Legislature(1995 - 1996)
01/24/1996 08:03 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
January 24, 1996
8:03 a.m.
MEMBERS PRESENT
Representative Joe Green, Co-Chairman
Representative William K. "Bill" Williams, Co-Chairman
Representative Scott Ogan, Vice Chairman
Representative Alan Austerman
Representative John Davies
Representative Pete Kott
Representative Don Long
Representative Irene Nicholia
MEMBERS ABSENT
Representative Ramona Barnes
COMMITTEE CALENDAR
HOUSE BILL NO. 341
"An Act establishing a tax court to consider and determine certain
taxes and penalties due and collateral matters, and amending
provisions relating to taxpayer challenges to the assessment, levy,
and collection of taxes by the state; and providing for an
effective date."
- PASSED CSHB 341 (RES) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 341
SHORT TITLE: ALASKA TAX COURT
SPONSOR(S): REPRESENTATIVE(S) GREEN
JRN-DATE JRN-PG ACTION
05/09/95 2042 (H) READ THE FIRST TIME - REFERRAL(S)
05/09/95 2042 (H) RES, JUD, FINANCE
10/24/95 (H) RES AT 09:00 AM ANCHORAGE LIO
10/24/95 (H) MINUTE(RES)
01/19/96 (H) RES AT 09:00 AM CAPITOL 124
01/19/96 (H) MINUTE(RES)
01/24/96 (H) RES AT 08:00 AM CAPITOL 124
WITNESS REGISTER
TOM WILLIAMS
Alaska Tax Counsel
BP Exploration, Incorporated
P. O. Box 196612
Anchorage, AK 99510
Telephone: (907) 564-5955
POSITION STATEMENT: Testified in support of HB 341.
DANIEL M. SECKERS
Tax Counsel
EXXON
3301 C Street, Suite 400
Juneau, AK 99503
Telephone: (907) 564-3776
POSITION STATEMENT: Testified in support of HB 341.
NORMA CALVERT
Marathon Oil Company
P. O. Box 3128
Houston, Texas 77040
Telephone: (713) 296-3915
POSITION STATEMENT: Testified in support of HB 341.
BEVERLY WARD
ARCO Alaska, Incorporated
134 North Franklin Street
Juneau, AK 99801
Telephone: (907) 586-3680
POSITION STATEMENT: Testified in support of HB 341.
DEBORAH VOGT
Deputy Commissioner
Department of Revenue
P. O. Box 110405
Juneau, AK 99801-0405
Telephone: (907) 465-2300
POSITION STATEMENT: Gave Department of Revenue's position HB 341.
ROBERT BRIGGS
Assistant Attorney General
Department of Law
P. O. Box 110300-0300
Juneau, AK 99801
Telephone: (907) 465-3600
POSITION STATEMENT: Addressed the Governor's Bill HB 427.
ACTION NARRATIVE
TAPE 96-6, SIDE A
Number 000
CO-CHAIRMAN JOE GREEN called the House Resources Committee meeting
to order at 8:03 a.m. Members present at the call to order were
Representatives Green, Williams, Ogan, Austerman, Davies, Kott and
Long. Representatives Barnes and Nicholia were absent.
HB 341 - ALASKA TAX COURT
CO-CHAIRMAN GREEN discussed committee substitute for HB 341,
Version "K," adopted at the Resources meeting of January 19, 1996.
He said the Administration has introduced a bill on the same
subject, but HB 427 does not have a Resource Committee referral.
He said his intention is to pass CSHB 341 to House Judiciary where
the questions or differences between the two bills would be better
addressed. Co-Chairman Green said House Judiciary will form a
subcommittee to iron out the differences between the two bills and,
hopefully, end up with a compatible bill.
CO-CHAIRMAN GREEN said the Administration, the department and the
sponsor all agree that the state's current tax structure and
appeals process is in need of repair. He said he would begin with
testimony from witnesses on the teleconference network.
Number 266
REPRESENTATIVE JOHN DAVIES asked the referral path of the
Governor's bill, HB 427.
CO-CHAIRMAN GREEN said HB 427 has a different path.
REPRESENTATIVE DON LONG said HB 427 had been referred to State
Affairs, Special Committee on Oil and Gas, Resources and Finance.
REPRESENTATIVE DAVIES said the only committee that both sets of
bills come to, besides Finance, is Resources. He suggested that a
subcommittee of Resources would be a more easily achieved event.
CO-CHAIRMAN GREEN said the "sticking point" is the resolve that
needs to be done on the legal aspects. He said this can be better
served by the Judiciary Committee. The fact that the bill needs to
be changed is a resource issue, but it is not the purview of this
committee to act on judiciary matters.
REPRESENTATIVE DAVIES commented that the Governor's bill did not
get a Judiciary referral.
CO-CHAIRMAN GREEN said the Governor's bill can still be addressed
by a House Judiciary subcommittee even though it does not have a
referral. He contended the issues are better addressed by the
people who consider judicial issues. He said if there is a
significant amount of concern, the Speaker of the House can assign
HB 427 to the House Judiciary Committee.
Number 636
TOM WILLIAMS, Alaska Tax Counsel, BP Exploration, Incorporated,
testified from and Anchorage and read his testimony into the
record:
"Good morning, Mr. Chairman and Members of the Committee. My name
is Tom Williams, and I am Alaska Tax Counsel for BP Exploration
(Alaska), Incorporated. Thank you for this opportunity today to
testify on behalf of BP regarding House Bill No. 341 and, in
particular, on work draft `K' of a Committee Substitute for the
Bill, which is dated January 17, 1996.
MR. WILLIAMS said, "Alaska's present system of tax appeals needs
reform. Present law makes the Commissioner of Revenue responsible
for acting as prosecutor, judge and jury in tax appeals. In other
states these functions may also be combined within one agency. But
in those states the potential problems from combining all three
functions is avoided in practice by delegating and dividing them up
among several different people or divisions within the agency. In
Alaska, with fewer than a dozen taxpayers paying some 80% of the
State's total unrestricted General Fund revenues, the stakes in the
tax appeals have often been so material to the State that the
delegations of authority here have failed to maintain a necessary
division of these three functions.
