligence would be an allowable lease expenditure without a
provision such as proposed in [CSHB 2001(O&G)].
2:00:56 PM
REPRESENTATIVE ROSES recalled that the plead was for criminal
negligence, and therefore he requested that Mr. Bullock parlay
that into this discussion.
MR. BULLOCK said that there's often similar penalties, even in
the tax area. There are civil penalties for negligence as well
as criminal penalties for negligence and fraud. He said that he
didn't know the particular elements of the negligence in the
criminal case. However, the statute the settlement was based on
also generally refers to negligence and thus, he opined, the
question is still open as to whether it rose to gross
negligence.
2:01:43 PM
REPRESENTATIVE ROSES opined that it appears that in this
particular situation the standards are being defined after the
act has occurred. He inquired as to how someone is held
accountable under negligence, gross negligence, or criminal
negligence when the terminology hasn't been defined prior.
MR. BULLOCK said what should be defined is what is expected.
Common law will define what expected behavior is. If the
expected behavior is what a "reasonable, prudent person" would
do, then there hasn't been negligence. However, if that
standard isn't reached and harm results, then there's a legal
conclusion that the action constituted negligence and thus there
would be liability to follow.
2:02:36 PM
REPRESENTATIVE ROSES expressed concern with the defensibility of
determining whether an action is simple or gross negligence if
the conditions of retroactivity are determined to be prior to
the action.
MR. BULLOCK said that part of what Representative Roses is
questioning is whether it's constitutional to apply the
provision retroactively. He offered his opinion, that it is
constitutional to apply this change retroactively. The standard
is generally that the first legislative session following the
first filing of a return is the time when changes can be made
that are retroactive; after that time, there would be an issue
as to whether that would be allowed.
2:03:41 PM
REPRESENTATIVE SEATON compared [paragraph] 19 to the addition of
the language on page 26, line 14. If there's a plea of criminal
negligence in the [BP case], then there seems to be a violation
of law. If that's the case, isn't that covered in the
additional language in [paragraph] 6, he asked.
MR. BULLOCK pointed out that [paragraph] 6 refers to the
existing law: "costs arising from fraud, wilful misconduct,
[OR] gross negligence" and then refers to " violation of law, or
failure to comply with an obligation under a lease, permit, or
license issued by the state or federal government", which is new
language. One interpretation of this paragraph is that it would
apply to the costs that arose from the violation of the law,
which would be penalties, other fines, or other dollar amounts
that relate to the violation itself, as opposed to repairing the
equipment that went bad, which is addressed in [paragraph] 19.
Mr. Bullock clarified that the aforementioned is just the
literal reading of this "and I'm not sure, this ... was offered
by the administration and I don't know whether they had an
interpretation that would reach the repairs that were required
from an accident that also resulted in a violation of law." The
settlement with BP specifically says that BP can't deduct the
penalty costs it's paying under the settlement and that BP can't
say other donations constituting community service are just
regular community service because they're related to the
settlement of the criminal charge.
2:06:02 PM
REPRESENTATIVE SEATON suggested obtaining a written statement
from the administration as to how broad violation of law is
because [paragraph] 19 is very problematic. For instance, what
would be considered a scheduled shutdown versus an unscheduled
shutdown. If the language could be made broad enough, then all
of the unintended consequences can be avoided with regard to
unscheduled interruptions as mentioned in [paragraph] 19.
2:06:58 PM
MR. BURNETT, in response to Co-Chair Gatto, related his
understanding that the department would be adopting regulations
that would specifically define what is meant by "unscheduled"
with a timeframe.
CO-CHAIR GATTO, noting that the legislation is before the
committee, questioned whether it's preferable to strike the term
"unscheduled". He expressed concern that once the term is used
in legislation, it may supersede any regulations.
MR. BURNETT commented that regulations have to conform to
statute. He said that he would discuss the suggestion with the
Department of Law (DOL) and let the committee know. He
mentioned that he would also do so for Representative Seaton's
questions.
2:08:13 PM
REPRESENTATIVE GUTTENBERG inquired as to who makes the
determination of failure to comply under a lease.
MR. BULLOCK responded that the first person who makes that
decision is the taxpayer, then the auditor looks at it and
applies the department's standards, probably in conjunction with
DOL's standards. The determination of what expenses are allowed
occurs during the audit process.
2:09:15 PM
REPRESENTATIVE GUTTENBERG inquired as to the timeframe from the
time that the tax is filed and the auditor completing an audit.
MR. BULLOCK specified that under current law it's three years
after the return is filed. Under CSHB 2001(O&G), that's
extended to six years.
REPRESENTATIVE GUTTENBERG inquired as to the average time to
complete an audit.
MR. BURNETT informed the committee that none of the tax returns
under the current law have been fully audited. Historically,
audits for production tax have taken two to three years.
2:10:04 PM
CO-CHAIR GATTO inquired as to how a discrepancy is resolved
under current law.
MR. BURNETT explained that normally in the course of an audit,
the auditor will find exceptions and work with the taxpayer to
resolve those. If the exceptions can't be resolved, an
assessment will be filed by the department. At that point, it's
the taxpayer's responsibility to prove that the assessment isn't
appropriate.
2:10:54 PM
CO-CHAIR GATTO posed a scenario in which there are too few
auditors and a four-year-old assessment is discovered.
MR. BURNETT clarified that if nothing was found in the first
three years, the taxpayer would be free and clear. Therefore,
extending it to six years would provide additional time to the
state. He noted that under current law, auditors often work
with the taxpayer and extend the time of the audit. Without an
extension there's a jeopardy assessment, which is when the
auditor doesn't know what the assessment amount will be so the
auditor estimates the maximum amount it might be and works
backwards.
CO-CHAIR GATTO asked if extending it to six years is endorsed by
the administration and the taxpayer.
MR. BURNETT said that he couldn't speak to whether taxpayers
like that extension or not.
2:12:07 PM
CO-CHAIR JOHNSON inquired as to who determines whether due care
was used.
MR. BURNETT responded that an auditor would look at the
department's regulations, which would be so promulgated under
this bill, and which would define what to look at for due care.
2:13:01 PM
CO-CHAIR JOHNSON surmised that this is then somewhat
discretionary.
MR. BURNETT responded that he did not think it would be
discretionary. It would have to be in accordance with the
regulations as to what constitutes due care and industry
practices. At this point, however, there is not a regulation
that he can show to the committee.
MR. BULLOCK said one type of thing an auditor would look at is
what would have been the reasonable expectation for maintaining
a particular field, such as how often to run an inspection or
cleaning pig. However, comparisons for what constitutes
standard maintenance cannot be with just any field, they must be
with similar fields with similar oil because characteristics of
the oil can affect corrosion. Thus, a cost would be disallowed
only if the company did not follow what is considered the norm
for that particular type of field. He said it goes back to how
much someone is expected to do to prevent a problem.
2:14:18 PM
CO-CHAIR JOHNSON commented that this goes back to previous
discussions by the committee and the difficulty it had in trying
to find the specifics as to what constitutes "good oil field
practices". He urged that DOR be very specific in writing the
regulations because they will be more important than the
decisions made by the legislature. He said that very specific
guidelines and regulations are something he will be looking at
very closely.
2:16:10 PM
REPRESENTATIVE ROSES followed up on extending the auditing
process from three years to six years. He reviewed Mr.
Burnett's previous statements that, currently, it is not
uncommon for an auditor and the taxpayer to negotiate an
extension and that the jeopardy standard is imposed if DOR is
unable to negotiate an extension. He asked how often a jeopardy
situation has occurred.
MR. BURNETT said he would get back to the committee with that
information.
REPRESENTATIVE ROSES stated that he did not want to extend the
amount of time if the jeopardy issue has not come up very often.
2:17:30 PM
MR. BULLOCK explained that there are things outside the control
of the auditors that affect when they can get the information
for making the assessment. One example is that the PPT has
opened up the issue of expenditures in the field and those are
subject to audits by the Internal Revenue Service (IRS). In
some cases, he said, the IRS will get an extension of its
statute of limitations, resulting in a change to the Alaska tax
liability. Pipeline tariff is a factor in determining gross
value at the point of production. A retroactive adjustment to
the tariff affects the value of oil and gas produced on the
slope and, in turn, affects Alaska's tax liability. Taxpayers
are required to notify the state when these types of changes are
made, he said. An argument in favor of extending the period to
six months, he continued, is that you wouldn't have to keep
opening up the statute of limitations. Therefore, it may be a
reasonable period to get everything settled so that at the end
of six years it is possible to say what the liability is.
2:18:45 PM
REPRESENTATIVE ROSES asked whether Mr. Bullock is saying that
the three years are not the issue; rather, the issue is that
nothing can be done until these other determinations are made.
MR. BULLOCK said right. There may also be determinations made
outside of the scope of what the auditor is looking at or can
do.
MR. BURNETT, in response to Representative Roses reiterating his
previous questions, said that he would get information to the
committee about how often the jeopardy issue has occurred. He
stated that since PPT was enacted only 14 months ago, DOR has
not yet gotten through an audit.
2:19:26 PM
CO-CHAIR GATTO related that when the Federal Energy Regulatory
Commission (FERC) investigated the pipeline tariff it took six
years for the agency to determine that an excessive tariff had
been charged. He asked whether, in a case like this, the excess
charges would be forgiven because of the three-year limitation.
MR. BULLOCK responded that it could happen, but there is the
expectation that people would be reasonable and fair.
MR. BURNETT agreed with Mr. Bullock.
2:20:34 PM
MR. BULLOCK pointed out that there is a statute of limitations
that is applicable to state claims or civil actions in court,
and this is a six-year period of limitation. There are some
things that the state benefits from, he said, because the state
is not just the DOR or the legislature, it is the public. So,
in responding to a civil action or court case, the state has a
longer period of time to answer a complaint so that it doesn't
suffer default judgment. There is some flexibility to allow the
government to protect the interests of Alaskans. This is the
factor that the committee must look at when deciding what is an
appropriate amount of time to determine the actual tax that is
due.
2:21:12 PM
CO-CHAIR GATTO asked whether the clock starts when the challenge
is filed or when the challenge is resolved.
MR. BURNETT answered that the statute of limitations for the tax
would generally start when the tax is due and filed, so it would
be three years from the annual March 31 deadline.
2:21:39 PM
REPRESENTATIVE WILSON understood that there is a manual for oil
industry standards that the industry itself goes by and,
therefore, there is something for measuring what is considered a
normal and acceptable standard.
MR. BULLOCK responded that this is the ["Manual of Oil and Gas
Terms: Annotated Manual of Legal, Engineering, and Tax Words and
Phrases" by Williams, Meyers, Martin, and Kramer] and that he
thought the term that was in there was "good oil field
practice". He explained that one reason it doesn't come up, and
why it can't be said to be relevant, is because governments
generally don't get involved with lease expenditures. He gave
the example of royalties:
In other states it might be the farmer that owns oil
under the ground, a traditional property interest you
own from the surface to the center of the earth. The
state owns the oil and gas reserves, but since our
royalty has always been free of expenditures, we don't
know what lease expenditures are, we never get
involved in it. And...the Internal Revenue Service in
figuring income tax - the state does not audit those
expenses, the Internal Revenue Service does - and they
determine the tax liability for a multi-state or
multi-national corporation and then Alaska gets an
apportioned amount based on the volume of production
in the state, what the tariffs are, property
investment, and other information. So, the state has
no history of looking at these expenses, and other
states don't because it is a can of worms. But,
that's a policy decision that...has already been made.
But, it...creates a problem when you get into lease
expenditures as what reasonable expenditures are.
2:23:43 PM
MR. BURNETT added that:
Alaska's petroleum production tax - we call it a net
tax - it is actually a tax on the gross margin on
production, gross profit level. Unlike income tax, we
don't have the same expenditure rules you would have
for a corporate income tax. Not all of the costs that
a company would normally deduct on a corporate income
tax, even if we had a non-apportioned state income
tax, would be the same ones that are deductible as
lease expenditures. So there can be a number of costs
in the state that an oil company has while they are
producing oil that are not deductible lease
expenditures. And it is our mission here to define
what those are and to make it clear.
2:24:34 PM
MR. BULLOCK further explained that other sources of information
as to what constitutes "good oil field practices" usually come
up in the context of environmental law and that these sources
were discussed in terms of HB 128. On the tax side, however,
there just is nothing out there.
2:25:26 PM
REPRESENTATIVE SEATON inquired whether the state is again in the
situation of adopting a standard of exercise of due care or
foresight for which there is not a judicial qualification or
definition.
MR. BULLOCK said he did not know because it is the
administration's language.
MR. BURNETT said he will have a DOR attorney get back to the
committee in this regard. In response to Co-Chair Gatto, he
said the committee would receive this information today or
tomorrow.
2:26:53 PM
CO-CHAIR JOHNSON stressed that it is imperative for the
committee to receive requested information quickly. He said he
will be providing a written list of requests, not only from the
House Resources Standing Committee, but also for information
requested, but not received, by the House Special Committee on
Oil and Gas.
MR. BURNETT, in response to Co-Chairs Johnson and Gatto, said
that Ms. Davis or Commissioner Galvin might be able to answer
the [standard of due care] question later in the hearing but, if
not, he will get someone else to do so.
2:28:34 PM
REPRESENTATIVE EDGMON returned to the issue of auditors, and
asked what is the possibility that the work load of an auditor
might be significantly more in the future than what is currently
anticipated.
MR. BURNETT answered that there is no intention for needing a
lot more auditors than there are today. He recalled that there
are currently 6 or 7 vacancies within the 17 positions for audit
staff. The legislation includes language that would allow
auditors to be paid more. The department is intending to
contract with a firm to obtain the help necessary for completing
the first and second years' audits and the fiscal note includes
a funding request for this purpose. In further response to
Representative Edgmon, Mr. Burnett said that the department has
been working on this for over a year now and has quite a bit of
knowledge about where the department is heading.
2:30:43 PM
CO-CHAIR GATTO asked whether the contracts will be made with
auditing firms that specialize in oil and gas auditing.
MR. BURNETT said the intent is to find a firm specializing in
oil and gas company auditing.
2:31:21 PM
MR. BULLOCK noted that the other disallowed lease expenditure is
listed in Section 33, [paragraph 20], of the bill: "costs
incurred to construct, acquire, or operate a refinery or crude
oil topping plant". He explained that a topping plant is
somewhat like a still; it is used to remove hydrocarbons to
procure diesel oil. He understood that the process is done at
some of the fuel stations. In response to a question from Co-
Chair Gatto, he offered his understanding that it is the first
four pump stations that have a supply of natural gas.
CO-CHAIR GATTO surmised that the amount of gas available in the
product going down the line has been exhausted, so there would
have to be a shift to different power sources.
MR. BULLOCK answered he did not know and that there are probably
issues related to pipe size and demand to be considered.
MR. BURNETT explained that a crude oil topping plant is an
expensive plant that produces a product that is commercially
available from other sources. The administration does not
consider a topping plant to be a lease expenditure because
building a small refinery for a fuel supply is not something
that is required by the lease. "There are other issues
surrounding that," he added, "and so this is a topic that has
had some discussion in other committees as to whether it's in
the best interest of the state to do it this way or not."
2:33:02 PM
CO-CHAIR GATTO asked if buying the product from Fairbanks would
be considered a lease expenditure.
MR. BURNETT answered that purchasing the product from a
commercial vendor would be considered an operating expense. He
continued:
The difference is if you build the refinery on site,
and you consider it a lease expenditure, it would be a
capital expense, which would be a deduction, and it
would qualify for capital credits. So, the state
would be participating in a much larger portion of the
cost upfront.
2:33:36 PM
REPRESENTATIVE SEATON asked if a plant built "on the lease
itself" would escape production tax and royalties.
MR. BULLOCK replied that he did not believe it would. He
explained that there are separate provisions that describe when
oil and gas are considered as produced. He added, "I expect
that it would be considered produced."
MR. BURNETT said he believed that is true.
2:34:16 PM
CO-CHAIR GATTO said:
But he makes a point that it's already produced when
it shows up as crude. If we then take the crude and
produce another thing, would that be double taxation
then?
MR. BULLOCK responded that refined products are not subject to
the production tax. He said, "So, if it's oil and crude oil,
and it's natural gas that's produced, it's subject to the tax."