MR. WILLIAMS continued, "The dangerous overlapping, in practice, of
prosecutorial, judicial and juror roles within the Department has
been worsened by the considerable deference given by the courts to
formal hearing decisions issued by the Department. On issues where
the facts are in dispute, the factual findings by the hearing
officer are upheld unless they are `not supported by...substantial
evidence in light of the whole record' in the appeal. This does
not mean that most of the evidence has to support the hearing
officer's findings, only that there be some credible evidence -
some evidence of substance - which supports them. This puts an all
but impossible burden of proof on the taxpayer, despite the fact
that the hearing officer's findings cannot become final without the
signature of the person who is statutorily responsible for taking
`all steps necessary and proper to enforce full and complete
compliance with the tax...law of the state[.]' And the fact that
hearing officers serve at the pleasure of the Commissioner further
undercuts their independence as fact-finders. Moreover, even on
questions of legal interpretation, which the judiciary normally
views as its own particular province, if the courts defer to the
Department's interpretation if they decide it involves the special
expertise of the agency, and few other areas of the law are so
technical and subject to agency expertise as tax.
MR. WILLIAMS said "Reform of the present system can proceed along
two avenues. One is to increase the actual independence of the
people hearing tax appeals from influence by the Commissioner of
Revenue. The other is to make the standard for reviewing the
Department's decisions in court less deferential to the agency's
positions.
Number 869
MR. WILLIAMS testified, "There are now no less than three different
proposals before the legislature to reform the present tax appeals
system, each of which goes varying distances down the two avenues
for reform. The first is HB 341 as originally introduced. In that
version, the Bill would create a new tax court in the Judicial
Branch to hear tax cases. This clearly goes as far as possible
toward making the tax tribunal independent of the Department's
influence, and minimizes the need and opportunity for judicial
deference to agency interpretations of the law.
MR. WILLIAMS stated, "The second proposal is the draft CS that is
before the Committee today. The key feature of the CS is the
opportunity for taxpayers to opt for a trial de novo in superior
court after an informal conference with the Department, instead of
the present process of having a formal hearing before a
departmental hearing officer with a subsequent appeal to the courts
to review the hearing decision. Trial de novo is a legal term that
means having a trial of the facts as if there had been no earlier
fact-finding by the agency. The CS would ensure that the `jury'
role will be played by an impartial judge, instead of a
departmental employee. But trial de novo would still allow the
courts to defer to the agency's expertise in interpreting the law
whenever they felt the matter was one involving agency expertise,
so in this sense the draft CS does not go as far as the original
Bill in providing for independence in the adjudication of tax
cases.
MR. WILLIAMS continued, "The third proposal on the table is the
legislation recently introduced by the Governor, HB 427 and SB 224.
That legislation would create a panel of administrative law judges
within the Department of Administration to hold the formal hearings
in tax cases, and those hearings would be on a de novo basis.
Being in a separate department, these "ALJs" would be considerably
more independent of the Commissioner of Revenue than the hearing
officers are under the present system, although they would appear
to be less absolutely independent of Executive Branch influences
than actual judges in the Judicial Branch would be. Offsetting
this, however, is the fact that the ALJs would have tax expertise
to match that of the Department of Revenue itself, so there should
be less occasion to defer to the Department's interpretations of
the law on the grounds of agency expertise than there would be with
trial de novo in superior court.
MR. WILLIAMS said, "Let me make BP's position as clear as possible.
All three proposals as currently drafted have some technical issues
that should be addressed before being enacted. But assuming those
technical matters can be taken care of, any one of the three
proposals would significantly reform and improve the tax appeals
system from what Alaska has now. This means that the most
important thing, from BP's perspective, is to pass one of these
reforms. Which one it is is less important than the fact that it
pass. The worst possible outcome this Session would be to fail to
pass anything, or to pass one and have it vetoed.
MR. WILLIAMS concluded, "We in BP are confident in your ability to
find a reasonable accommodation that will provide true reform in
tax appeal procedures. We look forward to helping you in that
effort in whatever way we can."
Number 1055
CO-CHAIRMAN GREEN referred to the flow chart in the packet
requested by Representative Austerman. He said the chart does help
to understand the process.
Number 1070
DANIEL M. SECKERS, Tax Counsel, Exxon, testified from Anchorage and
read his testimony into the record.
"Mr. Chairman, members of the committee, my name is Dan Seckers.
I am Exxon's tax counsel here in Alaska. I want to thank you and
the committee for allowing me the opportunity to testify before you
today.
MR. SECKERS continued, "At the onset, I would like to say that
Exxon appreciates the willingness of this Committee to address at
today's hearing the important issue of how the current tax dispute
resolution process in Alaska can be improved. We believe that with
certain changes a fairer and more efficient tax appeal process can
be achieved that would benefit all parties to the process. We also
believe that any substantive reform to the current tax dispute
resolution process would be a step towards improving the business
and investment climate in the state. A fair and impartial tax
appeal process would enhance the working relationship between the
state and the oil and gas industry and would send a clear signal to
potential investors that Alaska wants to be viewed as a state
willing to resolve tax disputes in a straightforward and impartial
way.
MR. SECKERS said, "Given that there have been two proposals
introduced this session which address the tax dispute resolution
process in Alaska, I plan to address general principles rather than
comment on a specific bill. I would like to share with you some
key elements that we will use to evaluate any proposal designed to
improve the tax dispute resolution process in the state of Alaska.
MR. SECKERS testified, "First, Exxon believes than an appeal from
the Department of Revenue's informal conference decision on a tax
dispute must be heard, and the facts and law must be developed,
outside the control of the Department of Revenue. Having the
collection of taxes and resolving tax disputes within the same
agency can fuel the perception of unfairness. Moving the tax
appeal process outside the Department of Revenue would go a long
way towards persuading Alaska taxpayers that the tax appeal process
contains the essential element of fairness.
MR. SECKERS continued, "Second, the person presiding over the
appeal must be independent. Currently, the person assigned to hear
an appeal works for the Commissioner and can be dismissed for any
reason by the Commissioner. If the person presiding over the
appeal believes that his or her decision may impact his or her
future job security, then that person's judgment has been
compromised because such person is not free to decide the appeal
based solely on the weight of the evidence presented and the
applicable law. To maintain his or her independence, the person
presiding over the appeal should be appointed for a fixed term of
years and be subject to termination during that term only for
cause.
MR. SECKERS said, "Third, the person presiding over the appeal must
be required to resolve all questions of fact based on the majority
of the weight of the evidence presented during the appeal. This
preponderance of the evidence standard should be used to resolve
all questions of fact unless another standard has been established
by law for a particular question.
MR. SECKERS testified, "Fourth, we believe the standards by which
questions of law will be resolved should be clearly stated. To be
truly impartial, the person presiding over the appeal must be
required to resolve all questions of law under the person's own
independent interpretation of what the law means after hearing all
the evidence submitted by the parties. The only exception to this
should be for those areas of law legislatively delegated to the
Commissioner by you, the members of the legislature. With regard
to these areas, deference should be given to the position taken by
the Department of Revenue but only if the position has a reasonable
basis in law. Any areas where judicial deference is to be given to
the Department of Revenue should be codified by you so that both
the taxpayer and the Department of Revenue know such areas of
deference.
MR. SECKERS stated, "Fifth, the appeal process should allow all
parties to the appeal to gather relevant evidence through a fair
and reasonable discovery process.
MR. SECKERS continued, "Sixth, the appeal process should allow the
introduction of fair and reasonable evidence. The admissibility of
any evidence should rest with the discretion of the person
presiding over the appeal. No evidence should be statutorily
determined to be irrelevant or inadmissible for all purposes.
MR. SECKERS concluded, "Finally, it is possible to argue that it
may be helpful if the person presiding over the appeal is
experienced in the field of tax law. While such experience may not
be essential to providing taxpayers with an impartial tax appeal
process in Alaska, it could be helpful towards the efficient and
speedy conduct of the appeal. Such experience, however, is not of
sufficient importance to override impartiality in any appeals
process.
"Mr. Chairman and members of the Committee, Exxon stands ready to
work with you, the Legislature, the Governor and his Administration
in achieving meaningful reform to the current appeal process
through incorporation of the key elements I have discussed here
today. Working together we can further our objective of obtaining
a fair, impartial and efficient tax dispute resolution process, one
that sends a positive signal about the business climate in Alaska."
Number 1344
CO-CHAIRMAN GREEN invited Norma Calvert to come forward.
Number 1380
NORMA CALVERT, Marathon Oil, read her testimony into the record:
"Good morning Chairman Green and members of the House Resources
Committee. My name is Norma Calvert and I am here today
representing Marathon Oil Company. Chairman Green, before I share
with you Marathon's comments on the committee substitute for House
Bill 341 (the Tax Court Bill), I would like to thank you and your
staff, along with the committee members, for your dedicated efforts
to improve the tax appeals process in Alaska. We believe the
system can be modified for the benefit of the taxpayers and the
state of Alaska.
MS. CALVERT continued, "As stated in Marathon's testimony given at
the October hearing, we strongly support the modification of the
appeals process. Although we believe a tax court as proposed in HB
341, as originally introduced, would provide the most impartial
process of resolving tax disputes, we also understand the concerns
raised at the October hearing by the Supreme Court system with
respect to establishing a specialty court in Alaska due to the
small numbers of taxpayers and cases to be resolved.
MS. CALVERT said, " Our testimony in October gave detailed synopsis
of our concerns of the current system. To review, our number one
concern is the empowerment within the Department of Revenue to
audit, issue assessments and govern the hearings for dispute
resolution. If the taxpayer does feel it necessary to appeal the
Department of Revenue's decision, a de novo review is not given at
the superior court level and great deference is given to the
Department of Revenue's decision, making it nearly impossible to
obtain an impartial review of the case.
MS. CALVERT said, "Recognizing the complications in forming a tax
court in Alaska, we support the Committee's substitute bill to
allow for a de novo hearing outside the Department of Revenue at
the superior court level. In continuing your efforts to improve
the tax appeals process, we would like for you to consider the
essential characteristics of an unbiased system: the appeals
process should be independent of the audit and assessment process,
outside the Department of Revenue; taxpayers should be allowed a de
novo hearing before an impartial tribunal; and the burden of proof
on questions of fact should be a preponderance of evidence
standard. We believe a de novo review at the superior court level
provides resolution to the concerns we have expressed and is a
great step in moving toward an impartial tax appeals process.
MS. CALVERT concluded, "There are a number of ways the current
system could be improved and we support the committee substitute as
an alternative to the Tax Court bill as originally introduced. We
encourage this committee, the Alaska Legislature and the
Administration to work toward a resolution that truly provides an
impartial appeal process in Alaska. Such changes will lead to
expedited resolution of tax issues, with benefit to all parties
involved. Most importantly, it sends a message of tax fairness
that is critical in encouraging future investments in Alaska."
Number 1527
REPRESENTATIVE DAVIES asked Ms. Calvert if she had reviewed HB 427,
the Governor's bill, and asked for her comments on that approach.
CO-CHAIRMAN GREEN remarked that HB 427 was not on the table.
Number 1538
MS. CALVERT explained she is not in the tax organization of
Marathon Oil, but would answer in a broad sense. She said Marathon
had reviewed the Governor's proposal, and their general feeling is
HB 341 provides a more impartial process by having the de novo
review at the superior court level.
Number 1631
BEVERLY WARD, ARCO Alaska, Incorporated, came before the committee
and read her testimony into the record:
"ARCO Alaska, Incorporated, appreciates the opportunity to present
its views regarding legislation to change the procedures for
hearing tax disputes and looking for ways to improve that process.
This has been an area of great concern to ARCO for more than twenty
years and we applaud the efforts of Representative Green and the
efforts of the Knowles Administration to deal with this complex
issue in a thoughtful and fair-minded manner.
MS. WARD continued, "ARCO believes that the present system for tax
hearings is broken. It is so broken that it is rarely used because
taxpayers go to great lengths to avoid it. ARCO has used the
existing formal hearing process only once in the past ten years.
There is a widely held perception among taxpayers that the existing
system does not provide taxpayers with the opportunity for a fair
and independent hearing.
MS. WARD testified, "In the past few weeks, we have looked at three
different proposals for changing the tax hearing process: House
Bill No. 341 introduced by Representative Green would establish a
separate Tax Court; a newly adopted CS for House Bill No. 341 also
presented by Representative Green would provide for tax hearings
before the superior court; and House Bill No. 427 introduced by the
Governor would establish an Administrative Law Court outside of the
Department of Revenue.
MS. WARD said, "While these bills each take different approaches,
each of these proposals would be much fairer than the present
system and we urge the legislature to give each of these bills a
full hearing.