MR. BURNETT suggested a better way to look at it is that the
producer is selling a certain amount of its production to itself
for use on site.
2:34:52 PM
REPRESENTATIVE SEATON offered his understanding that any
produced product sold off the lease hold to someone else is
established at a value and taxed, while any product used on the
lease hold itself "does not have that." He requested that the
committee be provided with a better definition from someone who
is more certain of the answer.
MR. BURNETT replied, "Certainly."
2:35:27 PM
MR. BULLOCK continued his review of CSHB 2001(O&G). He noted
that there is only one change related to tax credits, and it has
to do with transitional investment expenditures (TIE). There is
a change that is retroactive to the start of the PPT. When PPT
was enacted, it allowed taxpayers to look back to certain
expenditures they made in the previous five years, between March
31, 2001, and April 1, 2006. He said that CSHB 2001(O&G)
changes the five years to three years.
CO-CHAIR GATTO mentioned a claw back provision.
MR. BURNETT said the original governor's bill [HB 2001]
eliminated the TIE credit provision entirely, but that CSHB
2001(O&G) reinstated the TIE provision at three years instead of
five years. He said there is a sunset of January 1, 2008.
Under the original governor's bill, some companies will have
taken advantage of the TIE credits; but there are companies that
made expenditures and had no production to use against those
expenditures, thus these companies would be unable to take
advantage of some of those TIE credits.
MR. BULLOCK noted that that credit provision is in Section 24 of
the bill and it is an amendment to AS 43.55.023(i).
2:37:45 PM
MR. BULLOCK said that after the credits, the taxpayer knows what
must be paid and files a return. Then it is time for review to
determine how the returns and payments line up with the law.
The bill has changes that will help expand the information that
[DOR] has available. Furthermore, it gives [DOR] more time.
The expansion from the three-year statute of limitation period
for making assessments is in AS 43.55.075, and is shown in
Section 29 of the bill. Section 13, he noted, amends the
current statute of limitations that recognizes an exception for
the six-year period in the new section.
2:38:41 PM
MR. BULLOCK stated that the bill will allow [DOR] new auditors
that would be in exempt service. Section 9, he said, makes oil
and gas tax auditors and oil and gas royalty auditors in the
Department of Natural Resources (DNR) exempt employees. Section
40 provides transition language that allows auditors that are
currently employed by the department to opt to become exempt or
remain in the classified service.
2:39:10 PM
MR. BULLOCK said the bill contains additional information
requirements from the explorers and producers. Those show in:
Section 26, amending AS 43.55.030(a); Section 27, amending AS
43.55.030(e); and Section 28, which adds AS 43.55.040. One of
the changes in the information requirements, he noted, is that
an annual report would be required from explorers, even if they
didn't owe a tax. He said he thinks the intent is to allow the
department to know what is going on and "help them with a
revenue forecast." Furthermore, there are provisions in the
bill that will allow DOR and DNR to share information that might
otherwise be confidential. Those departments will have access
to an encyclopedia of facts regarding oil and gas production in
the state that relates to how the tax will be enforced, what the
expenses are, what the future holds in terms of exploration and
the likelihood of success. Sections 1-8, 10, and 12 relate to
the information sharing. He clarified that the bill would not
change the confidentiality of the information; it just allows it
to be shared. In response to a question by Co-Chair Gatto, he
said the structure of the confidentiality agreements of the two
departments varies slightly, mostly in how the information is
described. There are also outside limitations on DOR's
information; anything that the department gets from the IRS is
subject to different confidentiality requirements.
2:41:21 PM
MR. BURNETT said DOR has the ability to look at taxpayers'
federal tax returns under certain circumstances and must follow
the rules of the IRS in that respect. The department, for a
number of other reasons, has other areas where it has
confidential data and strict guidelines for handling that data
internally. In response to a question from Co-Chair Gatto, he
stated that, under statute, there is a criminal penalty for
revealing confidential information.
MR. BULLOCK said the issue is taken pretty seriously, because
the state wants taxpayers to report the information voluntarily
the first time and to have confidence that the information will
be protected.
2:42:22 PM
CO-CHAIR JOHNSON said he is concerned about confidentiality. He
questioned if it is necessary for everyone in the department to
have the capability or if the language could be narrowed down to
limit that capability to the auditors only. At some point, he
observed, some of the state's departments are actually
competitors of the producers, depending upon the situation.
MR. BURNETT proffered that at this point, the department
certainly would not give confidential information to secretaries
or others. That information would be given to tax technicians,
tax auditors, the director, appeals officers, and executive
management of the department.
2:43:42 PM
CO-CHAIR JOHNSON responded that what Mr. Burnett describes is
good business practice. He suggested that language is needed in
the proposed bill that would set restrictions regarding
confidentiality.
MR. BULLOCK stated that as a practical matter, what Co-Chair
Johnson suggests would be difficult to do. For example, he said
Section 28 of the bill allows the department to require returns
to be filed electronically. People in the mail room handle
returns as they arrive. He said, "Whether they actually open
the envelopes or not, they're going to see the information."
The restriction, he said, applies to every person in the
department, and if any one of them discloses the information,
that is a violation of the confidentiality statute. He said
this is a management issue; it's the job of management to ensure
that only those who need the information actually see it.
2:45:00 PM
MR. BURNETT confirmed Mr. Bullock's remarks. He explained that
tax payments come into the treasury, and there are people who
work cash management who have to be able to take care of the
credit payment information. He said there are a number of
places within the department where certain types of information
must be handled, and these can change over time; therefore, it
would be difficult to define in statute which employees would be
allowed to see confidential material. In response to a question
from Co-Chair Johnson, Mr. Burnett said every employee in DOR
signs a confidentiality agreement when he/she is hired. He
stated his belief that everyone in the tax division, treasury,
and the financial section takes [the issue of confidentiality]
"extremely seriously," as do those working in the Child Support
Services Division and the Permanent Fund Dividend Division.
MR. BULLOCK noted that he worked for DOR 30 years ago at which
time he signed a confidentiality form and, therefore, he still
cannot reveal anything.
2:47:14 PM
CO-CHAIR JOHNSON asked if the same could be said for DNR.
MR. BURNETT said he could not speak for DNR, but that the
Department of Administration requires all state employees to
sign a form that requires that they keep all confidential
information confidential.
2:47:41 PM
REPRESENTATIVE WILSON said confidentiality is demanded in the
fishing industry related to when the processors pay their taxes,
and she has never heard of anyone there saying that that
information has ever been leaked.
2:48:36 PM
CO-CHAIR JOHNSON reiterated that he wants to ensure the
integrity of confidentiality.
MR. BURNETT repeated that the department takes the issue
seriously. In response to a question from Co-Chair Gatto, he
said he is unaware of any violations occurring during his three
years of working at DOR. He said a small amount of taxpayer
information was inadvertently leaked to a legislative committee
from DNR several years ago, but he offered his understanding
that the information was "captured pretty quickly" and did not
involve the oil industry. In response to a question from Co-
Chair Gatto, he said there have been no violations regarding
confidentiality in the three years since he has worked for the
department. He recollected that a small amount of tax payer
information had been inadvertently leaked to a legislative
committee from DNR several years ago, but that it was captured
quickly and did not involve the oil industry.
2:49:38 PM
MR. BULLOCK said there is a current exception to the disclosure
of taxpayer information if it is possible to cleanse the
information for statistical purposes. For example, to show how
much revenue is received from a particular tax. That can be
disclosed, and that type of information is disclosed in the
revenue forecast, he said. One of the changes in the bill is to
allow the publication of additional information. Section 35
adds a new section, AS 43.55.890, which would authorize DOR to
disclose some tax information, provided that the information is
an aggregation of three or more producers.
2:50:34 PM
MR. BULLOCK recommended viewing CSHB 2001(O&G) as having three
segments: the tax segment, with its change of progressivity and
tax cap; the expenditure segment, which includes the
disallowances of certain costs, violations of law,
dismantlement, repairs resulting from negligent maintenance, the
topping plant, and the tax credit change from five years to
three years; and finally, that segment of the bill that relates
to determining the actual amount of the cash that the state
should receive, what the tax should have been, and auditors and
information available to the department to make assessments. In
response to Co-Chair Gatto, he said he does not believe there
are any changes to penalties in the bill. He noted that there
are existing penalties in Chapter 5 of Title 43 that apply to
failing to pay without good cause and a penalty for negligence
or intentional disregard of the law, the latter of which is 5
percent of the tax amount.
2:52:01 PM
MR. BURNETT, in response to a question from Co-Chair Gatto, said
the interest currently has an 11 percent floor.
CO-CHAIR GATTO said 5 percent seems light.
MR. BULLOCK clarified that the federal failure to file penalty
is 5 percent a month up to 25 percent and half a percent a month
for failure to pay. He said penalties are separate from
interest. Interest, he said, is just the compensation to the
state for the loss of use of the money, whereas penalty is an
imposition for not doing something that should have been done
and not having a good reason. He stated that if there is an
honest dispute about the interpretation of law, then that is an
issue where there might have been a reason for what the person
did. He said there are also criminal penalties for negligence
and fraud. He stated, "Fraud is when they know what it ought to
be and they intentionally try to deceive the department
otherwise."
MR. BURNETT noted that tax evasion is a Class C felony.
2:53:56 PM
MR. BULLOCK, in response to a question from Representative
Seaton regarding installment payments, said the federal penalty
is a penalty equal to the interest and from the date the
installment payment was supposed to be made until the date when
the tax is due on April 15. He said when it is unpaid at that
date, then a statutory rate of interest applies. He added, "And
if you don't pay it on that date, then the failure to pay
penalty applies." He said the way the PPT is written is that if
there is an underpayment of the installment during the year, the
taxpayer would have to pay interest until that filing and due
date, and then at that point it becomes an unpaid tax, as
opposed to an unpaid installment, and then the interest is due
on that amount. He said he did not know off-hand whether
interest accrues on the interest on the underpayment of the
installment.
2:55:03 PM
REPRESENTATIVE SEATON said:
But as I recall, the interest was not the statutory 11
percent interest until the actual true-up tax date,
and that it was a lower federal rate and depended upon
... how much it was underpaid as to that rate.
MR. BULLOCK read:
The unpaid amount of an installment payment required
under the installment payment statute that's not paid
when due bears interest at the rate provided for an
underpayment under the IRS Section 66.21, compounded
daily from the date the installment is ... due until
March 31.
... Interest accrued, under that paragraph, that
remains unpaid after March 31, is treated as an
addition to the tax, and bears interest for the unpaid
tax.
MR. BULLOCK said that answers what he did not know: The
interest that is a penalty for underpaying the installment is
fixed when the return is due, and that continues to bear
interest the same as the unpaid tax, if there is any at that
point.
2:57:28 PM
MR. BULLOCK, in response to a follow-up question from
Representative Seaton, explained that this interest is on the
underpayment of an installment; therefore, if the payer was
brought current, then interest would just run for the period in
which that installment was underpaid.
2:57:46 PM
REPRESENTATIVE SEATON noted that under the old Economic Limit
Factor (ELF), a monthly tax was paid, and that this was changed
by the PPT to a tax based on a taxpayer's annual yearly profit,
thus becoming an annual tax. He inquired whether a conversion
was made back to a monthly tax for progressivity when oil and
gas was changed from a net tax to a gross tax under subsection
(o) [in CSHB 2001(O&G)].
MR. BULLOCK said whether or not somebody is subject to the
progressivity tax is determined on a monthly basis. If the
gross value at the point of production is above $50 in a month,
then that triggers the tax for that month. The next month, if
it's $49, there's no tax under that provision, because it does
not apply for that month. He continued, "And then, over the
year, you look at all the months for which the progressivity tax
was required to be paid, what that total amount was, and that's
the amount that would have to be trued-up." He said there is a
provision "in here" that amends .020 and addresses how monthly
installment payments are determined.
2:59:48 PM
REPRESENTATIVE SEATON asked, "Is that monthly installments for
the net tax or is that..."
MR. BULLOCK interjected, "It's for both. They continue to make
installment payments." He specified:
The second of two amounts used to calculate the
installment payment for a month is the amount
calculated for the month under AS 43.55.010, which is
the new provision.
MR. BULLOCK said there will always be timing elements. He
explained, "Because it takes time from the time it comes out of
the ground ... until it gets delivered to a refiner and they
determine sales price. And so, the times aren't always exact;
there's some adjustments, and those adjustments should show up
in the true-up in a year." He reiterated that he had worked for
DOR and in the case of monthly taxes, every time there was a
return filed for that month it starts a whole new statute of
limitation. Therefore, he continued, changing to an annual
basis lumps everything together and provides a neat way of
truing up before April 1, and then the statute of limitations
can apply to that whole year.
3:01:08 PM
REPRESENTATIVE ROSES inquired why it is necessary to make the
auditors exempt, as opposed to having a contract or
reclassification of the position. Does [DOR] not already have
the capability of making a position exempt without the help of
the legislature, he asked.
MR. BURNETT said [DOR] does not have the authority under
existing law to make positions exempt in the executive branch
without additional legislative authority. He said there is a
section that allows the governor to create exempt positions for
a specific study or project for a temporary purpose, but this is
ongoing work of the department.
3:03:09 PM
REPRESENTATIVE ROSES asked about reclassifying the current
positions, as opposed to making them exempt.
MR. BURNETT responded that all of the department's auditor
positions were reclassified about three years ago. He
continued:
However, ... when you're doing a classification under
the state classification and pay plan, you have job
class families, and each job class family is a group
of related jobs that have a similar type of work, and
there are different levels .... The pay plan compares
those jobs on, I believe, eight factors that relate to
the type of work - the complexity, the qualifications,
et cetera. The difference between the oil and gas
revenue auditors and the corporate income tax auditors
is not a difference specifically in qualifications or
in the difficulty of work. It is that people with a
specific industry knowledge have a market - there's a
niche market for people in the oil and gas industry.
And the market for those people is a higher paid job
market than it is for people in other parts of those
professions, while they may have the same technical
qualifications. ... If you look at the statute ...
Title 39, I don't remember exactly the site ...
several years ago the legislature made ... petroleum
geologists and petroleum engineers exempt from the
classification pay plan for exactly the same reason -
because they could not offer a competitive salary for
people who were specifically in that industry. It's
not so much the job they're doing, but the
relationship with the industry and the pay in the
industry.
3:05:32 PM
REPRESENTATIVE ROSES said his summary of Mr. Burnett's statement
is that reclassification does not work because the entire group
of employees that do auditing would have to be reclassified, as
opposed to those that just do oil and gas auditing.
MR. BURNETT answered yes. He said that last year the Murkowski
Administration adopted a market-based pay plan. That plan
identified job class families where the market pay was less than
where state employees were. Compared to other jobs in state
employment, he said, those jobs were not necessarily underpaid.
However, there are certain jobs, like nursing, where there is a
nationwide labor shortage. Therefore, nurses and related jobs
and tax auditors and related jobs were given a two-range pay
increase, which is approximately equal to an increase of 15
percent in pay. Even with that increase, the state has
continued to have difficulty in attracting people who have
specific industry experience who would be familiar with the cost
of an actual oil production facility or an oil company. So,
this is the reason for the request, he said.
3:07:17 PM
REPRESENTATIVE WILSON asked why the department doesn't just
continue to contract "these positions."
MR. BURNETT explained:
We have not let any contracts at this point for this.
This is ongoing work, which is done by members of a
collective bargaining unit in state government. And
every collective bargaining agreement that I'm aware
of in state government has a provision that does not
allow the state to contract out work that's normally
done by the members of that collective bargaining
unit, unless the state can clearly show through a
feasibility study that it's less expensive for the
state to do that. It is not less expensive for us to
do this. It's necessary because we need to find an
auditing company that has the skills - the specific
industry knowledge and experience - to help us do
this.
3:08:33 PM
REPRESENTATIVE WILSON asked if Mr. Burnett was saying that the
department cannot contract out because the union agreement won't
allow it.
MR. BURNETT replied that it is his understanding that it would
require a feasibility study and/or some type of negotiation with
the union before the department could change the agreement to
contracting out. He continued:
And that would not allow us ... to be able to hire
employees. ... We believe we need employees with
specific industry experience [and] qualifications, and
we believe that the market price for those is much
higher than what we can pay under the classification
and pay plan for the state.
3:09:24 PM
REPRESENTATIVE WILSON recalled a similar situation related to
the nursing field and it took two years to complete a market
comparison study.