MS. WARD said, "In judging these three proposals and any other
proposals which might emerge, ARCO urges the legislature to
critically examine the proposals against nine criteria which ARCO
believes should be present in any tax hearing process:
-The hearing should be outside the control of the Department of
Revenue.
-The hearing officer or judge should serve for a term of years
rather than be subject to termination at will.
-The hearing officer or judge should be specifically required to
have experience in the area of tax law.
-The hearing should be a de novo proceeding where the hearing
officer or judge has original jurisdiction and hears evidence
without regard to the proceedings below.
-The burden of proof on questions of fact should be preponderance
of the evidence.
-The standard of review of questions of law should be substitution
of judgment.
-Where authority has been legally vested in the Commissioner of
Revenue to interpret a revenue provision, a reasonable basis
standard should apply.
-A taxpayer should have the opportunity to conduct legitimate
discovery but neither the taxpayer nor the Department of Revenue
should be permitted to abuse the discovery process.
-The hearing process structure should, to the extent possible, take
into account the uniqueness of Alaska's situation of very few
taxpayers and tax appeals. The hearing system should be tailored
to Alaska's needs and be as efficient as possible.
MS. WARD continued, "ARCO urges this committee to apply these
criteria to all three proposals as wells as to the existing law.
We believe a proposal might emerge which meets all of these
criteria and is acceptable to the stakeholders - the legislature,
the Administration, the court system and the Alaska taxpayers.
MS. WARD concluded, "In closing, ARCO would like to stress two
points. The first is that from our perspective this is a very
important issue which has long term implications for how taxpayers
will view the business climate in the state and the fairness of the
playing field. The second is that this is a major opportunity
where all of the stakeholders are making a bona fide attempt to
establish a fair tax hearing system and every bill that has been
proposed is a significant improvement over the existing system.
"Once again, we applaud your efforts and the efforts of the
Administration. We stand ready to do whatever we can to facilitate
the enactment of fair tax hearing legislation."
Number 1853
REPRESENTATIVE SCOTT OGAN asked Ms. Ward to explain the current
burden of proof with the Department of Revenue.
MS. WARD said her understanding of preponderance of the evidence
means the majority of the evidence has to support the argument.
Number 1915
DEBORAH VOGT, Deputy Commissioner, Department of Revenue, said she
did not plan to give an overview of the Governor's bill (HB 427),
except to talk about general concepts. She said she appreciated
industry representatives comments on the principles they wanted to
look at rather than line-by-line problems or the benefits of any
particular approach.
MS. VOGT feels the current system is not broken. She said the
current system is fair and can be used by taxpayers to resolve
their differences in a fair way. She said she believes the system
is perceived to be broken and that perception is not going to go
away. Ms. Vogt said she would present information that she had
also provided at the October 24, 1995 hearing on HB 341.
MS. VOGT continued, the Department of Revenue decided to look into
the perception that its system is unfair. This first thing we did
was a survey of all fifty of the other states. The DOR talked to
each of the tax departments in each of the states and concluded
that its system of having the department review a taxpayers
dissatisfaction with his assessment in front of the department, and
then have it go on appeal to the superior court on a substantial
evidence test, is in the distinct minority.
MS. VOGT said the Department of Revenue then contracted with New
York consultant Paul Frankel, Morrison & Foerster, who has
consulted with a number of other states on tax resolution and tax
dispute procedures. Mr. Frankel reviewed Alaska's laws and
regulations and proposed regulations and recommended the Department
of Revenue move toward a system of independence. His criteria was:
(1) the independence of the person who does the de novo review or
the trial; (2) the taxpayer should be able to have its factual
determinations made in an evidentiary hearing before it is required
to pay the tax; and (3) the individuals performing the trial have
tax expertise and be tax professionals.
Number 2071
MS. VOGT referred to the flow sheet entitled, House Resources
Committee comparison of Alaska's Present Tax Audit and Appeals
Process and the Resources committee substitute HB 341 version "K."
She said, in our current system, a taxpayer files a return and with
most taxpayers their return is reviewed and accepted. With the oil
and gas taxpayers, we have a policy that every return is audited,
and the tax for the severance tax and the corporate income tax of
the industry taxpayers are constantly reviewed. She said it is
rare that the audit process has not resulted in some disagreement
with the taxpayers initial filing. So, the tax bill is then
issued. At that point, under our current system, the taxpayer has
a choice of paying the bill, going to informal conference or going
to formal hearing. The informal conference is an opportunity to
come in and talk with the department about what the Department of
Revenue may have done wrong. In a $200 million dispute, the
conference is going to be a little more formal than with a
fisherman over a dispute of a couple of hundred dollars. It is not
a trial, or an adversarial process where two parties put on
evidence in front of a judge, and the judge makes a decision on the
record.
MS. VOGT testified that a taxpayer can skip that process and go
straight to formal hearing which is a more formal proceeding. It
is an adversarial process, it is a three component system where you
have a judge and two parties, and the judge is the hearing officer
who is, as the taxpayers pointed out, an employee of the Department
of Revenue. It is the statutory duty of the commissioner to hold
the hearing himself. She said she remembered when Tom Williams was
commissioner, he held at least one hearing. The hearing officer
holds the hearing on behalf of the commissioner and makes a
recommended decision to the commissioner. The commissioner then
adopts, rejects or revises the decision or sends it back for more
work; and then the hearing officer puts out the decision under the
commissioner's name. That decision can be appealed by the taxpayer
to the superior court. As the taxpayers have testified, the
standard of review at the superior court is the substantial
evidence standard. What that means is the judge looks at the
record to discover whether there is any good evidence in the record
that supports the hearing officer's conclusion. That is the job of
the trial court, to weigh the evidence and believe the witnesses.
MS. VOGT explained that the standard at the Department of the
Revenue is the "preponderance of evidence standard" before the
department's hearing officer. She said the difficulty the
taxpayers have with that is that it is the department's hearing
officer who views the facts and not an impartial party.
Number 2262
MS. VOGT clarified that "de novo" means "the trial," the point at
which the facts are tried. She said it was confusing to talk about
the concept of appeal with the concept of de novo, but what it
means is the person who weighs the evidence "de novo" does so as
though no proceedings have taken place.