MR. BURNETT said he was involved in that work and confirmed that
it took at least two years.
3:09:59 PM
CO-CHAIR GATTO remarked, "So, doing that is sort of like an
investment in future earnings."
MR. BURNETT concurred.
3:10:08 PM
CO-CHAIR JOHNSON asked whether there has been any analysis on
contracting out:
I mean, right now it's not cheaper or less expensive
to contract out with employees that we have now. Has
there been any kind of analysis once we get our market
comparison to the more skilled type auditors that
we're going to have to pay for? Has that analysis
been done?
MR. BURNETT answered:
That type of analysis would be something that would be
ongoing as we contracted with people and hired people.
So, what the ultimate mix would be is -- it's very
difficult. If you look at the fiscal note that was
presented with this bill, it indicates that our intent
is to hire an auditing company full-time for the next
three years, at least, and also bring in expertise so
that we have people in the department.
3:11:08 PM
REPRESENTATIVE GUTTENBERG remarked that the House Resources
Standing Committee is the fourth committee that has been faced
with this question. He asked whether the administration has sat
down with one of the bargaining groups and asked, "How can we
resolve this?"
MR. BURNETT said he could not speak to that issue because the
commissioner of the Department of Administration is responsible
for collective bargaining, not DOR. A solution is trying to be
found that least compromises the state's classification and pay
plan, has the least impact on the work force, and yet "allows us
to ... accomplish this." He continued:
If you look at the statutes, you'll find that jobs
like pharmacists, doctors, psychiatrists, ...
petroleum economists, ... petroleum geologists, [and]
commercial analysts are in the exempt service, and the
reason is because there are market pay niches where
you can't compare them to other work. ... So, that's
what we're looking at here is a very specific niche
market.
3:13:48 PM
REPRESENTATIVE SEATON said he would like Mr. Bullock to share
any sectional analysis or notes with the committee.
CO-CHAIR GATTO mentioned material from [DOR Deputy Commissioner]
Marcia Davis.
MR. BURNETT said a more descriptive document is being worked on
currently. He said Ms. Davis and [DOR Commissioner] Pat Galvin
are presently in a meeting with the governor but that they will
probably attend the committee meeting in the afternoon.
3:14:49 PM
CO-CHAIR GATTO confirmed that Steve Porter was present in the
room.
The committee took an at-ease from 3:15:14 PM to 3:36:20 PM.
3:36:44 PM
CO-CHAIR GATTO asked whether there were further questions for
Mr. Bullock.
CO-CHAIR JOHNSON offered the committee's appreciation for Mr.
Bullock's hard work.
MR. BULLOCK responded that it is an honor to be doing this work
because it is important to the future of the state and the
people living here.
3:38:47 PM
CO-CHAIR GATTO inquired whether the limited information
regarding results of the PPT and the lack of auditing is because
of not enough DOR auditors.
MR. BURNETT explained that when PPT passed last year it
authorized seven additional auditor positions for DOR, for a
total of ten positions that includes tax technicians as well as
auditors. While DOR has been hiring people over the past year,
the existing production tax auditors were, and still are,
auditing production tax returns under the old statute.
Additionally, the existing auditors were also writing the
regulations for PPT. He pointed out that there is a time lag
because an audit cannot be done until after the taxpayers'
returns are received which is in April.
3:41:11 PM
CO-CHAIR GATTO asked if April is when the data is just starting
to be received or is completely received.
MR. BURNETT said April is when the tax returns are completely
received. While the state knows how much money it has from the
monthly filings, the audit process cannot begin until after the
annual return is filed and the data is complete. That is one of
the improvements that the state is looking for in the statute.
MR. BURNETT, in response to Co-Chair Gatto, stated that DOR has
no intent to add new auditor positions beyond filling the
department's five existing vacancies and hiring the contract
auditors included in the fiscal note.
3:43:10 PM
REPRESENTATIVE WILSON inquired whether it is normal to be two
years behind in the state's auditing process.
MARCIA DAVIS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), confirmed that two years is normal.
She explained that at the end of March DOR receives returns for
the prior calendar year. However, many taxpayers are in joint
ventures on the North Slope for which federal tax returns are
not due until October, and this invariably results in the
individual operators then having to file amended returns with
DOR. It is therefore better for DOR to wait until November to
begin the auditing process. Because the department is nearly a
year behind at the outset, she continued, being two years behind
is actually quite good.
3:44:59 PM
REPRESENTATIVE FAIRCLOUGH asked how DOR processes its
advertisements for auditor positions.
MR. BURNETT responded that all final recruitments for state
employees in the classified service are posted on Workplace
Alaska through the Department of Administration. Additionally,
during the past year DOR also spent over $100,000 for print
advertising throughout the U.S. in trade magazines and general
circulation newspapers.
3:45:59 PM
REPRESENTATIVE FAIRCLOUGH inquired whether centralizing the
hiring process [through Workplace Alaska] causes so much delay
in the processing of applications that applicants have taken
other jobs before the state is even able to respond.
MR. BURNETT noted that DOR's hiring manager is able to see
applications as they come into Workplace Alaska and can contact
applicants as soon as the application period is over. However,
he said, very few qualified auditors have applied and almost
none have had the specific oil and gas experience and knowledge
that DOR is seeking.
MS. DAVIS, in response to a further question from Representative
Fairclough, acknowledged that the state hiring process is
certainly less nimble than in private enterprise against which
the state is competing for auditors. In those cases where
applicants had accepted another position prior to being
contacted by the state, she said it was unknown whether that was
the result of timing or the clear disparity in pay.
3:49:26 PM
REPRESENTATIVE FAIRCLOUGH related that some of the departments
have said that modifications to the hiring practices by the
previous administration resulted in slowing the timeline for
hiring. She asked whether DOR advertised for its vacant
positions.
MR. BURNETT stated that DOR had advertised over the previous
year for all of the positions. He explained that due to
insufficient applicants for the higher level positions, DOR
decided to downgrade positions and try hiring people at the
entry level. The department stopped advertising on Workplace
Alaska during the process of reclassifying the positions which
took a long time.
3:50:43 PM
CO-CHAIR GATTO commented that attracting teachers to the state
is also becoming more difficult each year. He inquired whether
the state is allowed to use more active, aggressive hiring
methods than just waiting for people to apply.
MR. BURNETT said that having the positions be exempt would allow
DOR to contact people and offer them a position. This could be
done in a day as long as the commissioner and the governor's
Chief of Staff agreed with the salary.
CO-CHAIR GATTO commented further that DOR needs to tell the
committee what it will take to attract qualified auditors for
the positions.
3:53:27 PM
CO-CHAIR JOHNSON requested organizational charts for the
auditing divisions of both DOR and DNR that show staff positions
and whether or not they are vacant.
MR. BURNETT agreed to provide a chart. He said the last time he
looked there were 19 vacant positions in the tax division,
including the oil and gas auditors.
3:54:30 PM
CO-CHAIR GATTO asked whether there is a cost-cutting environment
directing that not all of the vacant positions be filled.
MR. BURNETT answered that there are guidelines on how many
vacancies a department should budget for and the range is
approximately four to seven percent depending on the size of the
organization. He said that 20 out of 120 positions is
significantly more than 7 percent and DOR is certainly not
intentionally budgeting for that.
3:55:19 PM
STEVE PORTER, Consultant for Legislative Budget and Audit
Committee, Alaska State Legislature, stated that as former
deputy commissioner for DOR he is familiar with the state's
difficulty in filling auditor positions. It is a problem that
began six years ago and is not associated with the start of the
PPT. He said that while he was with DOR, various strategies for
attracting auditors were discussed, including one long-term
strategy of hiring auditors fresh out of school and hiring many
more than needed with the idea being to "train up your own."
During the training period which can take up to six years, the
state would lose its trainees to federal government and private
industry because - on the salary scale - the state is at the
bottom of the pile. Those auditors remaining with DOR would be
staying out of loyalty to the state, not because of being well
paid. Thus, he said, the vast majority of people before you
today are working out of commitment to public service.
CO-CHAIR GATTO remarked that Alaska needs to pay its auditors
enough so that Alaska is their first loyalty because they could
work as loyal public servants for any state.
3:59:19 PM
REPRESENTATIVE FAIRCLOUGH pointed out that no audits have yet
been done under PPT because of the two year time lag. She
expressed her concern that the bill before the committee is
based on auditing experience under the old ELF system and is
therefore only a "best guess" at what information is needed by
the state.
MS. DAVIS responded that DOR addressed this weakness by sending
its current staff of auditors for training with an outside
contractor whose specialty is auditing the joint interest
accounts of companies operating around the world. The auditors
who received this training were consulted during the drafting of
the administration's bill, she said.
4:01:27 PM
REPRESENTATIVE GUTTENBERG said he is aware that DOR is about to
lose some senior people who have been there for 20 years. He
inquired whether DOR has a plan for filling these positions and
addressing this loss of institutional knowledge.
MS. DAVIS said DOR's plan is to stop hiring entry level people
and use the exempt auditor positions [established under HB 2001]
to bring in "high-level" people with extensive oil and gas
experience. The exempt status will allow a higher pay scale for
attracting experienced people from industry as well as
government. Further, she explained, DOR will fill current
vacant positions with the most experienced people that can be
found and the senior auditors who are about to retire will work
side-by-side with these junior auditors to ensure that they
receive training.
4:03:36 PM
CO-CHAIR GATTO requested Ms. Davis to compare the differences
[in the various versions] of HB 2001.
MS. DAVIS stated that her typed comparison is between the
original HB 2001 [ACES], and [CSSB 2001(RES)], and the House
Special Committee on Oil and Gas (HO&G) proposed committee
substitute (CS) for HB 2001, Version 25-GH0014\K, Bullock,
10/27/07 ("Version K"), but that her handwritten notes on the
comparison relate to the bill actually passed by the committee -
CSHB 2001(O&G), Version 25-GH0014\L.
The committee took an at-ease from 4:05:41 PM to 4:12:58 PM to
distribute copies of Ms. Davis's written comparison to committee
members.
4:13:18 PM
MS. DAVIS reviewed how to interpret her written comparison and
then addressed the differences between the bills. Section 1 of
ACES [HB 2001] was removed in [CSHB 2001(O&G)], she said, but
the administration would like the provision to be reinstated.
She explained that Section 1 requested a statement of
legislative intent regarding the interpretation of AS 43.05.260
by a DOR regulation. These relate to how the statute of
limitation is applied when circumstances change after the
statute of limitations runs out. Currently, the department has
three years from the date a return is filed to claim that the
return is incorrect. After three years, the state is precluded
from re-opening the return. Ms. Davis continued explaining that
under this statute and regulation, DOR has taken the position
that it can go back and re-open a return after the statute of
limitations has expired when a Federal Energy Regulatory
Commission (FERC) ruling modifies the tariff rate for that time
period or when expenses are disallowed on a federal tax return,
resulting in an increase of taxes that would have been owed the
state.
4:18:13 PM
CO-CHAIR GATTO asked whether the FERC ruling zeroes out the
clock so that the state can go back three years after the FERC
ruling.
MS. DAVIS answered that she was not sure and would get back to
the committee, but that it does re-open the department's
opportunity to look at a return.
4:18:40 PM
MS. DAVIS stated that DOR is not aware of any outstanding
lawsuit on whether the statute should or should not be opened.
But, she said, the Alaska Oil and Gas Association (AOGA)
expressed its concern before HO&G that this statute was somehow
a way to lock down an interpretation of how interest would be
calculated. She said that it was not contemplated by DOR that
this statute would affect other laws related to interest.
Therefore, the Senate Judiciary Standing Committee is reviewing
the language to make sure it does not override existing law
relating to interest.
4:19:29 PM
MS. DAVIS skipped the differences in provisions relating to the
progressivity factor and tax rate elements of AS 43.55.011(e)-
(p), saying that they are scheduled for discussion by the
committee on 10/30/07. Ms. Davis also skipped the provisions
relating to AS 43.55.020 that describe how the tax gets paid,
saying that any changes made to the tax rate in AS 43.55.011
will affect the provisions of AS.55.020.
4:21:28 PM
MS. DAVIS moved to a provision relating to economic terms in AS
43.55.023(b). She explained that under existing law the tax
rate is 22.5 percent and that a company producing oil and gas
can take deductions and capital credits, thus receiving a 22.5
percent relief against that tax. For a company with no
production and therefore no tax liability, PPT allows the
expenditures to be carried forward and used as deductions in the
future, but only at 20 percent a year. She said this disparity
probably arose when the tax rate was 20 percent and the carried
forward loss was 20 percent, and that when the tax rate was
changed it was forgotten to also change the operating loss carry
forward. She said that the administration had asked HO&G to
correct this disparity by matching the operating loss carry
forward to whatever tax rate the committee established.
However, she stated, the committee overlooked this.
4:23:25 PM
CO-CHAIR GATTO inquired whether the 20 percent per year loss
carry forward disappeared after five years.
MS. DAVIS answered yes, as it pertains to each particular
"bucket of costs". For example, if the tax stayed at 22.5
percent, the administration would seek to have the loss carry
forward changed from 20 percent to 22.5 percent. In further
response to Co-Chair Gatto, Ms. Davis explained that the maximum
per year for loss carry forward is 20 percent for each bucket of
costs and that this amount is not reduced or increased for each
successive year during that five year period.
4:24:23 PM
REPRESENTATIVE GUTTENBERG asked whether there is a point of
having the same number between the tax rate and the tax credit.
MS. DAVIS responded, yes, the point is to give them the same
economic benefit associated with having those capital
expenditures and being able to use them as a deduction. This
way, someone who is already producing will not have an economic
advantage over someone who has not yet entered into production.
4:24:57 PM
REPRESENTATIVE SEATON inquired whether Ms. Davis is talking
about net operating loss carry forward or TIE credits.
MS. DAVIS said she is referring to the net operating loss carry
forward in AS 43.55.023(b), but that this provision is not
included in the bill that is before the committee [CSHB
2001(O&G)].
4:25:48 PM
MS. DAVIS reviewed the difference between the administration's
original bill [HB 2001] and [CSHB 2001(O&G)] regarding treatment
of the TIE credits. She said the original bill removed TIE
credits in their entirety because they had already been used for
2006 and 2007 and the effective date of the bill would be
January 1, 2008. Therefore, she continued, benefit was received
for one and two-thirds years.
4:27:16 PM
CO-CHAIR GATTO commented that the previous House Resources
Standing Committee (HRES) had addressed TIE credits and
eliminated them altogether.
MS. DAVIS replied correct.
CO-CHAIR GATTO said the HRES's justification for eliminating TIE
credits was because companies had already made the benefit of
that investment, so being able to go back and access the benefit
a second time constituted "double dipping". He said HO&G
returned the TIE credits to the bill [CSHB 2001(O&G] in a
slightly different form.
4:28:08 PM
MS. DAVIS responded that under CSHB 2001(O&G) the TIE credits go
back three years instead of five years. In working with the
Senate Resources Standing Committee, she continued, the
administration discovered a problem with completely eliminating
TIE credits: incumbents can use their TIE credits for 2006 and
2007, but new entrants that have incurred costs but do not yet
have production cannot. So, to put new entrants on equal
footing with incumbents, the senate's version of the bill [CSSB
2001(RES)] allows the carrying forward of unused credits for
2006 and 2007. She said the administration estimates that this
will preserve 60-70 million dollars' worth of credits from the
smaller producers. Under CSHB 2001(O&G), which preserves unused
2006 and 2007 credits for incumbents as well as new entrants,
the administration estimates it will be an additional $900
million to $1 billion.
4:30:10 PM
CO-CHAIR GATTO asked Mr. Porter if he agreed with the
administration's estimate on the amount of money involved.
MR. PORTER said yes. The way the formula works is that a
company's 20 percent credit is a fixed number - whatever the
company spent during that five years it gets to take a credit on
that at 10 percent per year. He explained that removing the
years 2001 and 2002 results in roughly $1.2 billion or so being
taken off of the total value, but that the total value is only
what is subtracted against. Therefore, 2008 doesn't change
because the formula doesn't change, it just reduces the amount;
and the years 2009-2013 don't change either. The only thing
that happens in those last two years is the loss of that
proportion of the 20 percent. The money is taken off the back
end, he continued, thereby leaving most of the credit the
company would have applied for anyway. He agreed with Ms.