Number 2318
MS. VOGT said the department has some problems with the way CSHB
341 is drafted and appreciates a further opportunity to work out
whatever becomes of this effort. The DOR feels the committee
substitute does not provide the full independence the taxpayers are
looking for; (1) because it only applies to certain taxes, and (2)
the taxpayers have a choice whether to go through the Department of
Revenue proceedings or go to court. For a small taxpayer that may
be an important decision because court proceedings will be more
formal and it is going to be harder to do it "pro se," without a
lawyer, and small taxpayers may feel that this has not fixed
anything for them. The legislation that is before you does not
provide for tax professionals to review the tax cases; you will
appeal to the superior court and it is not clear whether you get a
jury or not. But, you will certainly get the luck of the draw in
the judge, and the judge will not have any particular background or
expertise in tax matters. Many taxpayers, maybe not the ones we
have heard from today, but fishermen and small corporations are
very dependent upon the tax expertise within the department.
Number 2401
REPRESENTATIVE ALAN AUSTERMAN stated that the taxpayers still have
that ability.
MS. VOGT replied yes, they could stay within the Department of
Revenue and go to formal hearing, or they can go outside the
Department of Revenue and go to more complex hearings and a
considerably graver expense.
Number 2430
MS. VOGT said another element that Mr. Frankel talked about was
that the taxpayer should be entitled to have his or her trial go
for paying any taxes, and this legislation requires the taxpayer
pay all the undisputed taxes, which seems to make sense, but also
that the taxpayer posts a bond for the disputed taxes. That is
what we do when the case goes to superior court, but we have
already held the trial by the time it goes to superior court.
Number 2430
MS. VOGT said the current system raises an issue for the DOR that
every commissioner over the years has grappled with; how to
preserve judicial independence for those cases that are going to
come to the commissioner's office for resolution. For example,
when a matter comes to the commissioner's office and it comes to
formal hearing, the commissioner must then remove himself from the
details of the case on the division's side. That is not hard for
a commissioner in a state with thousands and thousands of
taxpayers, and no one of whom pays more than two or three percent
of the state's taxes. It is very hard in a state where you have
three big taxpayers, and the cases, as they are coming through the
process, are important.....end tape.
TAPE 96-6, SIDE B
Number 000
MS. VOGT is saying the commissioner is not going to know until the
taxpayer makes the choice of either going through the Department of
Revenue proceedings or going to court, what route that case is on.
She said that is the difficulty and the department feels if we are
going to do this, let's do the whole thing, let's get the hearings
out of the Department of Revenue and then the commissioner's role
becomes clear for all cases.
Number 033
MS. VOGT said the final principle is the department thinks whatever
system is used should streamline the cases. Some cases take years
and years to resolve, and part of that is because they are so big,
and part of that is because the laws were not as clear as they are
now, but part of it is because the procedures are not designed for
streamlining the cases. Ms. Vogt informed Chairman Green that she
feels his bill will make things worse. She feels court proceedings
are going to be more complex, more drawn out, require more
discovery and more formal rules of evidence. She said it is going
to take longer, and it is going to be longer before the public
knows how much money it is entitled to from the taxpayers.
Number 071
MS. VOGT said the Governor's bill, HB 427, provides the formal
hearing function for taxes to be moved to the Department of
Administration, outside the purview of the Department of Revenue.
An independent "administrative law judge (ALJ)," the same function
as a hearing officer, would be established in the Department of
Administration. The chief administrative law judge, if more than
one, would be hired for a term of years and be dismissable only for
cause. The "administrative law judge" must have a tax background.
The standard of review is clearly articulated in the Governor's
legislation and fits in with the articulated requirements that the
industry testified to today. The "administrative law judge" would
review factual questions on a preponderance of evidence unless some
other standard is required by law. There are a couple of instances
where either, for instance, the Supreme Court of the United States
has repeatedly said, in certain income tax matters or by statute,
a different standard is set. CSHB 341 changes the hearing
procedure for determinations of what the economic limit is. The
statute says the taxpayers has to show by clear and convincing
evidence.
MS. VOGT said questions of law should be resolved on the
substitution of judgment standard. In questions that are committed
to the agency's discretion, or questions of basic policy, should be
reviewed and should be deferred to, if there is a reasonable basis
for those. The department felt very strongly that we did not want
an outside hearing officer or judge to be substituting his or her
judgment for that of the commissioner on those things that are
really committed to the Department of Revenue's judgement.
Number 219
MS. VOGT referred to Dan Seckers testimony where he recommended
that standard for those questions committed by statute to agency
discretion. The department feels that goes too far. There are
issues that the courts are going to find are really founded in the
expertise of the department or that are really basic policy issues.
The legislature is not going to be able to think of every one of
them and articulate them in statute. She felt that everyone agreed
that the Department of Revenue's policy determinations ought to be
left to the department, but she feels there is still some
disagreement between the department and the taxpayers.
Number 246
MS. VOGT said the Governor's bill resolves the dual role of the
commissioner problem because it takes all of the tax hearings out
of the DOR. It has a lot provisions in it to streamline the cases.
It has provisions dealing with discovery and provisions dealing
with evidence.
Number 291
MS VOGT concluded, saying she is pleased that the committee has
taken on this issue. It is an issue that ought to be resolved and
she hopes the Administration and the committee can come to a
resolution.
CO-CHAIRMAN GREEN noted the arrival of Representative Nicholia.
Number 321
REPRESENTATIVE OGAN said if the vast majority of tax situations end
up in dispute; a better approach is to write tax laws that are less
ambiguous, resulting in fewer disputes.
MS. VOGT said that was a good point. The department has had a
series of regulation review, writing and projects for the oil and
gas taxes to narrow the grounds for dispute. She said there are
always going to be disputes no matter how clear the law. She said
on the corporate income tax side, issues like, "Is a certain
foreign tax, an income tax or not?" If it is an income tax, then
it is not a deduction against our income tax, if it is an excise
tax then it is. She said we can go to hearing on some of these
issues and get precedential hearing decisions, but the committee
has heard testimony from some taxpayers that they are reluctant to
use that system. Most of the tax and royalty matters have been
settled in the last six or eight years. She said what she sees
from a tax administrator's perspective is that the department does
not have answers to some of the recurring kind of questions. A
hearing process that every one believes is fair can help the
department move forward in that direction.
Number 445
REPRESENTATIVE LONG said HB 341 was geared toward certain taxes, he
asked Ms. Vogt to clarify what taxes are covered in this bill.
Number 461
MS. VOGT replied, CSHB 341 addresses the major taxes, the oil
severance tax and the corporate income tax, those are the big ones.
The procedures it articulates apply to those taxes, the mining
license tax which is not a big tax, it applies to fisheries
business tax, but it does not apply to the landing tax and those
taxes are the left and right hands of each other for onshore
processing and offshore processing. It applies to the oil
severance tax, but not the conservation tax and the conservation
tax is a function of the same production that the severance tax is.
She would like to see legislation for this effort that applies to
all tax and not just specific ones.
Number 521
REPRESENTATIVE AUSTERMAN asked the Chair why CSHB 341 did not
contain all taxes.
CO-CHAIRMAN GREEN said the original legislation started out as a
tax court, specifically, for a majority of the oil taxes. Through
the committee substitute, the bill has taken a somewhat different
approach. He said he understood the department's desire that if
the tax appeal process is adjusted, then it should be for all
taxes. Albeit, the number would be greater, but the amount would
be rather small compared to ones that this originally addressed.
He said, some of the undisputed taxes were left out.
Number 570
REPRESENTATIVE AUSTERMAN asked if there would there be a problem
with including all of taxes in the new committee substitute.
CO-CHAIRMAN GREEN said he would have to review that issue and did
not see a problem.
REPRESENTATIVE JOHN DAVIES said the fact of whether the oil and gas
conservation tax and whether certain fisheries taxes should be
included is more of a resource issue than a judicial issue. He
suggested the Resources Committee make those recommendation as it
forwards the packet to the House Judiciary Committee.
Number 608
CO-CHAIRMAN GREEN said he certainly had no objection. He said he
would also forward Ms. Vogt's testimony.
Number 618
CO-CHAIRMAN BILL WILLIAMS asked Ms. Vogt to provide information on
tax appeal ratios concerning fishermen versus the oil industry.
MS. VOGT said the majority of the DOR's appeals involve the
corporate income tax. She said there are not very many cases.
Over the last four or five years, approximately 15-20 cases coming
out of the Income and Excise Division have gone to formal hearing.
The Income and Excise Division is responsible for corporate income
taxes, all the fisheries taxes, everything but the oil severance
and the former separate accounting. The department has had
approximately four appeals from the oil and gas side which involved
the severance tax and the former separate accounting. She said
almost all of the 20 cases involved the corporate income tax.
Number 755
CO-CHAIRMAN WILLIAMS asked a question about smaller taxpayers being
reluctant to use departmental expertise.
MS. VOGT responded that the reluctance she is aware of comes from
the large taxpayers. She said smaller taxpayers often rely on the
tax expertise of the people in the DOR. Most of these matters are
going to be resolved in informal conference. That process would
not change under either Representative Green's bill or the
Governor's bill except that you would no longer have the choice of
skipping it.
Number 880
MS. VOGT elaborated on the informal conference and said one of the
differences between Representative Green's bill and the Governor's
bill is that HB 341 requires the taxpayers to make the choice of
staying with the department, which they perceive as unfair, or
going to court where they have to get a lawyer and it is going to
become more formal.
Number 945
CO-CHAIRMAN WILLIAMS said the committee's goal is to develop this
process so that it is friendly to everyone and not perceived as the
taxpayers have testified. He asked how the committee can achieve
that when the Administration is saying that CSHB 341 will not be
able to get there.
Number 994
MR. WILLIAMS said small taxpayers may feel there is a problem of
lack of impartiality, but it is not merely a perception to how big
taxpayers, like BP, feel. Many small taxpayers like to cover their
own records and not be represented with an attorney. Those types
of taxpayers do not see the fine points, like myself, in terms of
burden of proof and preponderance of the evidence and trial de
novo. What they do know is their juror, their judge is an employee
of the commissioner who is also responsible for prosecuting the
audit (inaudible). That is what gives rise to the sense, for those
people as well, that it is tough to get a fair shake.
MR. WILLIAMS related that he was general counsel to Cook Inlet
Region, Incorporated (CIRI), prior to working for BP. While Cook
Inlet Region is small compared to the oil companies, we did get a
tax assessment because Cook Inlet Region has some royalty income
from leases in the Kenai Peninsula. That income was subject to
sharing under Section 7 (i) of the Alaska Native Claims Settlement
Act. So, not only on behalf of its shareholders but on behalf of
all the regions and village corporations who will share under
Section 7(i) and 70 percent of that revenue, the CIRI wanted to
contest the assessment issued against it. It ended up being
settled, in part, because there is a problem in the formal hearings
currently that become very cumbersome and expensive.
Number 1159
MR. WILLIAMS discussed Ms. Vogt's point about the Governor's bill
having the flexibility for the administrative law judge to relax
the procedures where you have a "mom and pop" corporate entity
coming in contesting an assessment or disallowing an interest
deduction when they find a receipt and come in show it. He said
that is the sort of thing that is good, there is flexibility in the
Governor's bill to deal with the small taxpayers. There has been
a problem in the past about merging these roles. He said, "When I
was commissioner, people who were not involved in the hearing and
did not hear the witnesses, nevertheless, were editing and revising
the hearing officer's findings and conclusions of law." That is
legally permissible, but it is not something that creates a good
atmosphere of trust between the taxpayers and the department. That
is the real problem that everyone is agreeing on. Set aside the
arguments about the legal merits of things, that is irrelevant, we
are looking at the future together and trying to put our
differences behind us and look over what our interests are in
common. This perceived problem of impartiality is an issue that is
an obstacle toward Alaska's competitiveness. The legislature and
the Administration are both concerned about this and so are we.
Number 1239
MR. WILLIAMS said we can debate the relative merits of all three
proposed bills, but compared to the present system, all three of
them are so far ahead of where we are now that it would be almost
preposterous that disagreement about which one is the very, very
best, would keep something from happening. That is what our
concern is, we want to work out an agreement with principles and
then put those principles down in words, and move forward. He said
BP is prepared to work as hard as they have to, to try to craft
something that is going to reflect one of these measures or perhaps
a combination that represents a significant improvement from where
we are.
Number 1305
REPRESENTATIVE PETE KOTT followed up on Representative Ogan's
question regarding the vast majority of tax situations ending up in
court. He wanted to know why the legislature had not made inroads
in solving this problem.