Davis's estimate and said it's about $200 million per year. In
further response to Co-Chair Gatto, Mr. Porter explained that
[unlike a deduction] credits reduce a company's tax bill dollar-
for-dollar.
4:31:52 PM
REPRESENTATIVE SEATON inquired whether the credit for each
company will be recalculated and adjusted down to the last three
years.
MR. PORTER answered that the credit is a "single batch number"
so that the year doesn't matter because it is a total number
that is being reduced.
4:32:47 PM
MS. DAVIS, in response to questions from Representative
Fairclough, stated that [HB 2001, as introduced,] did not have a
provision for allowing new explorers to take their unused TIE
credits, a harsh impact that the administration had overlooked.
Therefore, she said, the administration sought an amendment to
correct this harsh effect on new entrants. She explained the
importance of a level playing field in order to attract new
entrants to the state. Giving new entrants the full benefit of
incentives created by the state's tax policy is not giving them
an advance leg up, rather it is treating them the same as
incumbents. New investment by incumbent producers is equally,
if not more, important to the state's revenue picture, she
opined.
4:34:42 PM
REPRESENTATIVE FAIRCLOUGH asked whether it was an issue of
fairness, then, from the administration's perspective.
MS. DAVIS answered yes, because the administration is asking to
make the law effective January 1, 2008. The benefit has been
received, banked, and booked by incumbents for the 2006 and 2007
time period, she said, and it would be unfair to not provide the
same benefit to new entrants that were unable to use the credit
because they had not yet gotten their production going.
4:35:24 PM
REPRESENTATIVE FAIRCLOUGH agreed that it is an issue of fairness
for new entrants because they had laid plans. But, what about
fairness for the incumbents that had laid exploration plans as
well, she asked.
MS. DAVIS stated that in the five years prior to PPT, there was
no expectation by companies that they would receive deductions
for capital costs and investments made during that time period.
The incumbents' decisions, she said, were based on the economics
as they knew them at the time and all companies were treated the
same in that time period. Now, one and two-thirds years after
passing PPT, their TIE credit provision is being reconsidered
and the question is how to change things while making sure that
incumbents and new entrants are treated the same. This is done
by allowing incumbents to keep the TIE credits that they used in
2006 and 2007 and giving new entrants the same opportunity for
those years, because they both spent money in 2006 and 2007
relying on the TIE credit being in place at that time. Thus,
what makes it fair is to make the law change effective January
1, 2008.
REPRESENTATIVE FAIRCLOUGH commented that she understood the
administration's perspective and the distinction being made.
She said that despite the cloud over the past legislature's
head, she wanted to honor the body's recognition that both new
and incumbent investors had moved forward.
4:39:25 PM
CO-CHAIR JOHNSON opined that the major producers have made
investment decisions over the past 18 months that were based
upon receiving TIE credits. Where is the fairness regarding the
money they invested on the basis of receiving credits that are
now being taken away, he asked.
MS. DAVIS responded that there are clearly key drivers in
decision making, such as the ability to immediately apply
capital credits in the year incurred. This additional credit
that can exceed 10 percent of the total amount, may or may not
have served as an added bonus or been a key change in the
decision process for the years 2008 onward. She said the
administration is looking forward, not backward; thus, the
question is fair in terms of benchmarking what incremental
difference the TIE credit made for future investment decision.
4:41:25 PM
CO-CHAIR JOHNSON expressed his concern that companies made
decisions based on the 10 percent credit being enough for moving
ahead and assuming an investment risk. He said he would rather
have jobs than $900 million more in the state's treasury.
MS. DAVIS said the economic analysis due out on 10/30/07 will
play a prominent role in evaluating what constitutes an
appropriate tax structure and risk for both the state and
industry. With the TIE credits being $900 million-$1 billion
spread out over five years, the question is whether $200 million
a year makes a difference. This figure can serve as a benchmark
while reviewing the numbers and what the companies were looking
at for the next five years.
CO-CHAIR JOHNSON remarked that he is looking forward to the
economic analysis because no one, including the companies, has
been able to deliver any type of information as to what the
companies were looking at for the next five years.
MS. DAVIS said she was looking forward to the information as
well.
4:43:43 PM
REPRESENTATIVE GUTTENBERG submitted that the investment
decisions made three to fours years ago were made at oil prices
of $60-$70 per barrel, but now the price is about to sail past
$100. The time the company goes into production is the time it
gets its return. Giving the company a credit carrying forward
might be nothing compared to what it is going to get on the
dollar for the barrel; so, there is a balance there.
CO-CHAIR GATTO surmised that many investment decisions are based
upon projections of at least five years, thus the decisions were
made long before there were any TIE credits.
MS. DAVIS agreed that decisions made prior to 2006 did not
contemplate TIE credits. What companies would have
contemplated, she said, is a stress price. Prices in 2000-2004
were $20-$40 a barrel, so a stress price would have been
somewhere in the $20 range. Evaluation of whether a project is
a "go" or "no go" is based on a very conservative estimate of
the future oil price. This stress price is used because a
company has no control over what happens from there forward
relative to price.
4:45:48 PM
MS. DAVIS next explained that Sections 36-44 of the original
bill [HB 2001] contained provisions for improving the
exploration incentive credits (EIC) in AS 43.55.025. She said
DNR assisted with making these improvements which expanded the
scope of wells eligible for the EIC and shored up DNR's right to
receive data, well logs, and seismic information in the course
of providing those credits. These provisions were left out of
[CSHB 2001(O&G)], she said.
4:47:01 PM
REPRESENTATIVE SEATON inquired whether these provisions were
left out for a future committee to address or rejected by HO&G.
MR. PORTER said he thought they were left out with the intent
for a future committee to address. He said there were
positives, such as date changes, that benefit the industry, but
that there were also some added burdens on industry such as the
types of data they are required to provide. The previous
committee did not spend much time dealing with this issue, he
continued, but the details could be addressed by this committee
if it so wished.
REPRESENTATIVE GUTTENBERG urged that the committee address the
issue because the lack of information hinders the state's
ability to manage its "oil patch".
4:48:34 PM
MS. DAVIS outlined Section 45 included in the original house
bill [but excluded in CSHB 2001(O&G)]. She explained that the
provision expanded the tax credit fund in AS 43.55.028 to
include the buy back of exploration incentive credits in
addition to the buy back of capital credits under PPT. The
department must request an appropriation in advance for
purchasing the capital credits; however, DOR is working blind
because the capital credits have not come in by the time that
the request must be made. Under current PPT law, the credits
must be refunded within a 60-day turn around. Therefore, DOR
must come back with supplemental appropriations. For example,
she said, the appropriation for next year is $25 million, an
amount that is clearly inadequate. The original bill set up a
fund that would be there for the coming year, Ms. Davis
continued. The fund is 15 percent if the price of oil is less
than $60 and 10 percent if it is above $60. Since it is a non-
dedicated fund, it is available for the legislature to
appropriate to other purposes, but its express purpose is for
providing the refunds presented to DOR. She suggested that
whenever any funds are left over, the legislature could choose
to either appropriate less for the following year or let the
number increase and create a cushion for those times when
extraordinary costs are being offset against net tax or the
price of oil plunges.
4:51:04 PM
MS. DAVIS noted that CSHB 2001(O&G) includes the original bill's
requirement for producers to file annual reports and non-
producers to file both annual and monthly reports. However, the
penalty provision for failure to file a report was not included
in CSHB 2001(O&G), she pointed out. Additionally, both versions
provide DOR with the right to request forecast information, but
again the penalty provision for companies that fail to provide
forecast information is left out of CSHB 2001(O&G). The result
is that DOR can request information from the industry but cannot
enforce that request. She explained that under existing law the
penalties that DOR can impose are percentages of the existing
tax liability. However, since there is no tax liability
associated with information reports there is no penalty and,
thus, no means of enforcing DOR's requests for information.
Therefore, she said, DOR is requesting that the committee
consider reinserting these penalty provisions.
4:52:27 PM
REPRESENTATIVE SEATON related concern by industry that the
penalty provisions would allow DOR to go back under the six year
timeline and assess fines of $1000 per day for that entire time
period. He asked whether DOR would assess the penalty based on
the date the report is requested or the date the report was to
have been filed.