Number 1356
MS. VOGT responded there are going to be tax disputes as long as we
have taxes, and we are going to have to have a system for resolving
them. She reiterated that the DOR had tried very hard over the
past couple of years to work on the regulations so that the
magnitude of the disputes is as narrow as possible. What we are
striving to do is to make the disputes with the industry of the $20
million magnitude rather than the $200.00 or the $2 billion
magnitude. She related that the DOR had made progress in resolving
old disputes and most of them have been settled. She said the
department's tax program is getting close to current and will be
current in a couple of years. She mentioned two very old issues
remaining and said the department simply needs a way to resolve
those remaining issues.
Number 1521
REPRESENTATIVE KOTT confirmed with Ms. Vogt that she is suggesting
the state has lesser of a problem today than three years ago.
MS. VOGT replied, absolutely.
Number 1530
REPRESENTATIVE AUSTERMAN wanted clarification that the informal
hearing process in the Governor's bill stays the same, and then, if
the process goes to formal hearing, it goes before a hearing
officer in the Department of Administration.
MS. VOGT said that was correct with one exception. The exception
would be that the informal conference would no longer be a matter
of choice, it would be mandatory to go through the informal
conference proceeding within the Department of Revenue.
Number 1685
REPRESENTATIVE AUSTERMAN confirmed that after the formal hearing at
the Department of Administration, the appeal would go to superior
court, and, if appealed again, it goes to trial de novo.
MS. VOGT said the appeal at the superior court would be on the
record and would end an appeal of an administrative decision like
it is now.
Number 1724
REPRESENTATIVE KOTT stated that when these cases end up in superior
court, the Department of Revenue is represented by counsel. He
asked if counsel is retained on contract or is the Department of
Law responsible for providing counsel.
Number 1776
MS. VOGT said the Department of Law makes that decision. In the
past, they have used outside attorneys for some of the bigger
cases. She understands the department is moving toward the ability
to handle more and more of these issues in house.
Number 1800
REPRESENTATIVE KOTT wanted clarification from the Department of Law
about court rules concerning the "prevailing party." He wanted to
know if there is a court rule that prevents a taxpayer from
arbitrarily or capriciously filing in superior court. Is there a
prevailing party court rule that would be applied?
Number 1890
MS. VOGT felt Representative Kott was referring to the attorney
fees provisions Alaska has, that is different from any other state,
where the prevailing party is entitled to some portion of its
expenses in litigating. She said the committee substitute has a de
novo trial in superior court and the prevailing party is entitled
to attorney fees under Rule 82. She clarified that no fees are
available for the Administrative proceeding in the Department of
Revenue nor are they in the Governor's bill at the Department of
Administration.
Number 1967
REPRESENTATIVE AUSTERMAN said under the Governor's bill, the formal
appeals process goes to the Department of Administration. He asked
Chairman Green his feeling on amending the proposed committee
substitute for HB 341 to include that.
CO-CHAIRMAN GREEN clarified, "of going directly to superior court
after the informal hearing?"
REPRESENTATIVE AUSTERMAN said the industry might want to answer
that question and suggested the industry may not want to go to
court quite so fast if the Department of Administration is the
formal appeal officer.
CO-CHAIRMAN GREEN deferred to Ms. Vogt. He asked, "Are we at arms
length or are we the same with a different title."
NUMBER 2085
MS. VOGT said she the question might be better addressed by the
industry. She said many states that have "independent review of
tax appeals" have that review in an administrative agency outside
of the tax department. She said the DOR's consultant, Mr, Frankel,
has been a proponent of exactly that model.
MS. VOGT responded to the comment about cabinet members sitting
around talking about a particular case, and said the obstacle there
is the commissioner of the Department of Revenue would then be a
litigant in front of the commissioner of the Department of
Administration and he would not be able to talk about that case.
Number 2197
MS. VOGT clarified in the Governor's bill that the commissioner of
Administration does not adopt a proposed hearing decision made by
the administrative law judge within the department. The
administrative law judge simply adopts his own decision and it is
not subject to approval by a cabinet member. The administrative
law judge would be appointed for a term and dismissable only for
cause. His or her decision then would be appealed straight to
superior court. She believes the Governor's bill sets up the sort
of true independence the parties are looking for.
Number 2264
REPRESENTATIVE AUSTERMAN recommended hearing from the oil industry
whether having the informal hearing process incorporated into the
Department of Administration would solve some of their problems.
He said if the committee was going to amend HB 341, that is one of
the areas he will consider.
Number 2370
CO-CHAIRMAN GREEN said Ms. Vogt has been invited to work with the
House Judiciary Committee.
MS. VOGT said if the Department of Administration were substituted
for the Department of Revenue in the committee substitute, the DOR
would object to there being a de novo hearing at the Department of
Administration and then, again, at court.....end Tape One.
TAPE 96-7, SIDE A
Number 000
MS. VOGT explained in drafting the Governor's bill, the Department
of Law felt it unusual to appoint an administrative employee for a
term of years. The Department of Revenue did not want to stray too
far from the normal personnel procedures, and felt that by
providing the independence protection to the chief administrative
law judge, it would accomplish the perception of true independence
that we are looking for here.
Number 139
REPRESENTATIVE DAVIES conjectured that the chief administrative law
judge has the protection, but if his deputy is actually the hearing
officer in the case. Is it the deputy's decision that is appealed
to superior court or is his position adopted by the chief and that
is appealed to the superior court.
MS. VOGT replied that HB 427 has a provision that states that the
decisions have a precedential value and the administrative law
judges are expected to circulate decisions among themselves and
come to an agreement.
Number 220
ROBERT BRIGGS, Assistant Attorney of Law, Oil, Gas and Mining
Section, Department of Law addressed the question of who makes the
final decision on a tax case in the Governor's bill. The way it is
drafted, the final decision would be made by the hearing officer
who heard the evidence. There is a provision in the bill for
opinions on questions of law to be circulated among the chief
administrative law judge and the other administrative law judges
who might be employed. The purpose for that provision is to
provide some consistency, sort of a "collegial atmosphere" for
administrative law judges to look over each others shoulders and
read their legal opinions and say, "I do not think you have this
right" and give a chance for that kind of comparison for legal
opinion. As to questions of fact, those under the Governor's bill
would be decided by the person who hears the evidence.