MS. DAVIS responded that she had not heard of this particular
concern. In further response to Representative Seaton, she said
she would get back to the committee in this regard.
4:53:54 PM
MS. DAVIS stated that the provision in Section 56 of the
original house bill was excluded from CSHB 2001(O&G). She
explained that this provision would re-write AS 43.55.165(a) to
require DOR to issue regulations that specifically define what
are considered leasehold expenditures, rather than having the
statute define what are not leasehold expenditures. The current
statute is self-implementing and therefore precludes DOR from
issuing regulations. This has resulted in producers being given
too much discretion in interpreting what constitutes direct and
reasonable leasehold expenditures related to the development of
oil and gas upstream.
MR. PORTER added that the provision would reverse the current
structural relationship between the industry and the state.
CO-CHAIR GATTO surmised that it is much easier to say what is in
because it is impossible to come up with all of the outs.
MR. PORTER responded that saying what is in is not without
problems because it is possible to accidentally exclude numerous
things that are probably normal lease expenditures. So, both
occur and the state needs to be aware of the risk of both sides
of the equation, he advised.
4:57:07 PM
REPRESENTATIVE SEATON asked whether this provision was omitted
intentionally by HO&G or was a deferral for another committee to
deal with.
MR. PORTER said he did not know.
MS. DAVIS, in response to Co-Chair Gatto, explained that non-
substantive conforming language had to be inserted into [CSHB
2001(O&G)] when it excluded the Section 56 provision.
4:58:07 PM
REPRESENTATIVE GUTTENBERG requested an elaboration of the cost
allocation for expenditures upstream in AS 43.55.165(h) [a
provision excluded from CSHB 2001(O&G)].
MS. DAVIS said this was a rewrite by DOR of AS 43.55.165(h) in
regard to the department adopting regulations that describe the
means for allocating costs between oil and gas and between
leases and properties in order to determine which leasehold
expenditures apply to which leases. While drafting regulations
to implement the PPT statute regarding this issue, it was
discovered that the statute is not as clear as DOR would like.
Because the department has written the regulations, she said,
this is only a clarifying amendment because it doesn't change or
specify any allocation rules.
4:59:35 PM
REPRESENTATIVE SEATON said he thought the whole goal of having
oil and gas together in PPT was so that there wasn't a cost
allocation between oil and gas. Is this now instituting an
allocation between oil and gas, he asked.
MS. DAVIS answered that this is exactly right regarding concerns
that were expressed during the last time. This does not change
the language in PPT to that extent because the original language
still remains. Where there is a reasonable method of allocating
cost between oil and gas in between leases, she explained, there
can be instances when facilities are shared between units and it
is necessary to figure out which costs go to which participating
area (PA).
5:00:48 PM
REPRESENTATIVE SEATON inquired whether the clarification is
related to the upstream utilization of energy that is non-
taxable when the energy is used within the unit, but is taxable
when it is sold outside of the unit.
MS. DAVIS responded that there might be numerous reasons why,
from a tax point of view, there is a need to allocate a
leasehold expenditure between oil or a gas in between fields or
PAs, and that Representative Seaton's example could be one of
them because there is non-taxable and taxable product flowing at
the same time.
5:01:33 PM
MS. DAVIS finished her comparison of the bills by noting that
the differences in regard to definitions, repeal, retroactivity,
and applicability are due only to the need for conforming
language as a result of removing sections from [CSHB 2001(O&G)].
5:02:26 PM
CO-CHAIR JOHNSON reiterated that maintaining confidentiality is
of utmost importance to him. He asked for assurance that there
would be no breaches of confidential information by the state.
MS. DAVIS responded that both DOR and DNR take their obligation
for preserving taxpayer confidentiality very, very seriously.
Sharing of information between the departments would be
undertaken using aggressive systems for maintaining
confidentiality that would be put into place from the very
beginning. She said she envisioned that a protocol committee
would be established by the two commissioners to set up
standards, lockdown procedures, and a list of the individuals
having access to the information.
5:04:51 PM
CO-CHAIR GATTO surmised that confidential documents would be
related to property rights and that the release of these
property rights would be a criminal offense.
MS. DAVIS stated that DOR's standards for confidentiality impose
criminal sanctions for any release and that those criminal
sanctions would also apply to DNR personnel who have access to
confidential DOR information.
5:05:31 PM
CO-CHAIR GATTO asked whether it would be a Class C felony.
MR. PORTER said he did not know.
MS. DAVIS said she is unsure whether it is a Class C misdemeanor
or felony and that she would get back to the committee.
CO-CHAIR GATTO opined that this is an important issue because
information sharing between the two departments will increase
the volume of documents being viewed by individual state
employees and that the committee was as concerned about this as
the industry.
5:06:20 PM
REPRESENTATIVE GUTTENBERG pointed out that legislators also have
confidentiality agreements and cannot talk about any proprietary
information given to them. He asked what the penalty is, other
than job loss, for an industry employee who releases
confidential information.
MR. PORTER answered that there is no requirement for the
industry to keep its own data confidential and that each company
would determine its own penalty. If information is accidentally
released, he said, it becomes public data.
5:07:17 PM
REPRESENTATIVE GUTTENBERG said he is referring to the concept of
the whistle blower - where industry gives the state confidential
information, but someone from inside the company then releases
information that shows there is something wrong with the
information that was given. While the information may be
confidential for the state, the industry person releasing the
information will only suffer ramifications from inside the
company.
MS. DAVIS said that this is correct. However, companies usually
have contractual arrangements with each other and with operators
about what information can and cannot be publicly divulged.
5:08:30 PM
REPRESENTATIVE GUTTENBERG asked why some people were required to
sign confidentiality agreements in order to see the Wood
Mackenzie reports, while others were not.
MS. DAVIS explained that Wood Mackenzie sells its product to an
entity, such as the state or a company. Generally, the terms of
that contract allow the sharing of the information internally
with the entity's employees, directors, and officers. Any
sharing of information beyond this circle, such as with a
contractor hired to help analyze the report, must be approved by
Wood Mackenzie. She said that DOR and the Legislative Budget
and Audit Committee purchased the report together and that Wood
Mackenzie reserved the right to approve the list of contractors
with whom the report would be shared.
5:09:58 PM
CO-CHAIR GATTO inquired whether DOR ever has confidential
documents that must be supplied to the producers for which the
department insists must remain confidential.
MS. DAVIS responded that DOR can discuss confidential taxpayer
information only with that taxpayer.
CO-CHAIR GATTO surmised that whatever DOR tells the taxpayer is,
in turn, confidential.
MS. DAVIS said correct.
5:10:38 PM
CO-CHAIR GATTO asked if DOR included legislators in the group
that it would be sharing the Wood Mackenzie information with.
MS. DAVIS said she was unsure because the contract was with the
Legislative Budget and Audit Committee. The report was shared
between DNR, DOR, and the committee, and it was DOR's intent
that the information also be shared with legislators. The
protocol was that any legislator viewing the report would need
to affirm that he/she understood the terms imposed on the report
by Wood Mackenzie.
REPRESENTATIVE SEATON confirmed that legislators were required
to sign a confidentiality agreement, but that [the ability to
review the Wood Mackenzie report] did not extend to
[legislative] staff.
5:12:05 PM
REPRESENTATIVE SEATON referred to the new language in paragraph
(6) on page 26 of CSHB 2001(O&G). He recalled that there was
some question as to whether the costs [specified in paragraph
(6)] could be interpreted as fines and court fees. He opined
that it seems very unreasonable that "we would say that a lease
expenditure does not include costs arising from fraud or wilful
misconduct and then limit it to court fees and fines." He
related his understanding that a clarification of what "a
violation of law" means and whether it includes a criminal
negligent plea by BP on the North Slope. He then said that he
wants to find out whether paragraph (19) [on page 28 of CSHB
2001(O&G)] is necessary for the intent of the legislature or
whether the new language in paragraph (6) is sufficient. He
characterized paragraph (19) as problematic for the industry to
work with in the future.
5:15:40 PM
CO-CHAIR GATTO commented that he is always cautious with regard
to unintended consequences of language.
5:16:47 PM
CO-CHAIR GATTO reviewed the schedule for tomorrow, during which
public testimony will be taken at 6:30 p.m.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 5:18:07
PM.
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