Number 306
REPRESENTATIVE DAVIES recommended that perhaps all administrative
law judges should have the protection of term of office so that
their perceptions of fact and their findings would have that mantle
of independence that we are trying to achieve.
CO-CHAIRMAN GREEN stated that the committee has heard Ms. Vogt's
opinion about a tax court. He then asked her if she would still be
opposed to a tax court review if the issue included the capability
of a tax "wise" judge to hear the case.
Number 439
MS. VOGT reiterated two reasons why the Department of Revenue was
not happy with the idea of a tax court. She said the first problem
in the current draft is the lack of tax expertise, and felt the
Chairman was postulating that if that issue was solved, how would
the DOR feel. She said the other major element is the expeditious
treatment of tax matters. She talked about developing an informal
system for the small taxpayer; a system that would not be subject
to the formal rules of court; and formal evidence rules to all the
panoply of discovery. She said the DOR has spent a fair amount of
time developing provisions in the Governor's bill that would give
the hearing officer some "teeth" to get a handle on the magnitude
of the case and keep it to a reasonable size. She feels the size
of cases will "blossom" rather than become streamlined under the
committee substitute.
Number 537
MR. WILLIAMS asked to comment on an earlier issue and addressed the
subject of, "moving toward clearer rules of the game to reduce tax
disputes." He said he agreed with Ms. Vogt that there has been a
lot of progress made and continues to be worked on now. It is an
ongoing process to clarify the rules. He said, part of the problem
in the past, and one the lessons to be learned from it is that when
mistakes get absolutely colossal, policy making may become
paralyzed or becomes driven by considerations that parties would
rather not see driving those decisions. The point is, by making
the playing field on the tax appeals more level, at the same time
that tax rules of the game are made clearer, we take the pressure
off the system and have a fair and equitable system of tax
administration which, from this side of the Table, Alaska has
lacked. We are very encouraged by the progress that has been made
and are encouraged to believe that there will be a lot more
progress to be made with the Administration on clarifying the tax
rules. That is a complimentary effort not an exclusionary effort
to the one that you are dealing with here in the subject of this
legislation. The two go hand-in-hand and between the two of them
we will have a better system.
CO-CHAIRMAN GREEN asked Ms. Vogt if the administrative law judge
concept in the Governor's bill could be modified by removing it
from the Department of Administration and creating an independent
administrative law judge.
Number 692
MS. VOGT said she was unprepared to address that issue at present,
but she expressed concern with the expense of setting up an entity
separate from existing government.
Number 717
CO-CHAIRMAN GREEN said if that were contracted out instead of
having a departmental employee, would the expense be a trade off.
MS. VOGT said she cannot imagine that a contract attorney would be
less expensive than a state employee.
Number 752
CO-CHAIRMAN GREEN asked the view of the Department of Revenue
regarding the right to the discovery procedure if there is a quasi
"de novo" in the Department of Administration.
Number 796
MS. VOGT replied the subject came up with Paul Frankel who
recommended eliminating the discovery procedure. She explained
that Mr. Frankel's point was that the Department of Revenue has the
subpoena power and can get all of the taxpayers records. The
taxpayer has access to his own file in the DOR.
MS. VOGT said that she and the commissioner were intrigued by that
idea and floated it out for discussion amongst the group working on
the Governor's bill. She said the DOR had some resistance from
both sides, from the attorneys in the Department of Law and from
the taxpayers we worked with. She remarked that Mr. Frankel has
probably not seen tax cases in which one taxpayer pays almost half
the taxes in the state.
Number 881
MS. Vogt continued, the DOR worked very hard to find some sort of
compromise that would limit a "blank check" on discovery without
compromising appropriate due process.
Number 933
CO-CHAIRMAN GREEN said if an applicant protested an administrative
law judge decision in the Governor's version, and the ALJ refused
to provide the applicant with a particular request; and the
applicant appealed to superior court, would the entire record
including the denied request be transferred to superior court.
MS. VOGT said yes, it would be like a trial judge in superior court
making a ruling that the superior court or the next court up would
be empowered to find the ruling was in error and the evidence
should have been admitted.
Number 973
REPRESENTATIVE DAVIES asked if the intent of the Chair was to move
CSHB 341 from committee. He stated he found the discussion very
useful and suggested that the committee hold the bill and continue
the discussion. Representative Davies said if it is the intent of
the committee to move the bill, he would like to include two items.
Number 1010
REPRESENTATIVE DAVIES asked that the committee substitute for HB
341 include the understanding that the Chair would request the
Speaker of the House to refer the Governor's bill to the House
Judiciary Committee.
CO-CHAIRMAN GREEN responded that would be a consideration, and
whether or not that is actually done, the context of the bill would
be reviewed in the House Judiciary Committee.
Number 1056
REPRESENTATIVE DAVIES said testimony from the taxpayers indicates
they think there is a substantial agreement in principle among all
the parties here about the kinds of concerns that need to be
resolved. He recalled a specific suggestion that the subcommittee
consider these principles to find the commonality, and then proceed
to a new committee substitute to incorporate all of these things.
CO-CHAIRMAN GREEN said that certainly is his feeling as well that
there should be a strong recommendation to the Judiciary Committee.
Number 1111
REPRESENTATIVE LONG said that was also one of his concerns. He
said he was unsure of the procedure but that he intended to make a
motion to attach HB 427 to HB 341.
CO-CHAIRMAN GREEN said the committee can send a recommendation, but
the question of whether we attach HB 427, or not, is moot because
the context would be part of the recommendation for review. He
said he felt he could speak for the chairman of the Judiciary
Committee that that would be his attitude.
Number 1177
REPRESENTATIVE OGAN commented that there is a problem in many state
agencies where the same organization that creates the regulations,
enforces and adjudicates the regulations. He feels HB 341 is a
step in the right direction.
Number 1208
CO-CHAIRMAN WILLIAMS moved that CSHB 341 Resources move from the
House Resources Committee with individual recommendation and the
attached fiscal note. CO-CHAIRMAN WILLIAMS motion also included
the language "the questions brought up by the Chair and other
Representatives be attached." There being no objection, it was so
ordered.
Number 1237
CO-CHAIRMAN GREEN announced the committee will hear HB 325, Heavy
Oil, on Friday, January 26th.
Number 1281
ADJOURNMENT
The meeting was adjourned at 9:58 a.m.
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